Q2 2020 Earnings Call
[music].
Good morning, and welcome to the Deer, and company second quarter earnings Conference call.
Lines have been placed in listen only until the question answer session of today's conference.
I'd now like to turn the call over to Mr. Josh.
Sure of Investor Relations. Thank you you may begin.
Thank you Hello, good morning.
On the call today, or John made chairman and CEO, Brian Campbell, Chief Financial Officer Glory read AG, and Turf Division, President and Britain or would manager Investor Communications.
They will take a closer look at your second quarter earnings and spend some time talking about our markets. Our current outlook for fiscal 2020. After that we'll respond your questions. Please note slides are available to complement the call. This morning. They can be accessed on our website. John do you Dot Com Slash earnings for the reminder, just called being broadcast live on the Internet and recorded for future transmission and used by doing.
The company any other use recording transmission of any portion of this copyright broadcast without the express written consent of Deere is strictly prohibited participants in the call, including the Q and a session agree that there like Mr remarks in all media, maybe stored and used as part of the earnings call.
This call includes forward looking comments concerning the company's plans the projections for the future that are subject to important risks and uncertainties additional information concerning factors that could cause actual results to differ materially is contained in the company's most recent form 8-K, and periodic reports filed with the Securities and Exchange Commission.
This call May also include financial measures that are non conformance with the accounting principles generally accepted in United States of America her gap.
Additional information concerning these measures, including reconciliations to comparable GAAP measures is included in the release and posted on our website, John Deere Dotcom Slash earnings under quarterly earnings and events I'll now turn the call over to John May.
Thanks, Josh Good morning, and welcome to John Deere second quarter earnings call.
Before discussing the details of the quarter I'd like to begin the call with an overview of our response to covert 19, and the near term empirically implications of the pandemic for our business.
First off I sincerely hope that you and your families are safe and healthy and well. These times are challenging for many people and my thoughts are with those affected by cobot 19.
Additionally, I'd like to express my sincere gratitude to those who are serving our communities. So that we can all overcome this pandemic.
From the courageous medical professionals to those tirelessly working in industries essential to stability and recovery.
Such as the extraordinary colleagues that John Deere and many of our customers I want to say thank you.
As John Deere has responded to covert 19, our first priority has been in will always be the health safety and overall welfare of our employees.
It is only by protecting our workforce that we can ultimately deliver on our commitment to our custer customers in fulfill our role as an essential business does a designation we are both proud of and humbled by.
Over the last two months Weve proactively implemented additional health and safety measures at our operations around the World Importantly, many of these measures we're taking on very early in the head of regulations or official guidelines. These measures such as employee.
Health screening additional personal protective equipment, social distancing guidelines enhanced cleaning and sanitation efforts.
And staggered production schedules.
Diligently pursuing health and safety measures, we not only help protect our workforce, but we also provide our employees with peace of mind, so that they feel secure coming to work and consistent with our dedication to health and safety in our workforce we.
Also provided a number of additional benefits to encourage employees to take care of themselves and their loved ones without fear of financial harm.
As additional benefits help support symptomatic employees or those deemed high risk. While also supporting workers, who are challenged by the lack of school or daycare options.
During this time, our strong partnership with the you ADW in other labor organizations across the Globe has played a key role in helping us implement these measures, allowing us to answer the call as an essential business.
I'm proud to report that substantially all of our global manufacturing base is running with exception of a few facilities operating at limited capacity such as those in India.
Our commitment to health safety and well being extends outside of our walls in into the communities. Our employees call home for instance, John Deere is for is producing thousands of protective face yields to meet the immediate and ongoing needs of health care.
Workers, serving our communities.
To this we had our foundation support of our social safety net in our home communities around the world.
Highlighted by our recent investments in food banks and their capacity.
At the same time, we're also modifying our work to ensure that our customers in dealers can keep their operations running.
Underlying deeres designation by many governments as an essential business is the fundamental recognition of the roll our customers play in securing our global food supply and vital infrastructure.
One goal has been to maintain customer uptime.
You do this we've kept new equipment shipments moving and parts depots operational around the world.
This has been no small task, particularly in light of the economic.
Flex cities of the regulatory economic and other barriers that have affected our supply chain.
As it relates to our dealer channel.
The vast majority are operating today and were able to maintain business safely throughout the last two months importantly.
Dave leveraged our E commerce tools and connected support capabilities through out the pandemic, allowing them to remotely service customers machines and maintain appropriate social distancing.
Ultimately the measure that we've taken to ensure continuity of operations have enabled our customers to carry out the essential work of promoting food security and providing critical infrastructure.
While customers operations very around the world.
This is an especially critical time for those involved in agriculture.
During the last few months many of our customers have been planting or harvesting a crop and therefore have required continuous support from John Deere and our dealers.
Furthermore, John Deere financial has continued providing financing to customers globally. Throughout this crisis and has provided flexible terms to customers experiencing disruptions due to covert 19.
The best summarize our efforts over the last two months.
We are protecting our employees, who in turn help ensure that the essential operations of our customers keep running.
And where our customers need even further support and financial assistance, John Deere financial allows us to serve customers in ways that others cannot.
In addition to the operational actions. We've also proactively managed our balance sheet and cost structure to ensure we are well capitalize through this period of uncertainty.
Over the years, we've built a business with a cost structure that can flex with movements up and down the cycle. So much of this is already in our DNA.
In addition to that we plan to make further structural improvements beyond the typical cost levers we pull throughout the cycle.
Lastly.
I'd like to revisit the strategy, we laid out during our analyst event at CES in January.
Regardless of code covert 19, all of the key elements of our strategy continue to direct our efforts. We continue to work on executing our priorities, which have proved more important now than ever first.
We are focusing on capital allocation both investments in R&D.
And investments.
To the areas of greatest potential for differentiation in profitability, resulting in intensified precision AG investments higher penetration in our aftermarket and retrofit business and an increased emphasis.
On high performing product lines, while actively addressing any lower performing product line.
Second.
We are reorienting, our organization design to create a business that is more customer focused across the entire production system in order to better capitalize on the immense opportunity in front of us.
As it relates to intensifying our precision AG business.
The current environment highlights the importance of Deere's technology stack as a key differentiator in the market.
We've been investing in machine conductivity and data platforms for nearly a decade.
Having those foundational technologies and our installed base has a naved enabled our connected machines metric to increased significantly year over year, which has provided in some cases triple digit growth in adoption of the services like remote.
Display access service advisor remote and expert alerts.
In light of the current circumstances, we see it has an obligation to continue investing in precision technologies that support customers and keep them running.
We remain convinced of the value of creating a more agile organization to more nimbly respond to ever changing market conditions.
These organizational shifts will ensure our managers are empowered to make decisions and take action as retire required at this time I'd like to turn the call over to Brent Norwood to cover some of the details on the quarter Brent.
Thanks, John now, let's take a closer look at our second quarter results beginning on slide five enterprise net sales and revenues were down 18% to 9.25 billion, while net sales for our equipment operations were down 20% to 8.22 billion.
Net income attributable to different company was down 41% to 665.8 million or $2, an 11 cents per diluted share.
In the quarter the company recorded impairments totaling 114 million pretax and approximately 105 million after tax related to certain fixed assets operating lease equipment and a minority investment in a construction equipment company headquartered in South Africa.
At this time I'd like to welcome to the call Corey read President of AG and turf for the Americas for a discussion of the divisions results Cory.
Thanks, Brent, let's start with the worldwide AG and turf second quarter results on slide six.
Net sales were down 18% compared to last year, primarily driven by lower shipment volumes and the impact of currency translation.
Partially offset by positive price realization price.
Price realization in the quarter was positive by 1.5% while currency translation was negative by 2%.
Operating profit was $794 million, resulting in a 13.3% operating margin for the division.
The year over year decrease is primarily due to lower shipment volumes sales mix, along with the unfavorable effects of foreign currency exchange.
These factors were partially offset by price realization lower selling administrative and general expenses reduced production costs and lower research and development expenses before reviewing our industry outlook I'll first provide an update on the operational status of our facilities around the world as well as some commentary on the regional dynamics in.
Acting AG markets starting on slide seven.
In North America, nearly all AG and turf facilities have remained operational during the second quarter.
A few factories have experienced temporary production stoppages due to supply base disruptions.
Although risk and uncertainty remains we currently forecast to recover any delayed shipments throughout the balance of the year.
For our large AG business the remainder of our 2020 production schedule is largely backed by customer orders through either early order programs are rolling order books, specifically order programs for combines and crop tiers are are completed well large tractor order books extend into the fourth quarter roughly 90% for.
Right now our north American customers are focused on planting and crop protection.
Planted acres for soybeans are expected to rebound this year corn acres are forecasted at the highest level since 2012.
Favorable spring weather has resulted in above average planting progress at this stage of the season and is running well ahead of last year's severely impacted progress.
Despite the recovery and planted acres. The current environment is weighing on farmer sentiment as near term demand for agricultural commodities remains uncertain.
Recent shifts in the food supply chain combined with decreases in ethanol demand have contributed to the likelihood of elevated carry out levels for grain, which has weighed on commodity prices the impact of the phase one agreement with China remains an unknown variables at this time since most agricultural exports to China from North America tend to.
Occur around the harvest season.
As a result farmers are taking a wait and see approach on any anticipation of an uptick in exports.
Despite the many unknowns and variables large row crop farmers by and large have continued operations as normal.
On a positive note key input costs, such as fuel and fertilizer have decreased providing some offset to the decline in commodity prices.
Dairy and livestock farmers on the other hand, seeing greater degrees of short term disruption due to lower milk protein prices.
Restaurant in school closures have shifted food consumption trends, creating an oversupply of some AG products in the near term.
Government may directed towards these producers will help offset some of the recent effects that we expect this segment to remain challenged for the year.
Regarding our consumer oriented businesses in the U.S. turf and utility sales have remained resilient, especially in the seasonally important month of April.
With many U.S. consumers quarantining and together with favorable spring weather in North America home and lawn projects of buoyed demand for products, such as riding lawnmowers and compact utility tractors.
Well, we've been encouraged by demand through April it's important to note that demand is typically driven in part by the overall economic situation and as a result, we've taken a more cautious outlook for the rest of the year.
Shifting to South America farming conditions in Brazil have been favorable as the first crop is mostly harvested and expected to set a record for soybean production. Despite some persistent dryness in the southern growing regions. It second crop is also in overall good condition.
GAAP exports have been particularly strong while a sharp depreciation in the Brazilian real high has posted in boosted margins for the industry.
Despite the solid levels of profitability farmers have remained cautious on further investments due to the uncertainty caused by cobot 19, as well as possible implications stemming from the phase one us China trade agreement.
Moving onto Europe, our AG facilities are largely operational after experiencing some short term disruptions. This is due in large part to the amazing efforts of our team in and what they put in place to both keep employee safe and keep operations running.
As an example at one facility we entirely restructured our processes over the course of two days and were able to reopen immediately thereafter, we split production into two shifts enhance social distancing by workstation and procured additional personal protective equipment. Furthermore, we designed and trained employees on entirely new work protocol.
Calls these actions gave our employees the confidence to return to work within a week of establishing these new processes. Our facility was operating near its original level of productivity. This is just one of many examples in the region, where we've taken extraordinarily extraordinary efforts to maintain operations in order to support our customers.
While our facilities remain up and running market conditions in Europe are mixed arable farmers are contending with the uncertainty of lower yields due to adverse weather and softening commodity prices impacted by the pandemic.
Despite the uncertainty conditions for arable farmers remain mostly stable with weaker currency, providing some support to the incomes on the other hand, the dairy sector has experienced significant pressure is dairy prices have been negatively impacted by the closure of schools in restaurants, and the overall disruption to the food supply chain in near term changes.
Yeah.
Conversely, pork margins remained strong as exports to China are at an all time high.
Lastly, in Asian markets, our operations have varied significantly by country in China. Our facilities are all opened after experiencing closures in January and February.
Meanwhile, our Indian facility shutdown from late March through most of April and our operating at limited capacity today.
Responding we market conditions and sentiment very country by country with key markets in India, China, and southeast Asia moderating due to uncertainty.
Before reviewing our industry outlook I'd like to highlight a few seems observed throughout the quarter on slide eight that reflect the value of our dealer channel and connected support capabilities.
First regarding our channel it's important to note that substantially all of our dealers remained operational during the quarter and main full full ability to service our customers. We've long view their overall financial health as a formidable competitive advantage in our industry.
Financially, our North American AG channel came out of the last agricultural trough stronger than when they entered today as they work through cobot related challenges. Our channel is starting from a position of strength and stands ready to serve an industry fleet advancing in age while offering support on new technologies that deliver lower cost of operations.
And overall better outcomes.
Because of consistent investments made by both Dear and our dealers over the last 10 years, we're uniquely able to serve our customers in this challenging environment in a way that sets us apart from other industry players the combination of dealer investments in service capabilities, coupled with deere's investment in critical precision AG infrastructure.
Positioned us to meet customer needs throughout the pandemic.
Since 2011, Deeres equipped large AG vehicles with connectivity capabilities standard each machine.
This basic connectivity was the first critical step on this long journey to enable the many precision tools customers rely on today.
Features like the John Your operations Center service advisor remote expert alerts and remote display access are all part of a comprehensive precision AG interest infrastructure, we've been building out for a decade and important tools that feed our data and analytics capabilities, just as importantly, our dealer channel.
Already has the resources and infrastructure in place to actively utilize these tools and to serve our customers over the years, they've invested significantly in establishing their own technology departments in operation centers to better monitor and service customers machines.
For example over the last two years, our Brazilian channel established over 30 customer data operation centers dedicated to the full time monitoring in support of customers operations. The value of these collective investments became more evident than ever over the course of the last few months.
We've seen a significant increase in the use of our connected support tools with total connect connected machines up 30% year over year totaling over 200000 egg machines worldwide for some features such as remote display access we've seen adoption rates increase well over 100% since last year.
The increase has been particularly encouraging in regions like Europe in Brazil.
Not only of these tools allowed customers to practice social distancing guidelines, they've also decreased downtime and cost of their operations.
So while the recent environment has been challenging on many fronts. It's also confirmed to us that our strategy to intensify our precision investments while reshaping our organization to allow for greater degrees of agility and responsiveness is positioning us to deliver our customers a truly differentiated experience with.
Context, let's turn to our 2020 AG and turf industry outlook on slide nine.
We expect AG industry sales in the USA and Canada to be down roughly 10% for 2020, reflecting increased uncertainty in the us in slightly more challenging conditions in Canada.
Moving onto Europe, the industry outlook is forecasted to be down 5% to 10% as result of lower yields for arable farmers and a difficult market for dairy producers.
In South America industry sales of tractors and combines are projected to be down 10% to 15% for the year. Despite relatively positive fundamentals in Brazil farmers have adopted a cautious stance due to coven related uncertainty and any potential shifts in global trade between us and China. Meanwhile, the remains an ongoing economic uncertainty in Argentina.
Shifting to Asia industry sales are expected to be down moderately as key growth markets like India slowed due to countrywide lockdowns.
Lastly, industry retail sales of turf and utility equipment in the USA and Canada are projected to be down 10% in 2020, despite positive sales trends through the second quarter, we've taken a more cautious outlook on the rest of the year.
Moving onto our AG and turf forecast on slide 10.
Fiscal year 2020 sales of worldwide AG and turf equipment are forecast to be down between 10, and 15% which includes expectations of two points of positive price realization offset by currency headwind of about two points for the division's operating margin our full year forecast is ranging between 8.5 and 10%.
At this time I'd like to turn the call back over to Brent Norwood to cover details on the quarter for construction and Forestry Division Brent.
Now, let's focus on construction and forestry on slide 11.
For the quarter net sales of $2.26 billion were down 25%, primarily due to lower shipment volumes and the impact of currency translation, partially offset by positive price realization operating profit move lower year over year to 96 million, primarily due to lower shipment volumes in sales mix impairments of an asphalt plants in Germany and an unconsolidated.
Equipment company unconsolidated equipment company headquartered in South Africa, and the unfavorable effects of foreign currency exchange, partially offset by lower production costs and price realization.
Let's turn to our 2020 construction forestry industry outlook on slide 12.
Construction equipment industry sales in the U.S and Canada are now forecast to be down between 20, and 30%, reflecting sharp declines in oil and gas activity rental capex as well as.
As well as overall moderation in general economic activity during the second quarter.
Moving onto the global to global Forestry, we now expect the industry to declined 15%, 20% this year with the USA and Canada markets declining more than the rest of the world as lumber in pulp prices soften in North America.
Moving to the Cnf division outlook on slide 13.
Deeres construction and forestry 2020, net sales are forecast to be down between 30, and 40% compared to last year.
The incremental decline relative to the industry guidance reflects plans to underproduce retail sales as we take further actions to reduce field inventory.
The order book remains within our historical 30 to 60 day replenishment window, but at a much reduced production schedule.
Our net sales guidance for the year includes expectations of about one point to positive price realization and a currency headwind of about two points.
For the division's operating margin our full year forecast is ranging between two and 4%.
Let's move now to our financial services operations on Slide 14.
Worldwide financial services net income attributable to different company in the second quarter was 60 million as a result of a higher provision for credit losses unfavorable financing spreads and increased losses and impairments on lease residual values, primarily for construction equipment, partially offset by income earned on a higher average portfolio.
Ill.
For fiscal year 2020, net income forecast is now 490 million, which contemplates a tax rate between 24 and 26%.
The provision for credit losses in 2020 is forecast at 37 basis points, reflecting a higher degree of uncertainty relative to last year.
Slide 15 outlines our guidance for net income our effective tax rate and operating cash flow.
Our full year outlook for net income is now forecast to be in a range of 1.6 to 2 billion with an effective tax rate projected to be between 22 and 24%.
Cash flow from the equipment operations forecast is now in a range of 1.9 to 2.3 billion for 2020 I.
Ill now turn the call over to Brian Campbell for closing comments Brian.
Before we respond to your questions I'd first like to offer some thoughts on our liquidity position cost management financial forecast and the status of our strategy we discussed at CES.
First I'd like to highlight some of the actions taken during March and April to enhance our liquidity and financial position.
In mid March we stopped our share repurchases.
In late March in early April we successfully executed two medium term note offerings. The first offering raised 2.25 billion us dollars through the issuance of 510 and 30 year notes.
The second offering raised 2 billion euro through the issuance of four eight and 12 year notes.
Also in March we successfully renewed our revolving credit facilities totaling 8 billion.
An increase of 200 million from our prior year renewal.
These actions provide extra support for our overall liquidity profile and led to the continuing uncertainties arising from the ongoing cobot 19 pandemic.
They are also squarely in line with our use of cash priorities, which continue to serve us well through these challenging times.
As a reminder, the priorities are to maintain our a rating fully fund our operations pay dividends to shareholders and finally repurchase shares when conditions warrant.
As it relates to cost management the year to date results reflect our strong heritage of managing performance throughout the business cycle.
Given the speed of the recent downturn, we were able to maintain decremental margins below 25%, even including the costs associated with the voluntary separation program in our first and second quarters and the impairment charges taken in our second quarter.
A quick actions taken by employees at all levels pulling cost and capital levers.
Allowed us to achieve these strong results in this very challenging environment.
Second I want to provide some perspective on the 1.6 billion to 2 billion net income forecast that we are providing.
It goes without saying, but I want to emphasize that we are still operating in a very uncertain environment given the ongoing cobot 19 pandemic. However, we felt it was important to provide some perspective on our current estimate of fiscal 2020 financial performance.
Our forecasted driven by estimated industry performance as well as our expected inventory positioning.
Although all parts of our business have some level of demand uncertainty certain products like those subject to our early order programs operate on more of a sold ahead basis, and we have higher visibility to demand in those areas.
Other products have lower levels of visibility as they do not operate up early order programs and tend to be driven to a larger extent by general economic trends such as housing starts the price of oil levels of GDP and other factors are ranges attempt to reflect these dynamics.
In addition supply related risks remain as our global supply base supply base deals with the complexity caused by the cobot 19 pandemic.
While we have confidence in our supplier capabilities. They contend with uncertainties caused by the pandemic such as workforce availability effectiveness and availability of transport carriers, and overall availability and pricing and materials.
Uncertainty also remains with respect to our ability to maintain the level of operation required to support the production schedules. We are currently forecasting.
Although we have had good success to date there are many different factors that can impact our production and other operations first and foremost is the ability to provide a safe working environment for our employees.
Our forecast attempts to reflect these and other risks it provides our best estimate based on the factors that drive our performance as we see them as of today.
The higher end of the range reflects our current expectation of demand and our ability to manage through the current environment with minimal disruption, while the lower end of the range would reflect lower order receipts, coupled with higher levels of manufacturing suspensions and distribution challenges.
Given the complexity and uncertainty of the cobot 19 pandemic actual performance could deviate from our range.
Finally.
I want to emphasize John's points on the strategic direction of the company.
EPS seems like a long time ago, given everything that has happened over the last few months. However, managing through these difficult times leaves us even more convinced than the priorities, we articulated at that time.
We will continue to allocate capital to the areas that at the highest potential for differentiation like large and production system.
Accordingly, as we have pulled levers to reduce costs in this environment, we have protected the investment in these areas as they will be a significant driver of our future performance.
We will aggressively drive growth and our aftermarket parts and retrofit business and wheel drive more efficiency in our cost structure in order to move with enhanced speed and agility unlocking the full potential of our talented employee base.
No we're ready to begin the Q and a portion of the call. The operator will instruct you on the point procedure in consideration of others. Please limit yourself to one question. If you have additional questions. We ask that you rejoin the queue.
Operator.
Thank you if you would like to ask a question. Please press star one you will be problems with record your first and your last name. Please I'm your phone and recording your name and to withdraw your question Press Star to one moment. Please for the first question.
Our first question comes from Jamie Cook with Credit Suisse. Your line is open.
Hi, good morning, and glad to hear everyone well.
I guess just my first question can you just think dress you talked to in.
Quarter about taking additional are looking at structural cost can you talk about sort of the items that you're contemplating and what that could potentially mean, if any for savings in 2021, and then just a follow up on that are there any costs associated with restructuring implied in your net income died thank you.
Thanks, Jamie I'll start.
As we as we think about cost actions that we've taken we had the voluntary separation program that we executed in the first quarter, we're seeing savings on that throughout the throughout the remainder of 2020 on top of that as we've talked about we pull levers.
We reduced CNG full year, we expect to be down about 11%, we've been more targeted or surgical with what we've done on R&D.
And then we also see some things like incentive comp that's a bit of an automatic lever as we shipped up and down the the business. So those are the things I'd be contemplated in our guide as it relates to further actions.
I'll have anything in this forecast today.
Jamie its Ryan I'd point, you back to see us in our talking points, there were still executing against that strategy and we said about one point of structural cost improvement or structural improvement in our margins will come from cost. So we've got the voluntary separation programs. We did a 19 and 20 the full year run rate on those is about 120 million we've talked about the Bert.
Synergies of about $125 million Euro that would leave us about 100 million plus remaining of actions related to cost efficiencies looking at footprint looking an organizational design, we'll make those decisions over the next several months and we'll update as those decisions get made.
Thank you go and jumped to our next question.
Our next question comes from Jerry Ravage with Goldman Sachs. Your line is open.
Hi, good morning, everyone.
Sure.
I'm wondering if you can talk about proceeds of AD. So we're doing from a field data adoption wage and actually been ahead of expectations for a lot of folks.
Our Teekay, which you can plant. They can you talk about what youre take rates for those products are looking like for.
For this season.
If you could update us on the aftermarket exact merged kits.
Yes, I'll start Jerry.
When we look at precision AG I think we're continuing to see strong adoption Corey raw.
I made reference to our connected machines over 201000 connected machines you engage acres now over 190 million engaged acres and those are the you think about those are the things that are driving.
The underlying tools that are executing on that thats.
Do you see strong strong adoption of things like exact emerge and planting and planting progress. This year, obviously weather's been conducive, but what you're seeing significant improvements in what we've done there.
And things like combined advisor and some of the things that we've talked in the past all continued to be strong I think today, what we're seeing in.
Before you can add some some context here just what we're seeing on the aftermarket side and the ability to deliver a customer experience to customers that that is somewhat unmatched in particularly environment like this.
Yeah, Jerry I would start with we made a couple of comments about the core infrastructure the ability to connect out to each of these machines both at the individual vehicle level and at the system level.
Has allowed us to keep customers up and running.
I'll give you. An example of planting we had a customer who had hope. This plan are up wrong have individual hydraulic downforce on his planner. We're now getting we're now getting digital connections between those planners back to our dealers who are able to diagnose diagnosed those machines down to the individual Roe unit.
Without having to be in the field looking at the problem where to proactively see that alert come through alert the customer when they were starting planning that it wasn't planning appropriately and be able to turn that into a fix that allows that customers crop to be planet correctly and preserve their revenue. That's one of 1000 of these examples on the aftermarket side, it's been incredible to see how the did.
Structure has allowed us to see machine failures.
Able to connect with customers through digital portals be able to seamlessly continue aftermarket connections back to the dealership in a way that allows us deliver parks without ever having a face to face transaction. So.
Thats just a.
A decade of putting the infrastructure in place Thats allowed our customers and dealers to now take that infrastructure and turn it into tremendous experience for them in a difficult time.
Thanks, Jerry will go ahead and go to our next question appreciate it.
Our next question comes from Ashy scooped out with Stephens. Your line is open.
Hi, good morning, Thanks for taking the question just following up on aftermarket.
Have you guys sort of coal.
A pickup in aftermarket sales in the quarter beyond what you would have expected this being driven by the connected machines.
Based on what you're seeing so far.
Relative to the goals you have for.
The long term guidance, increasing aftermarket kind of getting it seems like you're getting an increased level of confidence in your ability to sorta achieve that aftermarket target.
Yes, I think we're certainly we're early early days on some of these initiatives, but I think we've seen good progress I mean, the digital tools and being able to diagnoses things and do a proactively as definitely helped this year.
We're planting earlier than we did last year, so that play some role into but we have seen an uptick, particularly north American AG.
Parts in the early part of the year. So that's been positive but we've also dealers have also been a lot of work. In addition to our parts organization to support the.
Yeah, I think you have a couple of things as Corey we have a couple of things going on number one we have an aging fleet, we've been down in new volumes over a number of years. So as the fleet ages the opportunity for that aftermarket potential.
If you look back 456 years ago at some of the highest machine populations. We put in that aftermarket opportunity is huge we've put an infrastructure in place to be able to connect to those machines to keep our customers up and running and we put systems in place at our dealers that allow them to transact in an ecommerce way that differentiates them in the March.
Okay. So a couple of points there obviously.
Theres an opportunity for us to both upgrade their equipment through performance upgrades things that we can take back across their fleet and also the opportunity to trade them into new equipment over time that aging fleet gives benefits in a number of ways. The connections at our dealers and been able to make using E commerce using their dealer customer portals is a differentiator.
For them today, and they've continued to grow their aftermarket business as a result of it.
Yes, maybe one last thing to add on top of that just from a from a digital tool perspective, a lot of our dealers have done a lot of work with online showrooms virtual.
Seen Walker ounces in.
We've seen significant opportunities there of our of our dealers differentiating their offering.
And maybe in particular in Brazil, where we've seen just a lot of greed activity relative to how do we support in support and sell in a different environment.
With that will go and build on a question. Thanks Ashish.
Thanks.
Our next question comes from Courtney yet the bonus of Morgan Stanley. Your line is open.
Hi, Thanks for the question.
I appreciate the color you guys gave on some of the structural costs that you're addressing but I think last quarter.
You talked about some cost whether it was elevated freight.
Or maybe some costs associated with social distancing that.
Might be Wayne on on your margins going for can you just kind of breakout.
If there's anything that we should be expecting kind of as you guys are returning.
Back to normal volume.
Well that will weigh on on Martin.
Yes, I mean, when you think about the particularly what we've got included in our forecast last last quarter, we talked about premium freight being one of the biggest items. So we continue to expect that full year on the AG side. For example, we expect about $50 million of premium freight as supply base has come back online and.
We're working to get those parts and components into our facilities. So that would be the one of the bigger ones on top of that it's harder to quantify some of the disruption or to your point social doesn't seem additional people you need to keep folks safe. So there are other costs relative to to operate in this environment.
And as well as just some of the inefficiencies relative to two disruption. So we have some of those really in both divisions, but.
If you think about.
From an AG and turf perspective, even with those costs, we're talking about.
For the full year Decrementals in the.
Upper teens to low twentys. So so feel really good about the ability to execute there and the uncertain environment.
Okay, Great and then you also.
Had mentioned.
The replacement schedule and that some of the sales this year robot Dennis from.
Early order program for thinking about next year can you just comment on.
The willingness as farmers to replace their equipment, given where commodity prices are today.
Any impact, but some of the government programs that were seeing come through could impact this decision.
Sure This Corey I think.
No doubt that there is uncertainty created by what's happened with the pandemic I think the big factors are thinking about what demand will look like from US China trade trade deal. It's certainly the case that are our fleet is aging. So if you look at the availability to take technology and upgrade both the performance of machine and the profitability.
Have a farmers operation, we really have two ways of doing that we can take those technologies back across the existing fleet to performance upgrades or we can trade those farmers going forward into into new technology.
I think the demand side of that is yet to be determined going into 2021, because theres a lot of interruption certainly the government programs. If you look at what they've done they've been a leveling effect that is help customers both maintain their profitability throughout this year. The insurance programs have given them a level of certainty as to whether incomes will be as.
We look to 2021, we'll look to the general economy and look to how trade continues through the remainder of the year.
Thanks, Gordon will go ahead and go to our our next caller.
Thank you. Our next question comes from Rob Wertheimer with nucleus Research. Your line is open.
Hey, good morning, everyone.
So my question is on the construction and there's a pretty substantial dealer destock implied in the gap between your marketing and your and your own revenues and then my question is dealer inventory kind of trend. The way you wanted to over the cycle or to the rental fleets or something else get out of hand.
Outflow that is going to bounce back when the market on the back or would you rather have a more streamlined dealer inventory and then just a small one how come we didnt are you didn't rather.
Cut construction, a little bit more in twoq versus threeq to Fourq you implied thanks.
Yeah. Thanks, Rob I mean, I think as you think about construction inventories in younger in really in particular, we're talking about North America and construction equipment.
We've we entered the year one Q, we talked about Underproducing, we will underproducing, one or produce more than we expected to coming into.
Into this quarter I think you ought to be how much did it come down in twoq versus expectations, I mean, the speed at which the deceleration occurred.
Lose candidly just faster.
Than than we would've expected.
And we've taken actions there too too.
Pull back there and as I mentioned, we'll underproduce and.
Try to try to manage those accordingly, maybe to the other part of your question a little bit of the phenomenon. How we saw those inventories evolve I mean, I think it's a combination of managing.
New fresh inventory in the dealer channel.
As well as viewer on rental fleet. So theres combination when we think about total dealer inventories really two pieces.
And trying to manage the combination of those two known certainly no on the production side as we Underproduce, we can pull back the new.
Faster.
And in the dealers will work through those.
Converting those rental machines into sales so it's really a balance of managing both components of those those inventories.
All right. Thanks, Rob will go and jumped over next question.
Our next question comes from Steve Fisher with UBS. Your line is open.
Thanks, Good morning, guys I just wanted to follow up on the margins and specifically in construction and could you just talk about what you have assumed.
For the second half of the year exceeding it implies around 1% margins are you assuming that you are profitable in both quarters or more profitable in one one quarter and losing money in the next and then as you think beyond.
Sort of 2020, how quickly could the margins come back there.
And what does it really requires that sort of the neutralizing of oil and gas is it something more on the verdict inside the synergies.
Those of the questions. Thanks.
Yes, Thanks, Steve I mean, I think when we think about the back half year for Cnf for mean as mentioned.
The biggest driver is volume and the underproduction that we're doing in the in the back half of the year so that that has.
Pretty significant impact I think maybe think about road building road building for the full year, we expect to be down about 25%.
So thats, a pretty significant reduction as well on a business that is drives drugs pretty pretty strong margin performance as well.
Yes, I think as we look at overall, though maybe you pointed to your your question, we'd expect that were positive.
For the back half of the year.
So no major shifts.
But it's positive in both quarters profitable in both quarters.
That's right.
Okay. Thanks, very much thanks, Steve go to the next question.
Our next question comes Joe O'dea with vertical research your line is open.
Hi, good morning, everyone.
A question on the AG and turf margin guidance with the that midpoint, calling for back half of the year revenue declines similar to what we saw in the first half of the year.
But implying decremental margins in the mid 20% range versus low teens in the first half of the year and so what you're seeing to drive some of that difference and the decremental margin performance on similar revenue trends.
Yes, I think when you think about back half I mean, theres a few things couple that I mentioned I think.
Important use question, but so we do have some of these incremental colby related cost so.
Premium premium freight some of the inefficiencies just relative to disruption the operations in another coated related costs.
And then FX has turned.
Pretty negatively as you saw significant deterioration versus the dollar on a number of currencies, but in particular, the Brazilian real.
Obviously that that was occurring in March so you see more of that impact in the back half of the year and then from a volume perspective, we do expect to the back half to to be.
Down a little bit more than what we experienced in the first half of the year.
And specifically on mix it looks like mix was a headwind in the quarter, but as we think about large AG that could be more stable relative to small AG think about the aftermarket trends that you've been discussing do you think about mix as being a tailwind in the back half the year.
Yes full year, we expect mix is favorable.
It's been relatively neutral kind of through the first half of the year. So thats correct.
Okay. Thank you. Thanks. Thanks, Joe will go ahead go to our next question.
Our next question comes from Stephen Volkmann with Jefferies. Your line is open.
Hey, good morning, guys, maybe just sort of a bigger picture or longer term question.
I think some goodbye was being with were sort of surprised because Cory you laid out a bunch of headwinds and in the AG space relative to a very large plantings and lower crop prices and demand questions and so forth. So.
I'm just trying to figure out.
You know how you're thinking about this from a little bit longer term perspective, you know as we get into you know next year, perhaps serving along question.
No I think you've covered I think you'd be answered part of it and that.
We're <unk>, we're at some pretty low levels overall, and we have a fleet. That's sitting is as old as it's been in probably a decade or a decade in the half which means you know one of the things that you see is the technologies available today given opportunity for customers to lower their cost structure in an environment, where we're overall demand is that.
Question. The the thing that customers can do is invest to make sure. They have the lowest cost of production of anyone in the market. So we see technology being driven across those acres. So old machine fleet, the ability to take products and technologies that we've delivered like exact emerged that's still relatively young.
In the market. If you look at total acres planet, but will continue to grow like our our exact apply and later R.C. and spray technologies, we have the ability to change the cost structure on each acre and if you take an aging fleet and you can change the cost structure, you have the ability to generate to generate a the sales I think our customers on the customers.
<unk>.
Their incomes have been buffered by the programs. The remained to be seen is overall demand for commodities and ultimately how trade works between the regents going forward.
You know what other one other phenomenon that we've talked about is you know our our units.
You know with replacement kind of getting pushed out with trade and then and then Cove. It you know our units of and Flatish and at a lower level, but we continue to grow the per unit sales in the business as customers continue to buy a higher spec more productive machines and so that's a phenomenon that gives us a little more confidence that even if indices.
He is maybe a little bit challenged we're going to be able to outperform given our value proposition and given our customers propensity to continue to upgrade and and purchase our latest and most productive equipment.
Great. Thank you guys.
Thank you go to our next question.
Yes, our next touching catch them 10 fine with city group. Your line is open.
Oh, Thank you good morning.
Maybe just a circle back Cory for you on on your comments on the order boarding watermelon, but <unk> into the fourth quarter I know.
You're you're doing some movement or Kansas, <unk> <unk> <unk> that line. So I'm just curious.
<unk>, obviously that those those those slots can be impacted by production rate. So I'm just trying to I guess that got a better understanding or whatnot actually means you know in terms of.
Where where you at this point last year and and is there any impact their current though.
You know potentially that the the i. cool build rates are they come down at all or been changed so that's a question.
Yeah, I think <unk>, Josh I'll start I mean, I think that you look at Waterloo as quarter mentioned, you know 90% of the year ordered out yeah. We've got you know eight to eight ours availability is in into September into the kind of mid to late September.
So you know, we're we continue to to move forward. There. So I think that's a that's a positive you. Obviously now we're building the the new machines as we as we go for you know, we we did see some some disruption on a supply side. We so we we spent a few weeks down as we were going through some supply challenges and you know at.
As a result, you know that that's impacted a little bit of what we've been able to do in may but it's quite mentioned you were confident in the ability to catch up there and you know our backup running building tractors today.
Yeah, you know the only other thing I would add is what that transition was taking place the end of the the second quarter. We're now building a product that's outstanding from a customer perspective, as it's hitting the market. Our customers have responded very favorably to it. So while we we obviously have our current order book largely film.
We're very we're we're very pleased with the performance of the new machine as it's hitting the market and it contains a lot of game changing technologies, we move forward into 21 and beyond.
A court just remind her <unk> output typically gets export it from Waterloo. These days.
<unk> it varies varies year to year. So you know if you think about exports from from other though it's predominantly would be you know your in in some other other parts of a of the World think like Oceania, Australia, New Zealand, but you know those would be those would be some of the biggest ones with with Brazil now producing.
You know for for themselves. So thanks, Tim well go ahead and go to a next question.
Our next question cash Dave at Rasta with Evercore. Your line is open.
Hi, good morning, the revenue growth for the second half the year and <unk> that decline.
The same as the first pass I'm, just trying to put that in better context.
Can you help us with second half of last year Your high horse power for remember correctly was under producing retail.
What will the production day in the back half of this year versus retail fragment tariffs just so we get some sense of that swing from under production too I'm assuming from these numbers less under production and then second if you can help just quantify the order book today, where is it versus a year ago, because when you say it's out through September.
That to simply depends it can be a certain amount of months space off or whatever the line rate is we're just trying to get a sense of that down 12.5%. How much is a swing from under production to less underproduction or maybe even producing in line and also some sense of the backlog, including maybe color on the new product and be helping that backlog more than the industry.
Thank you.
Yeah, I mean, I think is is as it relates to Waterloo, maybe maybe starting an egg in total you know the the the back half we expect back have volumes to be down a little bit more than than than the first half so not not equally matched sit down a little bit in the back have guys relates to to Waterloo, you know anything about large or high horse power Rocap tractors.
You know, we're we're gonna be in line effectively for the year in terms of production relative to retail. So you know not jet fuel. She doesn't have to just be clear just I'm speaking just on the second half will production D.N. line with retail for high horse power and the second half the year versus just to.
Mine does the comp it's going against a year ago.
Production versus retail second half versus second huh.
David It's ran I think what you're getting to basically what's the year over year and so a couple of different factors that you have to think about one is the industry were projected to be down, but you point out correctly that we underproduce last year. So we underproduce last year industries down. So we'll produce you know for the full year. This year roughly in line. So production at some of our larger fussy.
<unk> is a little bit higher as Josh talked about our mixed gets a little bit better this year, but one thing you need to think about us that's offset by really weak currency environment. So most of our currencies that we sell an outside the U.S. dollar if we can significantly so that offset some of that.
Okay, the new product help to the backlog and again, if you can just help us some way to quantify where's your backlog today versus a year ago.
Yeah, I mean, I think probably hasn't changed significantly from from where we've been a quarter go just because you know the from the year ago at the same time I'm asking year over year, I apologize I'm not being clear the backlog today versus this time last year I'm sorry.
Over a year, yeah, our our orders in Waterloo or up about 10% your ear.
Okay that that a lot easier when a guide them. Thank you so much I really appreciate stuff.
Alright, well go ahead do one more question.
Thank you I last question comes from Andy Casey Wells Fargo Securities. Your line is open.
Thanks, a lot and good morning, everybody.
Just a question.
How you would like us to look at at the upcoming early order programs and <unk>.
I mean outside of last year or to placement as had been waited to the early part of those programs, but with all the uncertainty you outlined in the market should we expect farmers are are going to continue to.
Latency and therefore.
Should we expect looking it you know what channel checks from whatever.
At the orders are probably going to be skewed towards the the tail and.
Would presumably visibility improves.
Yeah, you. It's it's a great question Andean you'll we'll we'll kick off you know Crocker you'll piece here a an early June so I I think as you rightly note you know lots of questions in plenty plenty of uncertainty from a customer perspective. So I think I think we'll we'll have to see how how they how they play out yeah.
I think it's early order programs will be a good indicator generally we get majority of the orders by phase in the later parts of the phase anyway. So you know it's our expectation is we won't know at the beginning of those early order programs. We we usually have pretty good gates that we go through relative to the phase is that's the last week of those phases generally give us a good indeed.
Cater what demands going to look like.
Thanks, Sandy well, thanks, everyone with that we'll we'll wrap up the call. We appreciate the interest and we'll talk to you assume thank you.
Thank you for your participation. This does conclude today's conference call.
You may disconnect. It this time.