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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning. Welcome to John Deere & Company Third 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 over the call to Mr. Josh Jepsen, Director of Investor Relations. Thank you. You may begin.
Hello, good morning. Also on the call today are Ryan Campbell, our Chief Financial Officer; Luke Chandler, Chief Economist; and Brent Norwood, Manager of Investor Communications. Today, we will take a closer look at your third quarter earnings and spend some time talking about our markets and our current outlook for fiscal 2019. After that, we will respond to your questions.
Please note that slides are available to complement the call this morning. They can be accessed on our Web site at www.johndeere.com/earnings.
First, a reminder, this call is being broadcast live on the Internet and recorded for future transmission and use by Deere & Company. Any other use, recording or transmission of any portion of this copyrighted broadcast without the expressed written consent of Deere is strictly prohibited. Participants in the call, including the Q&A session, agree that their likeness and remarks in all media may be stored and used as part of the earnings call.
This call includes forward-looking comments concerning the company's plans and projections for the future that are subject to important risks and uncertainties. Additional information concerning factors that could cause actual results to differ materially is contained in the Company's most recent Form 8-K and periodic reports filed with the Securities and Exchange Commission.
This call may also include financial measures that are not in conformance with accounting principles generally accepted in the United States of America, GAAP. Additional information concerning these measures including reconciliations to comparable GAAP measures is included in the release and posted on our Web site at johndeere.com/earnings under Quarterly Earnings & Events. Brent?
John Deere completed the third quarter with results reflecting a higher degree of uncertainty over the agricultural sector in North America. Concerns over market access, near-term demand for commodity, and weather continue to challenge the industry and have partially overshadowed a heightened outlook for farm incomes in the U.S. Meanwhile, some foreign markets such as Brazil have showed continued signs of strength as strong crop production and increased exports have benefited the local industry.
In construction and forestry, end market demand remained strong, resulting from broad-based industry drivers such a GDP growth, oil and gas activity, and infrastructure investments. With order books extending through most of the fourth quarter, the division is on track for a solid finish to the year. Now, let's take a closer look at our third quarter results beginning on slide three. Net sales and revenue were down 3% to $10 billion.
Net income attributable to Deere & Company was $899 million or $2.81 per diluted share. The results included a favorable benefit to the provision for income taxes due to U.S. tax reform. Excluding this item, adjusted net income was $867 million or $2.71 per diluted share.
On slide four, total worldwide equipment operations net sales were down 3% to $8.969 billion. Price realization in the quarter was positive by three points while currency translation was negative by two points.
Turning to our review of our individual businesses starting with agriculture & turf on slide five, net sales were down 6% in the quarter-over-quarter comparison primarily driven by lower shipment volumes and the negative impact of currency translation, partially offset by positive price realization.
Operating profit was $612 million, resulting in a 10.3% operating margin for the division. The year-over-year decline was due to lower shipment volumes, higher product cost, and the unfavorable effects of foreign currency exchange, partially offset by positive price realization.
At this point, I would like to welcome to the call our chief economist Luke Chandler to discuss the fundamentals affecting the ag business. Luke?
Thanks, Brent. Good morning all. 2019 is proving to be a mixed year for global agriculture. Increasing demand, some higher prices, and government support programs are helping to offset the uncertainties caused by trade disputes, weather setbacks, and disease disruption.
As shown on slide six, global stocks of major grain and oil seeds are forecasted fall 3% in 2019 - 2020. Major farm economies around the world are expected to be mostly on par or slightly improved in 2019 year-over-year. While ongoing market access issues have been detrimental to the North American farmer confidence, increased export opportunities emerged for farmers in other parts of the world notably Brazil and Argentina. Turning now to take a closer look at some of the key agricultural economies around the world, beginning with the United States where 2019 has been a volatile one for farmers particularly those in the Corn Belt. The U.S. row crop sector started the year with the USDA forecasting corn ending stocks at the highest level in over 30 years.
Soybean ending stocks at near record levels and the smallest amount of wheat acreage planted in U.S. history. As the planting season progressed, cold spring temperatures and the wettest 12-month period in U.S. history brought flooding and record planting delays across major corn and soybean growing regions. The result was heightened on uncertainty around row crop production. This uncertainty was reflected in the USDA’s latest estimates released this past Monday which surprised the market particularly the forecast of national corn production.
It is worth remembering that there is quite a lot of time remaining in the growing season. In addition to some improvement in prices earlier in the summer, the USDA in May 2019 announced the second round of the market facilitation program or MFP which includes up to $14.5 billion in direct payment to the U.S. farmers.
Higher levels of uncertainty regarding final planted and harvested acreage, yield, and MSP details have contributed to wide swing in farmer sentiments throughout the season.
Looking ahead to the rest of the crop season, trade uncertainty continues to dampen sentiment across the U.S. farm economy. That said, the impact of the second round of MFP payments leads to forecast the U.S. farm cash received in 2019 as shown on slide seven although full benefit of higher receipts on industry demand maybe somewhat delayed or dampened by the current uncertain environment.
Up north of the board of the Canadian farm economy continues to be challenged by lower farm income in 2018 and the overhang of an ongoing trade dispute with China. Wheat prices continued to be pressured by abundant levels of supplies while canola growers fight ongoing Chinese restrictions on imports. As a result, Canadian major crop area and cash receipts are expected to decline yet again this year. And Canadian farmers are proceeding cautiously with new equipment investments even though balance sheet remains solid. On a positive note, this year's profit is benefiting from light season rain after a dry start of the season, modestly improving the needs and farmer sentiment.
Moving down to South America, as shown on slide eight, the 2018 - 19 season marked a record year for combine corn and soya production. Rising global demand for grains and oil seeds is also driving the exports forecast to record higher level encouraging prospect for next season as well.
In Brazil, the 2019 value of production in local currencies for key grains and oil seeds and sugarcane is expected to be nearly 10% higher than last year. Brazilian farmers are seeking to capitalize on expanded trade opportunities not only in soybean but also in meat products with exports of beef, pork, and poultry all tracking higher on a year-over-year basis.
From an equipment demand perspective, the budget shortfall for the motor further [ph] poised industry demand earlier in the year. However, the budget has since been replenished for the new crop year. Overall, the 2019-20 harvest plan is viewed as supportive for the ag sector and equipment demand. Meanwhile Argentinian farmers -- sorry, meanwhile Argentinian farm conditions have rebounded strongly from last season's historic drought. The value of 2019 production is expected to be over 30% higher year-over-year. While ag fundamentals remain solid, political uncertainties create the challenging environment for Argentine financial markets more generally.
Still in the southern hemisphere, widespread drought in Australia continues to be the dominant issue shaping the farm economy Down Under. On the East Coast, drought is expected to result in a third consecutive below average winter grain crop albeit southern growing regions have improved from last year. Cotton production is also expected to be significantly lower this year due to constrained water allocation.
Conditions on the West Coast has held up much better in recent season and farmers here will be looking for spring rain to finish off this season's winter grain crop. In the EU, the macroeconomic outlook remains clouded by ongoing uncertainty regarding Brexit and whether a deal will be reached between the U.K. and the EU before the October 31 deadline. In the EU agricultural economy conditions are mixed across Europe with grain production expected to recover from last season's drought affected crops.
USCI's latest forecast has wheat production up over 10% despite challenges like excessively high temperatures and the lack of rainfall in parts. Core ag markets like France are expected to rebound as a result although the outlook has been tempered by the ensuing lower prices. Looking at the important EU dairy sector, farm incomes which were strained last year in drought condition are expected to benefit from a combination of largely stable prices and lower feed cost in 2019.
Moving over the Black Sea region, the current harvest outlook is more favorable than last year with production forecast to be up 3.5% in Russia and nearly 16% in the Ukraine. Wrapping up, while we do see some improvement in farm economies in most major producing regions in 2019, the backdrop of continued high uncertainty and volatility is expected to weigh on the outlook for the ag machinery sector.
By region at 2019, Ag and Turf industry outlooks are summarized on slide nine. Ag industry sales in the U.S. and Canada are forecast to be flat to 2019, with the decrease in guidance reflecting the previously mentioned uncertainty in the market. Moving to the EU 28 and the industry outlook is also forecast to be flat in 2019, as the production recovery is tempered by somewhat lower small grain process.
In South America, industry sales of practice and combines a project to be flat to up 5% for the year with strength in Brazil balanced by slowness in Argentina, due to the previously mentioned political and economic uncertainty. Shifting to Asia, industry sales are expected to be flat to slightly down as key market growth -- as key growth slow monitoring. Lastly, industry sales of turf and utility equipment in the U.S. and Canada are projected to be flat to up 5% in 2019 based on solid macroeconomic factors, notably continued consumer confidence.
I will now turn the call back to Brent Norwood. Brent?
Thanks, Luke. Before moving to the 2019 Ag and Turf forecast, I'll provide an update on the first phase of our 2020 planter and sprayer earlier program. As Luke already mentioned, planting was significantly delayed this season, as persistent rains kept farmers out of the fields for weeks. As a result, planting was still underway during the first phase of our earlier program, which negatively impacted early sales progress. Subsequently, we believe this year's phase one results are less indicative of the overall program, since many sales may push to phases two or three. In that context, phase one orders for planters exceeded our expectations with units flat compared to last year.
Importantly, the overall sales value is higher due to an uptick on take rates for our most advanced technology and larger planters, so driving increased equipment prices. More than ever this season underscores the immense value of seed and precise placement of the seed while planting. Anecdotally, we heard many examples of customers who were able to plant thousands of acres over a tight three-day window due solely to the use of our exact emerge planter. These anecdotes, minds with the increased take rates from our early order program, demonstrate customer willingness to make investments when the value proposition is strongest.
As for the phase one results of our sprayer program. Orders varied significantly between the U.S. and Canada. And the program's overall order book ended down double-digits in the first phase compared to last year. As previously mentioned, conditions in Canada remain challenged due to adverse weather conditions both last season and in this season, as well as FX weakness, and trade barriers on canola.
With the skew of Canadian equipment mix towards larger highly featured machines, its impact on the first phase was significant. Sprayer volumes were also down in the U.S., but to a lesser extent than in Canada. The U.S. results were negatively impacted by a tough year-over-year cost in 2018 and delayed spraying the season. It's important to note that customers were just beginning to spray near the end of phase one of our earlier program, driving customers to differ order activity until gaining further clarity on this year's crop.
Moving on to our Ag and Turf forecast on slide 10. Fiscal year 2019 sales of worldwide Ag and Turf equipment are now forecasted to be up approximately 2%, which includes a negative currency impact of about two points. Our full-year operating margin forecast is now 10.5% to reflect the previously discussed uncertainty lingering in the U.S., as well as the broadly unfavorable market conditions in Canada, additionally, the negative margin impact of currency development for the year.
Now, let's focus on construction and forestry on slide 11. Net sales of about $3 billion, we're up 1%, primarily due to positive price realization for the quarter partially offset by the negative impact of currency translation. Operating profit was $378 million benefiting from increased price realization and a lower impact of Wirtgen purchase accounting partially offset by a less favorable product mix.
Moving to slide 12, the economic drivers for the division continue to remain supportive of equipment demand for the year. For 2019, while growth and total construction investment and housing starts has slowed, both remain at overall solid levels for equipment demand. Meanwhile, oil and gas activity continued at solid levels, with oil prices firmly in the 50s and 60s and infrastructure investments are continuing at the state and local level.
Furthermore, equipment rental utilization rate remains high while rental rates continue to grow into 2019. Importantly CapEx budgets from the independent rental companies continue at level supportive of further equipment demand. Back then global transportation investment this year is forecasted to grow at about 5%, so growth rates vary by market. The overall positive economic indicators are reflected in a healthy order book which now extends through most of the fourth quarter.
Moving to the C&F outlook on slide 13, Deere's Construction & Forestry 2019 sales are now forecasted to be up about 10% compared to last year driven by strong demand for equipment as well as an additional two months of ownership of Wirtgen. Wirtgen's 2019 sales are forecasted to be about $3.2 billion and certain geographies have slowed in recent months. The global forestry market forecast is expected to be flat to up 5% with growth coming primarily from custom linked products in Europe and in Russia. C&F's full-year operating margin is projected to be about 11% with Wirtgen margins in line with the overall division.
Let's move now to our financial services operation. Slide 14 shows the provision for credit losses as a percentage of the average loan portfolio, the financial forecast for 2019 shown on the slide contemplates a loss provision of about 18 basis points, the current forecast puts loss provisions below the 10-year average and below the 15-year average as well.
Moving to slide 15, worldwide financial services net income attributable to Deere & Company was $175 million in the third quarter. For the full-year in 2019, net income forecast is now $620 million compared to previous guidance of $600 million. The higher forecast contemplates a lower tax rate.
Slide 16 outlines receivables and inventory. For the company as a whole, receivables and inventories entered the quarter up was about $1.1 billion. In the C&F division, the third quarter increase is a result of a higher order book and production schedules for the full-year rise is largely attributable to a historically low field inventory position at the start of 2019. It's worth noting that our forecasted inventory to sales ratio is in line with historic averages. For the quarter increase is due to recent weakness in Canada and deferred retail demand into Brazil as customers anticipated the new program. By the end of year, we forecast a $100 million increase in inventory and receivables.
Moving to slide 17, cost of sales for the third quarter was 77% of net sales and our 2019 guidance is about 77% in line with 2018 results. R&D was up about 4% in the third quarter and forecasted to be up 6% in 2019 or 5% excluding Wirtgen. The year-over-year increase 2019 primarily relates to strategic investments in precision ag as well as next generation large ag products. SA&G expense for the equipment operations was down 2% in the quarter and projected to be up about 4% for the full year. The decrease in guidance relates in part to a decrease in incentive compensation.
Turning to slide 18, the third quarter included -- third quarter included a $24 million benefit to the provision for income taxes resulting in a 21% tax rate for the period. The full-year effective tax rate is now projected to be between 23% and 25%.
Slide 19 shows our equipment operation is strong cash. Cash flow from the equipment operations is now forecast to be about $3.4 billion in 2019. The reduced guidance reflects a potential $300 million voluntary contribution to our OpEx plan.
Company's financial outlook is on slide 20. Our full-year outlook now calls for net sales to be about 4% which includes about three points of price realization and one point related to an additional two months of Wirtgen ownership. On the negative side, we expect the currency to be about a two point headwind for the full-year. Finally, our full-year 2019 net income is now forecasted to be at in our forecast to be $3.2 billion.
I will now turn the call over to Ryan Campbell for closing comments. Ryan?
Thanks, Brent. Before we respond to your questions, I'd first like to discuss our use of cash priorities and then provide some perspective on our financial performance, given the persistent uncertainty in the market. Like near-term fluctuations in end markets, our use of cash priorities remained the same. We continue to generate strong cash flow throughout the cycle.
Importantly, our capital allocation decisions continue to first support our A rating, while also ensuring that we effectively fund operating and growth needs. Next, we will maintain a dividend payout ratio that targets 25% to 35% of mid-cycle earnings and can be sustained through the cycle.
Note that we've increased our dividend by 25% over the last two years and that further increases will be under consideration as we demonstrate progress to our increased profitability goals.
Lastly, during the quarter, we repurchased $400 million of stock and we will continue to buy when we can create value for long-term shareholders.
Now regarding our financial performance, I want to note that we've significantly invested in next generation large ag products and accelerated our precision ag initiatives. Although while diversifying our construction and forestry division through the Wirtgen acquisition.
Additionally, we increased our infrastructure spending to gain efficiencies and modernize systems and enhance our dealer and customer engagement. Beginning in 2017, momentum has built in our ag business in the initial part of our 2019 early order program, which occurred in the summer of 2018 indicated an acceleration of replacements demand. As such, we took the steps required to meet the projected incremental demand.
Unfortunately, North American customer sentiment has since deteriorated only due to uncertainty over market access, but also due to weather and the demand impact of African swine fever as these challenges persist, we are now beginning more aggressive action on our cost structure to create a more efficient and nimble organization. These actions which will involve organizational efficiency, a footprint assessment, and an increased focus on investments with the most opportunity for differentiation are in support of our aspiration to achieve 15% structural operating profits by 2022. And will position us to capitalize upon the resumption of replacement demand growth.
Thanks, Ryan. Now we're ready to begin the Q&A portion of the call. The operator will instruct you on the following procedures in consideration of others and hope to allow more of you to participate in the call, please limit yourself to one question. If you have additional questions, we ask that you rejoin the queue. Angela?
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Rob Wertheimer with Melius Research. Your line is open.
Hey, it's Rob. Can you hear me?
Yes, we can hear you, Rob.
I'm so sorry about that. I hit the wrong button. Question is really just as you look into your potential cost savings plan you've also had a nice focus on innovation and maybe a spending policy on innovation, so could you talk about the next, you know, really two or three years on R&D? I mean you are seeing more and more projects that can generate a good return for you and therefore maybe keep that spend high and the cuts are in other areas, or maybe just balance that aspect? Thanks.
Yes. Thanks, Rob. This is Josh, I'll start. I think as we think about this, and as Ryan noted, it was the continued focus on those things that we think drive the most differentiation and most value creation for our customers, and you've really seen -- so that over the last few years as we've been investing in things like Blue River technology and features that we've been bringing out over the last couple of years, on the precision side, whether it's ExactEmerge or ExactApply, which Brent mentioned earlier, or things like Combine Advisor. So I think the ability to focus and prioritize their will be a key kind of how we operate going forward.
Hey, Rob. This is Ryan. We've made significant investments in the building blocks to be able to deliver incremental value to our customers through the use of technology and precision agriculture, and we will continue to do that. What I would say, we're early -- we're delivering measurable value today, but the opportunity, the more we work on it, the opportunity in our minds continues to grow. So we'll continue to have that be a priority for us. Now, at the same time, we're going to look at our global customers and work to find more efficient ways to deliver our products and services, so that we can satisfy their needs as well.
Thanks, Rob. We'll go ahead and go to our next question.
Next question comes from Seth Weber with RBC Capital Markets. Your line is open.
Hey, good morning everybody. Josh, last quarter you guys talked about potentially taking production down about 20% and some of the larger facilities, can you just kind of recalibrate us where you're at, kind of where third quarter was, and then what you're thinking for fourth quarter relative to third quarter? Thanks.
Yes, maybe just to kind of clear out, I think, that was probably not as clear as it as it could have been. As we think about -- the back half of the year, that comment was back-half of the year versus back-half of 2018. So, continue to expect that we will produce less than we did in 2018 similar to what we commented a quarter ago. I think importantly, maybe for a little more clarity is as we think about large tractors, we will underproduce retail demand for large tractors in the North America by a mid single-digit. So, no significant change to where we were a quarter ago, but that continues to be our expectation.
All right. Thank you, Seth. We'll go ahead and go to our next question.
Next question comes from Jerry Revich with Goldman Sachs. Your line is open.
Yes. Hi, good morning, everyone. I wonder if you could talk about how much of the cost improvement initiatives that you're looking for improving supply chain performance and on time deliveries and just update us if you wouldn't mind on how the expediting fees and costs shook out this quarter compared to what we had seen earlier this year?
So, from a supply-based perspective we've definitely seen the challenges, the disruptions, delinquencies have come down significantly, we're in better and better shape there. So, operating more and more effectively and efficiently, I think you've seen as it relates to your premium freight. We talked about some acute issues we have seen on small tractors. As we have noted, we expect those to carry into the third quarter, which they did but they've abated and we don't -- do not expect to see those as we go forward. By and large the situation much improved. As you think about cost savings moving forward, I think the opportunities there are, as we move from getting parts in, which was a significant challenge as we ramped in '18 and certainly '19, really shift to how can we spend more time on structural material cost reduction, which we typically have over time.
Thanks, Jerry. We'll go ahead and go to our next question.
Next question comes from Jamie Cook with Credit Suisse. Your line is open.
Hi, good morning. I guess two questions. Just based on what you guys said about. I guess, comment on how you're feeling about channel inventory and specifically on the large ag side as we approach 2020 and whether we'll be in a position in 2020 to produce in line with retail demand, given the under production in the back half of the year. And then I guess my second question, just well, the numbers on construction are obviously good this quarter and it sounds like you have good visibility. But there are some concerns that there's excess inventory on the construction side too. So can you just talk about what you're seeing from your perspective? Thanks.
Yes, I think the inventory overall, I think it's really a question. If you think about large ag in North America, we talked about I just mentioned, the mid single-digit underproduction for large tractors. I think what we expect is particularly in the U.S., what were the actions were taken will -- would allow us to produce to retail demand. Canada as noticed, there's a little more weakness there. So that's a spot that we need to work through further. So that would maybe a bit -- take a bit longer, but in the U.S., we would say we're positioned to do so, as if you think about where we're at from a field inventory perspective in construction.
As Brent mentioned, we still got on average, a couple months of order coverage, which is really aligned with where we traditionally run. So those replenishment times have had shorten. And that's -- we say that's a positive thing, which also helps in our ability to react to changing market dynamics. So we still intend to build field inventory during the year, as we've talked about coming off of historical loads. But that's the ability to be quicker on our replenishment allows us to be adjusting more quickly and as needed. So we'll continue to watch that market and make changes while we go forward.
So, thank you. We'll go ahead and jump to our next question.
Our next question comes from Steven Fisher with UBS. Your line is open.
Thanks. Good morning, guys. What if do you see as the biggest changes that are driving the $100 million net income guidance reduction? And then, I think your sales guidance suggests Q4 sales growth year-over-year both in ag and construction and can you talk about kind of what would be driving actual growth in the fourth quarter?
Yes, so we think about Ag in the fourth quarter, really the biggest, biggest impact there is in South America and Brazil in particular as we see some growth in that market particularly as we start to prepare for 1Q of spring season in Brazil and in 1Q. There is a little bit of a small tractor as well just from a year-over-year perspective where last year we were trying to build inventory and we had a stronger 3Q and a little bit weaker 4Q in 2019 is a little bit flatter, so those two areas and then there is a little bit of impact as you think about cash receipts improving and some MFP payments that we talked about where we could see some incremental demand, we don't think that's large but could be beneficial. On the C&F side, it's I would say it is more, we got the building inventory that we expected to see and plan for throughout the year that that drives the up from a fourth quarter perspective there.
And this is Ryan, you're thinking about the guide down by $100 million. There's some volume in there in both divisions. There's also a little bit of incremental discount spend particularly as it relates to the Canada market. But what I would say about that is overall we're still expecting 3% price realizations, so those are really some of the moving pieces that took us from 3.3 to 3.2.
Thanks, Steve. So we can then go to our next question.
Our next question comes from Ann Duignan with JPMorgan. Your line is open.
Yes, hi. You know that higher losses on your operating lease residuals in the quarter and also other assets on the balance sheet on that rose 33% year-over-year, suggesting the more used equipment is being returned onto your books. In meantime you're talking about 3% pricing on new equipment. So can you talk about whether new pricing is getting wiped out as farmers buy used equipment and not willing to pay for technology or even vice versa, they're willing to pay for technology on the used market. But that's just cannibalizing used values on equipment that doesn't have technology, I mean what's going on there and are we really talking about a 3% gross price if you've taken the losses on operating residuals into account?
Yes, so I think I mean if you think about used values in particular for large Ag as we are seeing them be pretty stable and I think maybe importantly good condition late model year are actually fetching a premium and there continues to be a demand for technology, whether it's new as we mentioned on the EOPs we are seeing strong adoption. And I think what we're seeing and we're hearing this directly from customers is technology impact is most important as you're going through challenging conditions. So the willingness to invest in technology certainly is there and we're seeing the benefits as we deal with shorter windows execute jobs in the field and that's presence, I say both on new and used. So I think that there's not a lot of differentiation there between those two.
And as you think about your initial comment on the operating lease losses note in the quarter, so as you think about when we did lease returns that come back through John Deere Financial, market goes back to dealer channel. So certainly the uncertainty we're seeing from a customer perspective is impacting the environment right now. And we as we have in the past have decided to move some aged inventory in order to not carry that for another used season and as a result of that, we've seen some pressure on recovery rates and that's what was reflected here in the quarter?
I think as we go forward, we continue to be really mindful of what's coming due and how do we work with the customers and the dealers to best manage that. And maybe one thing worth noting there is as we look forward, we actually see less lease maturities in the forward-looking 12 months than we have in the most recent 12 months. So we'll continue managing that and be mindful of what we're doing there.
Thank you. Next question please.
Next question comes from Andy Casey with Wells Fargo Securities. Your line is open.
Thanks a lot. Good morning everybody. My question is really the pathway from where you seem to be guiding margins in 2019 somewhere in the low to mid 9% range to the goal to be at 15%, mid-cycle operating margins by 2022. The margins headwinds that you had through 2019 appear to be dissipating similar to the FX headwind called out for ag and turf. If you exclude those headwinds, could you help us with what 2019 margin would have looked like, I guess I'm just trying to understand that over the next couple years, should we expect pretty healthy margins snap back in 2020 absent those headwinds or is the gap closure to goal that 15% more weighted to 2021?
Yes, thanks Andy. Yes, you're right. I mean if you look at our ag and turf division for the year, the combination of FX and mix are a little more than a 1.5 of margin drag in 2019. So that is a significant component there. And then as we've talked about quite a bit of the material in the premium freight has been, has been a drag as well on margins.
I think as we look forward and as we've talked about in the past in the fourth quarter, we expect material to improve and be favorable. Similarly in response to Gary's question we don't expect to see that the high level of premium freight that we have for the first three months of the year. Those are all things that that we would expect to see improvement. And then add to Ryan's comments as we move forward, we're continuing to look to take actions to deliver improved margins.
So cost reduction is going to be a component of that not only in 2020 but as we go forward through 2022. The other things remain the same that we are accelerating and feel really good about is adoption of precision ag and what we can do from a differentiated value perspective for our customers. Our ability to grow our aftermarket parts and services business and the successful integration of Wirtgen all of those things are the recipe to get us from where we are today to the aspirational target to that 15% in 2022.
Thanks Andy, we will go to our next question.
Our next question comes from Ashish Gupta with Stephens. Your line is open.
Thanks. Good morning. Just a clarification on the order book in ag, I think last quarter it would be May, you talked about it being out this September which would be roughly four months and now you kind of seems like talking about 4Q mostly covered which would sort of imply roughly two months be consistent with sort of the uncertainty commentary. But I just wanted to kind of clarify if that's the right way to think about it?
So the mostly covered was in reference actually to construction forestry where we've got about two months on average there in the construction book. As you think about large tractors, that's where we're well into November. And if you look at both 8,000 or 9,000 Series tractors. So we've got further coverage there again albeit on a lower schedule but we've got, I think pretty similar visibility to what we did a quarter ago.
Thank you. We'll go ahead and go to our next question.
Our next question comes from Joe O'Dea with Vertical Research Partners. Your line is open.
Hi, good morning. Josh, how do you think about the divergent trends that you're seeing in the EOP so far and maybe it's early days but just kind of out of the gate what you're seeing in combines to try to understand what the underlying demand level is and indications heading into next year where it sounds like planters good trends but highly technology oriented and then in a sprayer seeing the drag there and just trying to understand how you guys are sort of parsing through that to think about the direction of demand?
Yes, this is a great question, Joe. I mean I think as Brent mentioned EOP started in June. Historically when we started in June just because the planting season is over, so with that backdrop planting occurring well into June, where we think the first date may not be good as an indicator of what we expect in the year to come happy with the past because of the level of uncertainty there.
Sprayers really markets as Brent mentioned Canada down more significantly and that's impactful because of the high level of technology as well as machines you see in Canada that are typically ordered there, so that has been impactful, U.S. maybe one dynamic that's a little bit different for the U.S. even though we're down double-digits but you're a little bit better, Ag service providers you will make up nearly a third of the industry and they've been delayed perceptions obviously not doing really any spraying or much spraying at all in May and then limited amounts in June.
So anecdotally I think the conversations there said they've deferred and then delayed some of their CapEx decisions until we get a little bit deeper into the season. So I think that's been -- that's kind of played out over time. So we'll continue to see what very few looks like for those programs, but I think the positive news is customer's willingness to invest in technology where they can see value in positive outcomes.
And in addition to that, you look at what we saw on exact emerge growth in our take rates there, similar on exact supply. So continued progress, as it relates to combines still really early. We're two weeks in, so we'll continue to monitor that and provide some insight as we get to the fourth quarter. That program kicked-off in the first part of this month and runs through January. So we'll see how that that evolves as we go forward.
Thanks Joe. We'll go ahead and go to our next question.
Our next question comes from David Raso with Evercore ISI. Your line is open.
Hi, thank you. I know you just went through a lot right there but I'm trying to understand with one quarter to go when you target year-end inventory in receivables, it's making a statement about the next year assume demand profile. Can you help us a bit with what kind of demand profile did you bake into your assumption for those year-end inventory targets?
If you think of ag and turf in particular, I would say the two things that are really impact where we're ending and seeing what changed from our previous guide. I mean one is some weakness that we've seen in Canada that that's represented there and a little bit higher inventory receivables. And then the other piece would be Brazil. And as we look forward to the first quarter in that market and the expectations there given some of the factors Luke mentioned in terms of strong margins, really strong crops that we expect translates to see some positive end market changes there.
Thanks David. We will go to our next question.
Our next question comes from Steven Volkmann with Jefferies. Your line is open.
Hi, good morning guys. So my question is around pricing and the three points of prices is pretty impressive and I guess I'm just trying to figure out, I think you try not to capture mixed. So things like exact emerge and sort of the value there is not in the 3%, if I'm not mistaken and I'm just curious how you can push that much price and what the outlook might be as we sort of go out a little bit further?
As it relates to price, you're right in your commentary that that is like for like and does not include features or things that would be he added on. So that's fair. So those kind of things would show up in mix and not in our price realization. So that's correct. Yes, if you think about price, I think you're kind of how and why are we able to get it. I think it's really been able to deliver value to the customers and understanding the economic inputs and outcomes that we're able to deliver and I think we had a number of customers talked about it, the ability with exact converts for example to plant 3000 acres in three days and the only three days of good weather they had. That's a really big advantage to be able to have that and execute that and that's a difference can be the difference being getting a crop at all versus not.
As you think about going forward, we've averaged over the last decade on our quick operations about two and a half points of price and as we look forward, I think we've been higher this year in the net average probably get closer to that average as we step forward.
Yes, what I would say I mean as we think about the total value of our production system with respect to the equipment and technology and the service and support that our dealer network can provide as we feel comfortable that there's some significant incremental value that we can continually add for our customers. And so that's how we think about pricing. Now as Josh said, when something new comes out it doesn't come into pricing but updates or year-over-year comparisons to things that have already been out. That does come into pricing but that overall total value that we can bring with the products, the technology and the service and support that our dealers can provide give us comfort that that our pricing is well within bounds and Josh indicated it is within our historical ranges.
Thank you. We'll go to our next question.
Next question comes from Chad Dillard with Deutsche Bank. Your line is open.
Hi, good morning guys. So just wanted to circle back on the cost savings, so just want to get a sense for like what the control order of magnitude could be. How are you splitting that between each business Sprint business line and also just like the timeframe to enact and then hit the full run rate. And then secondly just a question on the low horsepower tractor you just want to get a sense for your comfort with the channel inventory and how you're thinking about production versus retail demand?
Yes, this is Ryan. So, on the cost side, we're not ready to provide that level of detail. What I would say is we've taken targeted actions already in the third quarter, we've got some contemplated in the fourth quarter, the total of those are relatively small at this point, they would total about $25 million in cost. We're prepared to provide an update with our fourth quarter earnings call as we give our 2020 outlook on what those might mean to 2020 and going forward. What I'd just say it's an acknowledgement that cost reduction is going to be just a larger component of our path from today's margins to the 15% aspirational margins that we haven't missed cycle in 2022.
And maybe just follow-on relative to contractor, I think broadly I think we feel comfortable with where we're at from an inventory level and we're pretty much aligned in line with where the industry is and we'll continue to be strong end market demand there really driven by general economic conditions in the U.S. in particular. So thank you.
We will go ahead and go to our next question.
Our next question comes from Mig Dobre with Baird. Your line is open.
Yes, thank you. Good morning and just to follow-up on that can you help me understand if the cost actions that you're talking about are sort of driven by the changes in the end markets expected production volumes et cetera or this is more structural in nature longer term planned and maybe the second part of my question is on Wirtgen, I love an update there and maybe your view on margin here because it seems to me like your outlook for margins has ticked down. And I'm wondering how we should be thinking about this business go forward? Thanks.
Thanks Mig, I will start on Burkett. Yes, so I mean if you think about Burkett overall, really strong third quarter which we expect that we talked about that. So essentially about 60% margins in if you kind of take out purchase accounting last year, that's actually similar margins on a slightly lower sales level. So we feel good about the way that business is performed. Margins did come in some for the full-year really driven by changes in mix, in their business as you have seen some shifts as well as under production on a couple of their brands as we align order fulfillment strategies as part of our integration.
So as we are going to under produce and are under producing to some extent this year that is impacting their margins but we think that's the right thing to do to position ourselves forward for going forward there. So I mean in summary on Wirtgen, strong margin performance in the quarter, continue to feel really good about that business, confidence in €125 million of synergies and we continue marching down that path and provide updates as we go.
Yes, on the cost reduction side, the plans are really focused on longer-term structural changes in our cost structure as opposed to lever pulling given where we are in the cycle but more to come in fourth quarter earnings call for that.
Thank you, Mig. I will go to our next question.
Our next question comes from Courtney Yakavonis from Morgan Stanley. Your line is open.
Hi, good morning guys. Just a quick clarification on the $25 million that you talked about being out of the third and fourth quarter, is that a run rate and is that currently embedded in the $100 million guidance reduction. And then secondly, when you talked about early orders, you talked about them being flat in units up because of precision Ag. Can you give us any more granularity on whether the uptick of things like ExactEmerge are continuing to see a step function higher or is it roughly at the same 35% level and just grinding incrementally higher? Thanks.
Yes, on the EOP side we saw that move from kind of that a third of planters going with ExactEmerge up to around 40% and that's just the exact numbers but we're also seeing just larger planters, so I think about with bigger planters and more highly featured both of those things are contributing to that that value being up as Brent noted.
On the cost side, those are one-time costs. I wouldn't conclude that that's the run rate. And it is embedded in the $100 million reduction in guidance that we have.
Thanks Courtney. We'll go ahead and go to our next question.
Our next question comes from Larry De Maria with William Blair. Your line is open.
Hey, good morning. Thank you. Just curious, did your outlook contemplate the USDA report just came out and did that change your thinking at all since it came out, because it sounds like you still expect farmers to use some of their MFP cash to buy equipment in your fiscal fourth quarter? So I'm guessing not. So maybe it plays out over time? And secondly, where do you guys stand on planted acreage and yield now? I don’t know if you differ from where expectations are? Thank you.
Yes, so maybe I'll start with the fundamental part of the question with regard to planted acreage and yield. And obviously, what the USDA released on Monday, surprised the market, particularly on the corn, I'd say more harvested areas than planted, and certainly the yield. So the limit down moving in corn price has caught a lot of people by surprise. So that's kind of what we have at the moment to work with, I guess what we would say is that, there's still a long way to go in this growing season.
Obviously, we've had a lot of abnormal weather. With the delay planning, there is a lot of variability in crop progress from the western side of the corn belt, where it's looking a lot better across to the eastern side, where there's a lot more variability. Obviously, the light of planning, development opens up windows for early crops and those sorts of things. So -- and certainly history shows us that final yield numbers can vary relatively significantly from these August estimates, so the methodology that the USDA uses changes as we go through the crop season. And as we get into harvest and get some actual harvest data, we might see that changing as we go forward. So we'll be obviously watching that closely. And that'll be important in terms of what it means to final production. And that's crucial ending stocks number.
And I think, Larry, what do you think about kind of the MFP impact? Certainly very, I mean, farmer-to-farmer, you get very different situations in terms of the size and health of their crops, whether or not they market a grain in May, June, as prices ran out. So there's a lot of dynamics, I think that'll impact, if and when they use some of that from a cash receipt perspective.
Yes, I guess just to add on to that Josh, like that the MFP has really been a shot in the arm for U.S. farmers, when you think about the cash receipts, it provides the boost for 2019 so it listed to its highest levels in 2014. And it certainly helps, given some of the issues that we've got with trade uncertainties and the impact that we've seen this week on commodity prices. So some of them will have been able to benefit from marketing old crop docks as what were some of the highest prices, we had in five years earlier in the year, they've been able to market forward at higher prices as well. And obviously, we'll wait to see what it means for equipment demand given the uncertain conditions we have.
Thanks, Larry. We'll go to our next question.
Our next question comes from David Raso with Evercore ISI. Your line is open.
Hi, thank you. A few addresses that I apologize if I missed it. Your implied construction equipment margins for the fourth quarter. I mean, on a year-over-year basis, it looks like a pretty solid decline, despite sales are up. And if I missed something that explains why the margin performance would all of a sudden roll like that. My apologies but can you explain why that’s the case?
Yes, you're saying in the fourth quarter?
Yes, the margin guidance for the full-year is 11%, I believe correct. So that implies, 9.6 or something of that nature for the fourth quarter and that that'd be down year-over-year, despite sales up 6%. And just given us -- having a pretty strong run of margins, I wasn't sure, if something was changing on incentives for dealers or mix or something I'm missing?
Yes, David. It's Ryan. I think mix is a component of that. The other aspect of that is construction as a different material, commodity footprint. And so overall benefits that we're projecting to see in that -- in the fourth quarter on material costs, part of that is positive in ag, construction is still not yet seeing that benefit. The other thing is pricing -- our pricing comparison gets a little bit tougher. There are some actions that we took in the fourth quarter of last year that improved our pricing. So the compare -- the comparison gets a little bit tougher in the fourth quarter for construction, those are really the puts and takes associated with the margin performance that we're projecting for the fourth quarter in construction.
Thank you.
Thanks David. Okay, we'll take one more question.
Our last question comes from Jerry Revich with Goldman Sachs. Your line is open.
Yes. Hi, thank you for taking the follow-up. I'm just wondering if we can expand conceptually on the cost reduction opportunity and the buckets of savings because as we look at the manufacturing footprint that you folks have pretty streamlined already a big tooling upgrade on the Tier 4 transition as well. So can you just help us understand the major buckets of opportunities as we are talking about improving the cost structure further from here in a bit more context? If you don't mind obviously, we'll get more detailed numbers next quarter as you mentioned, but any qualitative comments would be helpful?
Yes, so I think, Ryan kind of laid out kind of the three areas in terms of kind of organizational efficiency. I think the second one is you think about footprint. I think there, we are single source for a lot of our products on a global basis. So we feel good about our capacity, so we start to look at how do we make sure we're focused and prioritize on those things that add most value for our customers and then those are going to be the two most important areas.
Yes, Jerry. So we're not ready to breakout those buckets. Although, it’s is all three that we're going to focus on and fourth quarter will provide an update on where we are, what it means to 2020 and kind of our view towards margin improvement all the way up to 2022 to hit our aspirational targets.
So thank you, Jerry. Thanks, everyone. We appreciate it. We will be around, so please reach out, if you got questions. And have a good weekend. Thank you.
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