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Good morning. And welcome to Deere & Company Fourth Quarter Earnings Conference Call. Your lines have been placed on a listen-only until the question-and-answer session of today's conference.
I would now like to turn the call over to Mr. Josh Jepsen, Director of Investor Relations. Thank you. You may begin.
Thanks, Julie. Hello. Also on the call today are Ryan Campbell, our Chief Financial Officer; John Lagemann, Senior Vice President Ag & Turf, Sales and Marketing; and Brent Norwood, Manager, Investor Communications.
Today, we’ll take a closer look at Deere’s fourth quarter earnings, then spend some time talking about our markets and current outlook for fiscal 2019. After that, we’ll respond to your questions.
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, 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 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 website at johndeere.com/earnings under Quarterly Earnings & Events. Brent?
John Deere completed the fourth quarter with a strong finish in retail sales for both divisions. While uncertainty lingers in the U.S. ag market, replacement demand and increased adoption of precision technology will continue to be critical factors for 2020. As North American farmers work through trade issues and adverse weather conditions, sentiment in Brazil remains stable, offsetting weakness in other South American markets such as Argentina.
In the Construction & Forestry division, retail demand remains steady as end markets benefit from generally positive economic conditions. At the same time, dealers are cautiously managing inventory levels to ensure their ability to meet current demand while maintaining flexibility as activity fluctuates.
Now, let's take a closer look at our year-end results for 2019, beginning on slide three. For the full year, net sales and revenue were up 5% to $39.258 billion, while net sales for equipment operations were up 5% to $34.886 billion. Net income attributable to Deere & Company was $3.253 billion or $10.15 per diluted share. The results included a favorable benefit of $68 million to the provision for income taxes due to U.S. tax reform. Excluding this item, adjusted net income was $3.185 billion or $9.94 per diluted share.
Slide four shows the results for the fourth quarter. Net sales and revenue were up 5% to $9.896 billion. Net income attributable to Deere & Company was $722 million or $2.27 per diluted share. The results included a favorable benefit of $41 million to the provision for income taxes due to U.S. tax reform. Excluding this item, adjusted net income was $681 million or $2.14 per diluted share.
On slide five, total worldwide equipment operations net sales were up 4% to $8.7 billion in the fourth quarter. Price realization in the quarter was positive by 3 points, while currency translation was negative by 2 points.
At this point, I'd like to welcome to the call John Lagemann, Senior Vice President of Ag & Turf, Sales and Marketing to discuss the fundamentals affecting the ag business. John?
Thanks, Brent, and good morning all. Let's start with quarter's results on slide six.
Net sales were up 3% in the quarter-over-quarter comparison, primarily driven by strong price realization and slightly higher volumes. Operating profit was $527 million, resulting in a 9.2% operating margin for the division. The year-over-year decline was largely due to higher production cost, SA&G, and the unfavorable effects of foreign currency exchange, partially offset by positive price realization.
Importantly, our North American large ag business finished the quarter with strong retail sales, putting us in an excellent inventory position for the start of 2020. In the U.S., the large tractor and combine inventory to sales ratio is the lowest it's been since 2014, which puts us in a good position to produce in line with retail demand for North America large ag in 2020.
Now turning to slide seven, let's take a closer look at some of the fundamentals affecting the agricultural economy. It's been a year of uncertainty for corn and soybean growers in the U.S. In addition to continued trade uncertainty and near-term demand concerns, stemming from African swine fever, and unusually wet spring, delayed planting this season, which ultimately resulted in fewer corn and soybean acres for the year.
Compounding matters further, difficult weather conditions this fall has significantly delayed harvest, which is now the slowest -- the fourth slowest on record for corn. The combination of these factors have pressured grain supplies for the year.
More specifically, despite these lower levels of supply, overall grain consumption increased for the period, contributing to a decline in the stocks to use ratio for both corn and soybeans, and in turn higher year-over-year prices for both commodities in 2019. The wheat global stocks to use ratio is expected to rise again in 2019 as production increases in Russia and Ukraine more than offset dryness in Argentina and Australia. Ending stocks for 2019 reflect record high levels for global wheat inventories.
Now slide eight outlines U.S. farm cash receipts. 2019 farm cash receipts are estimated to increase about 2% year-over-year to $395 billion, while net cash income is estimated to be up around 7% to $113 billion. The increase in crop cash receipts and income is largely attributed to the market facilitation payments from the USDA, which are expected to contribute approximately $17 billion to the U.S. farm economy this year. As they complete their harvest, farmers will assess their individual situations to determine how best to allocate the year-over-year increase in receipts and income.
Before addressing our industry outlook on slide nine, I'd like to first provide a high level overview on the state of the North American ag industry. Despite uncertainty from trade, weather and ASF, we are still in a replacement market that if anything is becoming more amplified. Let me explain.
First of all, while this uncertainty has slowed replacement rates in both 2018 and 2019, and long-term trade resolution is still clearly desired, we do see some evidence that U.S. farmer sentiment is beginning to improve, as farmers acclimate over time to planning in a more uncertain trade environment.
Secondly, the fleet age in the U.S. has reached its highest point in over a decade. And our 2020 outlook anticipates even further aging of this fleet. This supports our view that many U.S. customers will reach a point where they simply need to replace their equipment. And with that impact, a gradual recovery of the equipment investment cycle will resume, as customers make decisions to upgrade their operations.
Lastly, in addition to the advanced age of the fleet, the impact of precision technology is further driving these replacement decisions. Throughout this prolonged period of uncertainty, farmers have continued to invest in technologies that deliver high ROIs and operational efficiencies. And there is no doubt that our own product introductions in this area of precision ag technology have had a distinct impact on the financial and operational performance of our customers, and never was that more evident than this year as our customers used these technologies to better manage the adverse weather conditions, I mentioned earlier. This impact of technology has also been very apparent in the results of our early order programs, where we have seen increased take rates for precision features compared to last year.
And speaking of our early order programs, the final phase of the planter and sprayer EOP concluded in October with mixed results on a unit basis. Early orders for planters finished up single digits with take rates for ExactEmerge technology up again significantly for fiscal year 2020.
Sprayer orders were down low double digits with the U.S. results down single digits, and Canada orders were down significantly more. It's also important to note that the first phase of these programs was significantly impacted by the late planting this season and that orders for the subsequent two phases were up quite significantly on a year-over-year basis. Our combine early order program completed the first of three phases in October with results down double digits. Similar to our crop EOP, the results of the first phase were negatively impacted by lower activity in Canada as well as the delayed harvest that I mentioned earlier.
Given the late harvest, this year's program may be more backend weighted towards phases two and three. Also, due to strong take rates in 2018 and 2019, Combine Advisor was moved into the base model for 2020, indicating a significant adoption of this game-changing feature.
Our tractor order book currently extends through the end of March, which is well ahead of last year. The strong order book is largely attributable to a mid-year model change as we transition to the all new 8R tractor featured at AGRITECHNICA this year. More specifically, our current order bank reflects the sellout of the current model as we begin taking orders for the new 8R starting in December.
We'll talk more about this new 8R as the year progresses. But simply put, it is the most technologically advanced tractor we've ever made and loaded with our latest precision technologies. This new model will feature upgrades in guidance, connectivity and user experience while enabling further electrification of associated implements. And initial reaction to these features has been very positive for both customers and dealers. We intend to begin production during the third quarter.
With that context, let's turn to our 2020 ag & turf industry outlook on slide nine. Ag industry sales in the U.S. and Canada are forecast to be down about 5% for 2020 with the year-over-year decline reflective of a cautious environment. Concerning the U.S. market, it's worth noting that we’ve made some adjustments to our leasing operations to address recent losses in the U.S. portfolio. Although the overall used equipment market continues to be quite stable, our lease return rates remain at elevated levels. At the same time, we've taken actions to reduce our matured lease inventory, which put downward pressure on our recovery rates in the wholesale market and contributed to the disclosed impairment. But, to address this situation going forward, we have taken the following actions. First, we've adjusted lease residual values to better reflect the current environment. Next, we've announced changes to our leasing program that will include a risk sharing mechanism with our dealers to ensure alignment. And lastly, we will realign our performance and incentive structures in order to increase dealer collaboration in our collective remarketing efforts.
In summary, we have taken significant actions to enhance our positions with our current leasing portfolio and our overall leasing strategy going forward.
In terms of our current portfolio, we have reduced mature lease inventory during 2019 and are now turning net inventory much faster. Regarding our leasing strategy going forward, the changes I highlighted, should provide for greater efficiency and managing the overall portfolio, while remaining competitive in the marketplace. And these changes will enable us to better leverage the strength of our dealer organization by allowing them to control the inventory in their own area of responsibility. This in turn will also support the evolution of promoting production systems versus individual products, because they can better manage their customers’ trade cycles.
We’ve received a variety of feedback from our dealers, but many of our strongest dealers view these changes as quite positive. They also see them as obvious evolution to our leasing strategy that reflects the growing importance of leasing to the overall industry.
Now, moving on to the EU28. The industry outlook is forecast to be flat in 2020, as most regions impacted from last year's drought, are expected to recover with favorable production for the year. Furthermore, the outlook for the dairy sector remains stable.
In South America, industry sales of tractors and combines are projected to be flat for the year. Sentiment in Brazil remains very stable with high levels of grain production combined with healthy producer margins and restored liquidity in the financing market, driving a positive outlook. However, other Latin American markets like Mexico and to a greater extent Argentina, face near-term challenges due to the potential for adverse policy impacting the ag sector. Shifting to Asia, industry sales are expected to be flat with growth in India offset by slowness in China. And lastly, industry retail sales of turf and utility equipment in the U.S. and Canada are projected to be flat in 2020 based on stable general economic factors.
Now moving on to the ag and turf forecast on slide 10. Fiscal year 2020 sales of worldwide ag and turf equipment are now forecasted to be down between 5% and 10%, which includes expectations of two points of positive price realization and currency headwind of about one point. Also note that our sales forecast does contemplate producing below retail demand for some small ag products in 2020.
Our full year operating margin forecast is ranging between 10.5% and 11.5%.
I will now turn the call back over to Brent Norwood. Brent?
Now, let's focus on Construction & Forestry on slide 11. Net sales of $2.947 billion were up 8%, primarily due to shipment volumes and positive price realization for the quarter. Operating profit was $261 million, benefiting from increased shipment volumes and price realization offset by higher production costs, SA&G and a negative mix. Similar to the ag division, C&F also finished 2019 with strong retail activity, keeping inventory to sales ratio within a desirable range.
Moving to the C&F outlook on slide 12, Deere's Construction & Forestry 2020 sales are forecast to down between 10% and 15%, compared to last year. The year-over-year decline is driven mostly by a mid-single-digit underproduction to retail volume versus a building of inventory in 2019. The order book remains healthy and back within our historical 30 to 60-day replenishment window, while the overall industry activity remains steady.
The global forestry market forecast is expected to be flat with growth coming from products in Europe offsetting declines in the U.S. and Russian markets. C&F’s full year operating margin is projected to be between 9.5% to 10.5% with roadbuilding margins higher than the overall division.
Let's move now to our financial services operation on slide 13. Worldwide financial services and net income attributable to Deere & Company was $90 million in the fourth quarter and $539 million for the full year. The provision for credit losses as a percentage of the average owned portfolio was 7 basis points for 2019.
Fourth quarter results were negatively impacted by a 77 million pre-tax impairment charge relating to the operating lease portfolio. As John mentioned earlier, we've already implemented measures to adjust lease program going forward to ensure stronger dealer alignment for remarketing returned machines on future releases. For fiscal year 2020, net income is forecast to be $600 million, which contemplates a tax rate of 24% to 26%. The provision for credit losses in 2020 is forecast at 19 basis points.
Slide 14 outlines receivables and inventories. For the Company as a whole, trade receivables and inventories ended the year up about $52 million, which was well below our forecast as a decrease in the ag division was offset by increases in C&F. In the C&F division, the full year rise is largely attributable to building some field inventory after a historically low position at the start of 2019. In ag, Deere's decrease is mainly attributable to a strong finish in retail sales and underproduction in large ag in 2019.
Moving to slide 15, cost of sales for the fourth quarter and the full year was 77% of net sales. Our guidance for 2020 is about 76%, down 1 point year-over-year. R&D was up about 4% in the fourth quarter and 8% for the full year. And our forecast for 2020 is down 2% from 2019 levels. SA&G expense for the equipment operations was up 8% in the quarter and 3% for the full year, while next year's forecast is down 3% from 2019.
Turning to slide 16. The fourth quarter included a $41 million benefit to the provision for income taxes and other favorable discrete adjustments resulting in a 9% tax rate for the period. Full-year 2019 rate of 20% included a $68 million benefit related to tax reform adoption. For 2020, the full year effective tax rate is now projected to be between 24% to 26%.
Slide 17 shows our equipment operations cash flow. Cash flow from the equipment operations is now forecast to be in a range of $3.1 billion to $3.5 billion in 2020. The guidance reflects a potential $300 million voluntary contribution to our OPEB plans.
Finally, the Company's fiscal year 2020 net income outlook is on slide 18. Our full year outlook calls for net income to be between $2.7 billion and $3.1 billion.
I will now turn the call over to Ryan Campbell, for closing comments, Ryan?
Before we respond to your questions, I'd first like to offer some closing thoughts on 2019 and then provide an update to some key initiatives we have underway in 2020.
In summary, 2019 was a challenging year with respect to losses in our lease portfolio and managing through midyear production cuts in large ag. However, the measures we've taken position us with greater flexibility to respond to market conditions in the future. As mentioned during our comments, we've taken actions during the last half of 2019 to reduce our inventory position, and address the performance of our lease book. Specifically, as it relates to U.S. large ag, we entered 2020 with the lowest inventory to sales ratio over the past several years, allowing us to produce roughly in line with retail demand in this important market. For leasing, the changes we are making to our programs will enhance the long-term sustainability of our leasing business model.
Now, as we shift our focus towards 2020 and beyond, we've recently launched some key initiatives to help us better execute our strategy.
As we mentioned during the third quarter earnings call, we initiated plans to create a leaner and more efficient organization with an increased focus on the areas of our business that provide the greatest potential for differentiation -- differentiated customer value. Throughout the remainder of fiscal 2019, we completed targeted measures to streamline operations and headcount, incurring cost of $30 million. These initial actions in 2019 were the start of a broader effort to produce a more agile organization that enables quicker responses to changing market conditions. This initiative will also place a greater emphasis on the acceleration of our precision technologies and aftermarket strategies.
In line with these objectives, today, we announced a broader voluntary separation program for eligible salary employees. The cost of the fiscal year ‘20 program is approximately $140 million and contributes to an annualized savings run rate of approximately $150 million when combined with the initiatives taken in 2019. Furthermore, we are undertaking an assessment of our overseas footprint as we work to serve our customers more efficiently. We will provide updates on our plans throughout the year during our quarterly earnings calls.
As a result of these actions, we intend to drive the following outcomes. First, a streamlined organizational structure with reduced layers reset to focus on delivering technology and innovation at an increasingly rapid pace. Second, these actions will drive capital allocation decisions that further prioritize markets, products and services with the highest potential for differentiation, as well as advance our solutions offerings focused on improving customer outcomes throughout their production systems. Lastly, we’ll accelerate our capture of aftermarket parts and services, leveraging our dealer channel and unique tools such as connected support and expert alerts.
In addition, we'll continue to focus on the successful integration of Wirtgen and realization of synergies while leveraging their market position and roadbuilding to offer customers a more complete solution.
As a final note, we acknowledge the uncertain environment we are operating in. However, we take these strategic measures as the beginning steps to reshape our organization and capitalize on the tremendous opportunities in front of us, particularly as it relates to precision technologies.
Now, we're ready to begin the Q&A portion of the call. The operator will instruct you on the polling procedure. In consideration of others and our hope to allow more of you to participate in the call, please limit yourself to one question. Julie?
Thank you. [Operator Instructions] Our first question comes from Stephen Volkmann with Jefferies. Your line is open.
Hi. Good morning, guys. I guess, I'll just kick it off with a little bit of color on your ag outlook, please. So, when I look at your various geographic outlooks, mostly flat U.S., down 5, I don't come up with anything close to net sales down 5 to 10, especially with a little bit of price tailwind. So, I guess, obviously, you're under producing. I think, you may have mentioned in small ag, but I was surprised to hear you say that you think you're kind of where you need to be in large ag. It just seems like a pretty big delta between your sales and your end market forecasts. So, maybe just a little color there? Sorry for the long question.
I think, as you think about those, you're right, most geographies flat, while we're down about 5 in the U.S. and Canada. I think, what we see there is certainly the impact that was mentioned in terms of under producing on the small ag side of the business. We expect the retail environment continues to be pretty stable and that we would continue to perform well there. But, as we've gotten to better inventory levels there, we realize we can optimize those inventory levels and will under produce as a result as we make that work.
I think the other part of thinking about the range is just recognizing the uncertainty in the environment, maybe a little bit cautious as we see some of the delays related to the harvest season, pushing back some of the activity in our EOP.
Yes, Josh. But, I’d like to make it clear that our product portfolio has never been better. We like our go-to-market strategies and we're certainly not planning on losing any market share from that perspective. So, we feel very bullish about our share position going forward.
Our next question comes from Jamie Cook with Credit Suisse.
Just two questions, one on the restructuring, the $140 million, just to be clear, is that included in the net income GAAP guide and when do you expect to realize the 150 over what time frame? And then, just my second question, Josh, is on the implied decrementals for the total Company, but I guess in particular, on the ag side, they look very healthy considering the sales decline. So, I'm just trying to get comfort, with what's implied in that decremental margin? Is there restructuring, price cost, freight tailwinds from last year, if you could just give some broader color there?
Yes, I'll start. Yes, we would say the programs that Ryan mentioned, we would have embedded in our guidance today. So, that's included in terms of the cost and the run rate savings. As you think about Ag & Turf for the next year, the big question in your comment on, are we seeing material prices, steel prices improve. We are seeing those come through and starting to improve. Now, maybe a little bit tampered by the fact that we under-produced in the back half of '19 and our production’s lower going into 2020. So, not maybe as big of a benefit. But, we are seeing those prices come down.
I think, the other thing to note on, as you think about our margins is, we are seeing higher pension costs, a little bit higher incentive compensations that are impacting us, and then some overhead as we bring in new product programs. So, we introduced a couple new products at AGRITECHNICA. So, we will be -- we're in the process of bringing those in. So, there is some impact on overhead spend as we integrate those and launch those in the year.
Our next question comes from Jerry Revich with Goldman Sachs.
I am wondering if you could just update us on take rates for precision planting and some of the other key products. I guess, we're hearing in the field, a lot of momentum in soybeans in particular. So, it sounds like that could be a multi-hundred million dollar revenue tailwind '20 versus '19. I'm wondering if you could comment on the exact take rates, and maybe on that revenue tailwind estimate. Thanks.
So, as mentioned by John, we've seen continued growth there. So, if you look at ExactEmerge, for example, we were around 30% last year. That number’s in the upper 30s, near 40 as we come through the early order program. And I think, this past season, the challenges with the wet conditions has been the best test case for why that technology is particularly valuable in the shorter windows that we need to execute those jobs is really, really important. ExactApply, we're seeing kind of very similar take rates to a year ago, which you’re talking about in the 40s. And then Combine Advisor, we moved into base equipment. So, that's a significant move, if you think about the duration in which we've seen that adapt very quickly. So, that's three years to go in base. And so, we feel really good about that.
On top of that what we're seeing from our tractors is on our some of our precision packages that our tractors can take, we've seen pretty significant growth. So, our 8R tractor has seen a jump to about 50% take rate on our CommandCenter AutoTrac guidance, which includes RowSense and some other functions. So, we're seeing that really across the portfolio. Anything you’d mention, John?
Yes. I’d just like to augment. This last year, the weather, I've never seen the weather conditions more adverse and really more unpredictable. And the ExactEmerge technology proved to be really a game changer. When you consider that -- one or two days could make a difference, whether a guy got his crop in or not. And it really proved itself. And then, I think on the Combine Advisor, if you think about some of the conditions that they face this fall, I think the ability to set those settings and then have them automatically set in the field proved to be really, really valuable. And then, on the premium activations, Josh, I think that just shows the precision piece of the technology here and how important that is, when you consider inch by inch accuracy. But, this year has proven to be a very solid year from a way to augment what they really do.
Jerry, it’s Ryan. Just a quick thought on that. It took over a decade for us to move AutoTrac from a feature and option into base machines. As we think about adoption of precision technologies, some perspective, Combine Advisor, this is year three. And we're moving it into base.
The only other thing I'd add there on the precision side is, we're seeing continued growth in engaged acres. So, we are north of $165 million engaged acres. So, that is that has grown and not just in North America, but we're seeing that grow overseas as well. Brazil's a market where we've seen significant growth there. So, we feel really good about the trajectory of those take rates, particularly as we introduce those features in other geographies like South America, but on top of that, what we're seeing from the ops center and folks engaging with those digital tools to plan, monitor and analyze their operations.
Thank you.
Thanks. We'll go to our next question.
Our next question comes from Rob Wertheimer with Melius Research. Your line is open.
Hi. Thanks. Good morning. Just one quick one on the voluntary separation. That is I guess, more U.S. based than international if I understand correctly. The future costs out that you'll work through and talk to the rest of the year is more on the international side. And then, I know it's hard to talk about things that are cost related but will that put you in a good position or is this a multiyear journey that you're kicking off on cost?
Yes, Rob. Thanks for the question. I'd say, this is -- this certainly is strategic in nature, and I'd say, not a one or two-quarter event. So, I think over time, we'll continue kind of executing on this path in terms of looking at our cost structure, but then also how do we best and most efficiently serve our customers all over the world. So, I think, we’ll -- as we continue to execute on the plans, as Ryan mentioned, we're undergoing assessment, we’ll provide updates, but I think that's a little bit.
Hey, Rob, it's Ryan. This is -- I would view it as a journey to reshape our portfolio and our business towards the areas that we've talked about with respect to where we can differentiate more than potentially other areas. And that's really with production systems, agriculture, precision agriculture and aftermarket.
Thank you, Rob. We'll go ahead to our next question.
Our next question comes from Mig Dobre with Baird. Your line is open.
Hi, yes. Good morning, everyone. I just want to go back to Steve's initial question on your Ag & Turf outlook. I guess, I'm having a bit of a hard time understanding exactly what's implied in terms of inventory destocking for the smaller equipment. Can you maybe put this in perspective? I mean, from what I recall, this is less than half the overall segment and we're talking about $1.5 billion plus worth of a headwind, at least on my math in 2020. And correct me if I'm wrong, and why is this happening now? And again, some framework and some context would be helpful.
Yes. Thanks, Mig. I think, when you think about that, I mean, we are seeing the large ag market come down. So, it's not small ag alone. So, we are seeing top line there. The benefit of the actions we took last year is we're able to produce in line with that retail demand. So, that's positive, but still it's at a lower level. As you think about the small ag side, and what we're doing there on the under production to pull those inventory levels down. That's really as we think about where do we need to be in the selling season, and what are those inventory to sales ratios. And roughly, we're talking about probably about a 10-point reduction of those inventory-to-sales ratios on where we want to be. So, there's some movement there, but that is that is the biggest portion of the underproduction.
And Josh, is this in under 40 horsepower tractors specifically?
No, I’d say more broadly. So, essentially 100 horsepower and below. So, you're talking about compact utilities plus utilities.
We’ve made some pretty significant improvements to the overall order fulfillment process on small tractors. And, frankly, with those changes, we're confident that we can bring the inventory down, as you mentioned. So, I think, it's a combination of factors.
Our next question comes from Joe O'Dea with Vertical Research.
With respect to the 15% segment margin targets, can you talk about the bridge to those targets at this point? How much of that is volume dependent? How much of that is things that you control?
Yes. So, I think, first and foremost those are things that we're working on regardless of end markets, and that's precision ag, after market opportunities, it’s activities on the cost structure, it's executing and integrating Wirtgen and our synergies there. So, those are I’d say the big piece of where we see the margin improvement coming from. As we think about what does the end market do, we're not contemplating a huge swing back in terms of improvement, for example, for large ag.
And so just following up on that. I mean, you're down this year I would say 2018, 2019 probably more reflective of normalized demand. So, those 15% margin targets, really with respect to normalized demand, and so, this year would be below that, just 2020 would be below that. Just to be clear.
Yes. Our math would put as just below 90% of mid cycle from an ag perspective overall.
Next question comes from Andy Casey with Wells Fargo Securities.
Question on the 2020 outlook, should we think that it is more truncated to the second half than usual? Because it kind of sounds like you expect demand to start out slowly, it's probably going to take some time to realize the benefits from the voluntary separation to kick in, and then you have comps that should get a little bit easier in the second half, given the inventory correction that you did this year.
Andy, that's fair. I would say, there's more of that impact in the first part of the year, certainly as you think about some of the costs, so the under production. And you're right, the comps would get a -- would be more favorable in the back part of the year where we did significant under production in 2019 in large ag.
Andy, the voluntary separation costs will be incurred in the first quarter. The benefit obviously will go throughout the year and then full year run rate benefits will be in the following year.
And then, a follow-up, just a clarification on the series 8R production starting in Q3. Does that impact the first half production rates at all for the existing 8R?
We're effectively -- I mean, we've got the schedule laid out and we've sold out, as Brent mentioned in his comments or John mentioned, we've sold out that that level of production that we have. So that's full. So, it really doesn't impact what we would execute on in the first half of the year.
Our next question comes from Steven Fisher with UBS.
Just a couple of things on the construction side of the business. What is your retail expectation for 2020, if I missed it? And how is the 1% price assumption for ‘20 compared to what you achieved in '19? And then, just wondering to what extent you're starting to see any competitive pricing in the segment as things start to soften there?
Thanks, Steve. Yes. So, when you think about C&F on price, as we talked about, or it was in our press release, we're expecting about a point of price in 2020 that compares to about 3 in 2019. And as we discussed throughout this year, C&F did 3 for the full year. That was much more front-end loaded where we took some price actions at the end of '18 and the early '19. So, we saw a lot of that come through in the early part of the year. But strong price performance, given where we’ve been.
Now, certainly that’s a market where we always watch what's going on, understand not necessarily the price leader. So, we'll continue to monitor what we're seeing going on from a competitive perspective. But, we think we're able to deliver that 1%, which is a good thing for that business.
And the retail expectation overall for construction in 2020?
Yes, sorry. Yes. We expect retail to be down around 5%. And certainly, as was noted, we will do some underproduction, a mid-single-digit underproduction in construction in North America as we align inventories in that business.
Our next question comes from David Raso with Evercore ISI.
First, a clarification, maybe I missed it. Ag & Turf high horsepower, did you under produce retail in the second half of '19? I know we’ve talked about that a quarter or so ago. Was that the case?
We did. So for the full year, we talked about -- a quarter ago, we said we were going to -- for the full year high horsepower North America, we under produce at mid-single-digit. We actually ended up under producing by high-single-digit as a result of executing the production plans but then also strong retail to close out the year.
That’s what I’m trying to understand. If you're producing at retail next year and you think high horsepower is generally, okay, I mean, I know it’s within the guide of down 5% for U.S., Canada, that would sound more on the smaller side. I'm trying to understand why your production want to be up a year following you're under producing, because it puts even more pressure on the amount of under production and the low horsepower to make the math work. Can you just square that up for us? If you're producing at retail for a higher horsepower in '20, wouldn’t your production be up from '19?
I think -- so, retailer is lower, first off, if we go from ‘19, ‘20, retail is lower and we're going to produce to that level. But that level is lower than where we would have been in -- that level is lower, just when we compare the years '19 to '20. So, we're going to produce in line, even after the underproduction that we did in '19.
But, if you’re under producing by high-single-digit in '19, even if retails down 3 or 4 in high horsepower, your production would be up, because you were under producing more a year ago. I think we're just putting a lot of pressure on a huge under production and low horsepower to make this math logical. And I just want to make sure we level set. Your high horsepower production would appear to be up in your retail environment, coming off how you under produced. I mean, that's just the math. I'm just making sure I understand we all level set leaving the call.
Yes. What I’d tell you is we are -- the lower retail that we see in '20 versus '19, producing at that is still at a lower level than what we saw in fiscal '19.
Okay. We can talk offline. And lastly, the cadence of how you see the sales playing out for the year, I know you don't give quarterly guidance, but any sense of the cadence of the implied total sales down about 9, how do you see it or even break it up by segment, whatever you choose to...
I mean, I think when you think about '20, it’s probably a little bit lighter in the first half as we talked about, we got some of the under production, some of the things on small ag, small tractors in particular that impact the first half of the year. So, I'd say a little bit lighter first half versus second half.
Thank you. Our next question comes from Ashish Gupta with Stephens. Your line is open.
Thanks so much. I have a question and a clarification. Do you think there's a demand pull forward for the 8R, resulting in the sellout? And then, just to clarify in the large tractor order book, I think last year in the fourth quarter -- on this call you said it was -- the large tractor order book was extended versus last year. I thought last year you said it was out through the fiscal second quarter, and I think you'd said through March this year. So if you could just clarify that’d be great.
Yes. So, I think we would say, there's an impact of the model changeover certainly. And I think, that’s -- Brent and John have commented on that in terms of -- that has impacted where orders are and we're not taking orders. So, certainly, we do expect some orders that come in on the existing model. So, I think that's the component. As you think about where we are in relation to last year, 8000 series, 9000 series, we're a month to two months further out in terms of availability. But that can be variable on what the underlying production schedule, right. So, that's not absolute when we compare those. But we are further out. We have more visibility this year than we do -- than we did a year ago at this time.
Josh -- and as we planned our transition strategy, we had intended to do this to sell out the current model and then transition into the new model. And I can tell you that there's demand on the current model since it's sold out. But there's a lot of excitement on the new ones. So, actually, the transition is going just as we had planned.
And then, sorry, just a quick follow up. So, I think he had said that you expect some downtime in the third quarter related to the model changeover. So, should we expect production to be lower in some Q versus -- is there going to be different seasonality?
I mean, there's probably a little bit of impact, but I don't think it's significant. I wouldn’t say significant as that changeover happens, really kind of at the end of our second quarter into the beginning of our third. So, I wouldn't think it would impact meaningfully our kind of seasonal shift there or seasonal split.
Yes. Our next question comes from Seth Weber with RBC Capital Markets. Your line is open.
On construction, maybe just on the Wirtgen business, it sounds like you're messaging that it's really the U.S. business that's going to be weaker. But, it feels like Wirtgen has been a little bit softer than we expected. I mean, can you just give us kind of a walk around and what you're seeing in the regions for the Wirtgen business? And, you kind of alluded to margins being above segment average, but our margins kind of where you would expect them to be at this point, or are you pushing -- still pushing synergies there? Is there still more upside on margins to come? Thanks.
Yes. I mean, certainly we think the opportunity on synergies is yet to come. There's a lot of work and we feel good about that €125 million. But we're not -- we haven't seen a lot of that making its way through from a margin perspective yet. What I would say is some of those synergies are having some impact. A good example is, we talked about this year of integrating order fulfillment. So, this year, Wirtgen did do some underproduction on some Wirtgen models as well as Vögele models, which have been impactful in terms of their margin performance. So, that's impacted their margin as we did do some underproduction to right size inventory there in some models and some markets. So, there --- that had an impact on Wirtgen margins for the year.
I think as you look around the globe there, North America has been pretty steady from a roadbuilding perspective. Europe has been relatively stable, kind of flat, maybe a little bit of caution in a market like the UK on Brexit. I think, if you look at emerging markets and other markets, that's probably where we've seen more of a weakness, China, we've talked about places like Argentina, Turkey where we've seen more incremental weakness. So, still feel really good about the business, really good about the integration and the synergy opportunities and continue to find more opportunities to leverage and work together. So, we'd say on track, certainly we took some steps with the underproduction this year and we've got some factory startup going on that's driven some inefficiencies but feel good about the future there.
Our next question comes from Courtney Yakavonis with Morgan Stanley.
I appreciate the color you gave on some of the steps you’re taking on the finco to reduce losses on operating leases. But can you just talk a little bit about how much you adjusted down the low residual values? And also, it sounded like this was primarily in ag -- primarily in the ag division, but, was there any impact on C&F operating leases residual values? And then, also, was any of this equipment with precision ag or any of the more advanced features or is this some of just an aging effect?
Yes. Thanks Courtney. I'll start there. I mean, I think, if you think about, as our lease terms have gotten longer, they tend to be in between three and four years. So, you've got a little bit -- a little bit, you’re not talking about brand new equipment. As you think about which division, if we see -- we saw it across both divisions, and maybe if you just go back to -- we made some changes to our lease book in 2016, where we reduced residual values, we encourage longer term leases, and we saw some of that benefit. We saw the benefit in '17, we saw in '18 as well. As we got into the latter half of '19, we saw kind of the market uncertainty impacting the recovery rates as we were remarketing this equipment back through the wholesale channel. So, that resulted in some of the impairment that we disclosed, and then the changes that John mentioned today. So, there's been a combination of those things that have impacted this, but we have seen it in both divisions. So, it's not a just one division or the other.
But we have not made major changes to the RVs. I mean, we've tweaked it a little bit to fit the market, but not major changes.
And then, just on the comments that you're rolling Combine Advisor into your pricing, I think you gave a 2% pricing forecast for A&T. How should we be thinking about that? Is that like for like equipment, or will there still be an additional mix impact from something like Combine Advisor that’s not necessarily an upsell anymore?
Yes. In its first year when it moves in base, it'll still be coming through mix, not in our price realization number. It would not have been in the comparable model last year.
Our next question comes from Ann Duignan with JP Morgan.
If I could ask why the strong dollar is not listed as one of the headwind facing U.S. agriculture, but I'm not going to ask that. I'm going to ask, why were you overproducing in the small horsepower sector in the -- under horsepower? And how much inventory do you have to reduce now that you've spent your overproducing?
Yes. And I would say, I think, as we look at that business, we were building inventory to get to a desired inventory level to meet really retail demand and meet the needs of those customers. The way those customers by those is, effectively on impulse. You walk into a dealership on a Saturday, you want to walk away with a tractor that day. So over the last couple years, we've been growing to get to that sustained inventory to sales level. And I think as John mentioned earlier, as we look at that, and we've gotten to that level, we've identified opportunities really to optimize those levels of inventory while still being able to meet the customer needs. So it's really about us getting a little more efficient and having a little bit better information as we've gotten to those levels to be able to execute. Anything you’d mention John?
Yes. And once again, we made and we made some pretty significant improvements to the overall order fulfillment process. So we're confident we can respond quicker to retail demand. So, I think the word optimization is spot on, Josh.
Next question comes from Tim Thein. Your line is open with Citigroup.
John, wondering, is there a way to quantify how much -- for Ag & Turf, how much of the forecast is made up essentially of your own estimates versus orders in hand. And in the spirit of the question is, normally at this time, just given the delayed harvest, presumably there's less of dealer -- visibility that dealer has and in turn that you have. So, is there a way to just quantify, again, I think it's ballpark numbers in terms of at this point in the year we normally have x percent visibility, and thus the balance is just our own estimate in terms of how order rates play out over the coming months.
Yes. I think I'll start, this is Josh. I think, certainly, the weather and the delayed harvest has impacted EOP combines in particular, certainly -- we would acknowledge, we have less visibility there because of the delayed seasonality that we're seeing. And that’s led us to probably be a little more cautious in terms of how we're viewing the market and our overall guide as a result of that. Now, I think tractors good visibility, as we mentioned, really driven more by some of the changeover in product. But those are the key things I would mention. I'll ask John to add in.
I'd like to repeat the comment I made in my opening comments that with this weather situation being so unique, there's a pretty good possibility that our early order program on combines will be back ended. We don't know that yet. So, that's why we're a little cautious, but we think there's a good chance of that as farmers complete their harvest and assess their income situation, we think there could be some year-end buying, but we don't know that yet.
And maybe just while you’re there, John, a quick follow up. In terms of you mentioned earlier, from a standpoint of replacement demand and the fleet being the oldest it’s been in a while. And I'm assuming this weather that you're talking that we're seeing is putting some additional pressure on the fleet. Are you seeing that manifested in terms of higher reconditioning bills and service and parts activity and dealers in terms of maybe a bit more visibility that you have that maybe we are getting closer to the point where you're going to see more need based buying or is it just more anecdotal?
Yes. I think that's a great question. And in fact, we are seeing good growth in the aftermarket. Our dealers are reporting part sales growth, absorption growth, et cetera. So we are seeing some larger bills as they come through the system. And we think our connected support approach that that Ryan alluded to, we think that's going to really help the dealer be proactive with some of those service opportunities. So, yes, as the fleet ages, we are seeing some pretty good sales growth on the aftermarket side of the business.
All right. Thanks, Tim. We'll go ahead to our next question.
Our next question comes from Ross Gilardi with Bank of America. Your line is open.
Good morning, guys. Thanks for squeezing me in. I wanted to ask another question about Combine Advisor and making that a standard option, only after three years, which you're doing at the same time, the Phase 1 of your order book is down double digits. And what I'm trying to get at is, is there a risk, this is a very short term decision that's going to remove your ability to go back and price in the future for this pretty valuable option when the market recovers. And this is a reality that you're going to have to give away a lot of these technologies in the base model to drive adoption, particularly as some of your competitors seem to be stepping up their game and really focusing a lot more heavily on precision agriculture?
Yes. I think, maybe one thing there to call out is when something used in the base, it's not free. When a feature moves into base, base price moves up with it. So we don't give up that pricing opportunity or margin that goes with that.
And we were seeing tank rates increase to the point where we needed to do that because it's a fundamental improvement to the overall combine, the way it functions. So, we think that's a positive, the way we’ve transitioned that into base so quickly.
We’re at the top of the hour. So, that'll be our last question. We appreciate all the interest. And we'll be around to handle questions. Thanks, everyone. Happy Thanksgiving.
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