Deere & Co (NYSE: DE) Q1 2020 Earnings Call Transcript

Deere & Co (NYSE: DE) Q1 2020 Earnings Conference Call

February 21, 2020

Corporate participants:

Josh Jepsen — Director, Investor Relations

Brent Norwood — Manager, Investor Communications

Ryan D. Campbell — Senior Vice President and Chief Financial Officer

Analysts:

Jerry Revich — Goldman Sachs — Analyst

Joseph O’Dea — Vertical Research Partners — Analyst

Stephen Volkmann — Jefferies — Analyst

Timothy Thein — Citigroup — Analyst

Jamie Cook — Credit Suisse — Analyst

Ashish Gupta — Stephens Inc. — Analyst

Andrew Casey — Wells Fargo — Analyst

David Raso — Evercore ISI — Analyst

Mircea Dobre — Robert W. Baird — Analyst

Chad Dillard — Deutsche Bank — Analyst

Ann Duignan — JP Morgan — Analyst

Brendan Shea — RBC — Analyst

Joel Tiss — BMO Capital Markets — Analyst

Courtney Yakavonis — Morgan Stanley — Analyst

Ross Gilardi — Bank of America — Analyst

Presentation:

Operator

Good morning and welcome to Deere & Company First Quarter Earnings Conference Call. [Operator Instructions].

I would now like to turn the call over to Mr. Josh Jepsen, Director of Investor Relations. Thank you. You may begin.

Josh Jepsen — Director, Investor Relations

Hello. Good morning. Also on the call today are Ryan Campbell, our Chief Financial Officer; and Brent Norwood, Manager, Investor Communications. Today, we’ll take a closer look at Deere’s first quarter earnings and spend some time talking about our markets and our current outlook for fiscal 2020. After that, we’ll respond to your questions. Please note that slides are available to complement the call this morning and can be accessed at our website at 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 express 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 statements 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. 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 and Events.

Brent?

Brent Norwood — Manager, Investor Communications

John Deere completed the first quarter with a solid performance and sees early signs of stabilization for the U.S. ag industry. Sentiment improved as some progress was made addressing market access for U.S. farmers through the passage of USMCA and the Phase-1 trade agreement with China. Meanwhile, markets such as Brazil got off to a slower start even as underlying fundamentals and farm production remain high. At the same time, markets for our Construction & Forestry division slowed, dampening results as the division takes actions to manage inventory levels and adjust to lower levels of demand.

Now let’s take a closer look at our first quarter results beginning on slide 3. Enterprise net sales and revenues were down 4% to about $7.6 billion, while net sales for our equipment operations were down 6% to about $6.5 billion. Net income attributable to Deere & Company was up 4% to $517 million or $1.63 per diluted share. The results included a pretax expense of $127 million relating to the voluntary employee-separation program conducted during the quarter.

Moving on to a review of our individual businesses. We’ll first start with Agriculture & Turf on slide 4. Net sales were down 4% in the quarter-over-quarter comparison primarily driven by lower shipment volumes and the impact of currency translation partially offset by positive price realization. Price realization in the quarter was positive by 3 points, while currency translation was negative by 1 point. Operating profit was $373 million, resulting in an 8.3% operating margin for the division. The year-over-year increase was primarily due to positive price realization and lower production costs partially offset by lower volume as well as a $78 million charge relating to the voluntary employee-separation program.

Before reviewing our industry outlook, we’ll first provide commentary on the regional dynamics impacting ag markets and Deere operations around the globe, starting on slide 5. In the U.S., farmer sentiment began to show early signs of stabilization during the quarter as uncertainty surrounding market access abated with the passage of USMCA and the signing of the Phase-1 trade agreement with China. Additionally, U.S. farm cash receipts are expected to increase in 2020, aided in part by the recently announced third tranche of market facilitation payments, which totaled $3.6 billion, further enhancing farmer liquidity.

While market access certainly has improved sentiment, farmers will likely remain cautious until ag exports to China begin to flow. Given the seasonality for soybean demand, exports to China are unlikely to increase significantly until harvest season. As a result, we do not expect significant changes in the replacement cycle during fiscal year 2020. Furthermore, at this point in the year, many of our large ag products are already sold ahead via early order programs that have now closed.

Despite limited changes to the current replacement cycle, we were encouraged by the results of the final two phases of our combine early order program. After a slow start, this stronger finish resulted in overall program orders ending up low single digits in the U.S. while down double digits in Canada. In total, the program ended down a high single digit on a unit basis but down just a low single digit on a revenue basis due to price increases.

Meanwhile, our tractor order book for fiscal year 2020 is healthy with a strong sold-ahead position, indicating a positive reception to our newly redesigned 8R featuring an industry first fully integrated 4-track option for a rigid frame row-crop tractor.

The strong order book reflects, in part, measures we took during 2019 to manage field inventory, allowing us to produce in line with retail sales in 2020, which is currently still our plan. Moreover, the actions we took in 2019 resulted in desirable field inventory-to-sales ratios that are significantly below the rest of the industry. And we’ll continue to manage new equipment inventory tightly throughout the year. Meanwhile, large ag-used inventory levels are in their healthiest position in years, which is supportive of a stable price environment for used equipment.

In contrast to the U.S., our field inventories, though considerably lower than last year, remain elevated in Canada. This is due to challenging industry conditions, namely existing trade barriers on Canadian canola and a declining exchange rate. Net farm income is expected to increase this year but will still be below long-term averages. As a result, we don’t see much change on the equipment replacement cycle in 2020, and we’ll focus on continuing to reduce our field inventory so that we can more closely match production to retail sales in 2021.

Shifting to South America and Europe on slide 6. Record soybean production and favorable exchange rates continue to drive very favorable producer margins in Brazil this year. These healthy soybean dynamics, coupled with an improving outlook for sugar prices, have improved overall fundamentals for the country in 2020. Despite these sound fundamentals, farmers are somewhat cautious regarding equipment investment as the impact of shifting trade dynamics have yet to be determined. Brazilian farmers were also anticipating further clarity and possibly better terms on government-sponsored financing for farm equipment, which contributed to lower retail sales at the end of 2019 and lower shipments through the beginning of 2020. On that note, in late January, the government announced a new financing program that will begin the transition to unsubsidized, market-based rates for ag equipment. This development should provide greater clarity on funding options for farmers and potentially support stronger equipment sales for the second half of the year.

Meanwhile, sentiment in Argentina remains subdued as farmers adjust to higher export taxes on corn and soybeans. On a positive note, this year’s crop is very strong, and margins are expected to be positive even in the face of higher taxes. Moving on to Europe. Even though results for winter crop conditions have been mixed, overall ag fundamentals have mostly improved year-over-year as the north region is recovering from last year’s drought. Margins in dairy and livestock remain supportive, while wheat prices continue above break-even levels. But despite the modest improvement in fundamentals, sentiment does remain soft.

Concerning Deere’s operations within Europe, we continue to drive greater degrees of optimization and focus to our business. Over the last few months, we’ve began work on rationalizing the operations of our sales branches and shifting more resources to our frontline selling efforts. We are also concentrating our product portfolio towards large ag with a deeper focus on precision technologies, and we are accelerating the implementation of our Dealer of Tomorrow strategy in the region more closely to what we have done in North America to ensure our channel is appropriately scaled and optimized in order to deliver and support higher degrees of technology in the coming years.

With that context, let’s turn to our 2020 Ag & Turf industry outlook on slide 7. Unchanged from last quarter, we expect ag industry sales in the U.S. and Canada to be down about 5% for 2020, reflecting a stable environment in the U.S., offset by more challenging conditions in Canada. Moving on to Europe. The industry outlook is forecast to be flat in 2020 as most regions impacted from last year’s drought are expected to recover with favorable production for the year. Furthermore, the outlook for the dairy sector remains stable.

In South America, industry sales of tractors and combines are projected to be flat for the year. Fundamentals in Brazil remain positive as a result of high levels of grain production combined with healthy producer margins and restored liquidity in the financing market. However, other Latin American markets like Mexico and, to a greater extent, Argentina face near-term challenges due to the potential for adverse policy impacting the ag sector. Shifting to Asia. Industry sales are expected to be flat, with growth in India offset by slowness in China. Lastly, industry retail sales of turf and utility equipment in the U.S. and Canada are projected to be flat in 2020 based on stable general economic factors.

Moving on to our Ag & Turf forecast on slide 8. Fiscal year 2020 sales of worldwide ag and turf equipment are still forecasted to be down between 5% to 10%, which includes expectations of 2 points of positive price realization and a currency headwind of about 1 point. It’s important to note that our sales forecast continues to contemplate producing below retail demand for small tractors in 2020. For the division’s operating margin, our full year forecast is ranging between 10.5% and 11.5%, unchanged from last quarter. Additionally, when modeling the full year, keep in mind that some of our large ag production schedules include lower shipment volumes in the second quarter due to factory changeovers resulting from the introduction of the new 8R Series tractor and a limited production build of the new X-Series combine.

Now let’s focus on Construction & Forestry on slide 9. For the quarter, net sales of about $2.044 billion were down 10% primarily due to lower shipment volumes and the impact of currency translation partially offset by positive price realization. Operating profit moved lower year-over-year to $93 million primarily due to lower shipment volumes as well as $24 million in expenses relating to the voluntary employee-separation program. On the positive, price realization and currency benefited profit for the quarter.

Let’s turn to our 2020 Construction & Forestry industry outlook on slide 10. Construction equipment industry sales in the U.S. and Canada are forecast to be down between 5% to 10%, reflecting mixed economic indicators and elevated levels of field inventory. For the year, employment, GDP and housing starts all remain stable drivers of demand, while oil and gas CapEx and rental CapEx are mostly down year-over-year.

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

Moving to the C&F outlook on slide 11. Deere’s Construction & Forestry 2020 sales are still forecast to be down between 10% to 15% compared to last year. The year-over-year decline is driven mostly by a mid-single-digit underproduction to retail construction equipment volumes compared to building inventory — compared to the building of inventory in 2019. The order book remains within our historical 30- to 60-day replenishment window and is consistent with our outlook.Our net sales guidance for the year includes expectations of about 1 point of positive price realization and a currency headwind of about 1 point. For the division’s operating margin, our full year forecast is ranging between 9.5% to 10.5%, unchanged from last quarter.

Let’s move now to our financial services operations on slide 12. Worldwide financial services net income attributable to Deere & Company was $137 million in the first quarter. For fiscal year 2020, net income forecast remains $600 million, which contemplates a tax rate between 24% and 26%. The provision for credit losses in 2020 is forecast at 18 basis points, reflecting a high degree of credit quality within our current portfolio.

Slide 13 outlines our guidance for net income, our effective tax rate and operating cash flow. Before reviewing the components of our guidance, it’s worth noting that we are monitoring the coronavirus situation and working closely with the Chinese provincial authorities primarily focused on the well-being of our employees and a safe return to production. In terms of overall exposure, the biggest potential impact to Deere is in relation to the supply base that serves our international operations. The situation remains fluid, and we are working closely with our suppliers and logistics providers.

Our full year outlook for net income remains unchanged and is forecast to be in a range of $2.7 billion to $3.1 billion, with an effective tax rate projected to be between 22% to 24%. Cash flow from the equipment operations forecast is also unchanged and expected 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 plan.

I will now turn the call over to Ryan Campbell for closing comments. Ryan?

Ryan D. Campbell — Senior Vice President and Chief Financial Officer

Thanks, Brent. Before we respond to your questions, I’d first like to offer some thoughts on current market conditions in ag and revisit some of the key initiatives we have under way in 2020. After a year of uncertainty in 2019, we are encouraged by early signs of stabilization, evident in the beginning of 2020. We view the signing of the Phase-1 trade agreement with China and the passage of USMCA as important first steps toward removing some of the uncertainty that has weighed on producer sentiment over the last year. Continued positive sentiment will be dependent in part upon a pickup in U.S. exports of agricultural goods to China.

Over the last quarter, we were pleased with the conclusion of our combine early order program and the progress made on our large tractor order book. As Brent noted, orders for our combine program ended up in the U.S. We are finding that despite periods of high uncertainty, customers continue to invest in products and services that drive economic value. Customers are increasingly opting for solutions that offer the highest levels of productivity, driving a better outcome for their operations and higher average selling prices for us. We view this as evidence that we can drive growth in our financial results even in periods when the number of units we sell is flat to slightly down.

Now shifting our focus to 2020 and beyond. We recently discussed some key initiatives to help us better execute our strategy. During our CES Analyst Day, John May laid out his priorities as CEO. Our first priority is to refocus our capital allocation on investments that: one, intensify our precision ag leadership; two, expand our aftermarket and retrofit business; and three, increase our emphasis on products and markets that have the greatest opportunity for differentiation. Our second priority involves reorienting our cost structure, including both our organizational design and footprint, to create a more agile company to best capitalize on the significant opportunity in front of us. To that end, we conducted a voluntary separation program during the first quarter as a step towards achieving greater degrees of agility.

Over the course of the year, we’ll pursue additional opportunities pertaining to our overseas footprint and organizational design. We believe the resulting organization will be more efficient and better equipped to respond to dynamic market conditions. As we have indicated, we will provide updates on these initiatives during our quarterly earnings calls, as decisions are made.

Josh Jepsen — Director, Investor Relations

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, please limit yourself to one question. If you have additional questions, we ask that you rejoin the queue. Caroline?

Questions and Answers:

Operator

[Operator Instructions]. Our first question or comment comes from Jerry Revich from Goldman Sachs. Your line is open.

Jerry Revich — Goldman Sachs — Analyst

Yes. Hi, good morning everyone. Ryan, I’m wondering if you could just expand on your last comment in terms of organizational structure and the opportunity set from realignment. Correct me if I’m wrong, I think you folks are set up as a matrix organizational structure with a very heavy emphasis on shared services. And so when we’ve seen these transitions in the past towards direct regional responsibility, there’s been really significant benefit at the margin line pretty quickly. So how should we think about your transition here as an organization compared to what we’ve seen from others that have had similar transition from matrix to regional responsibilities that you outlined here?

Ryan D. Campbell — Senior Vice President and Chief Financial Officer

Yes. Jerry, thanks for that question. We’re still going through the analysis of what it might look like. And what I would point to is when we talked at CES and we talked about our bridge from mid-cycle margins from 12.5% to 15%, we said about 1% would come from cost structure. Certainly, the voluntary separation program that we just executed is a component of that, the Wirtgen synergies is a component of that, and then the footprint and kind of the recharacterization of the organizational design will be the rest of that. And so if you think about 1 point would be over $300 million, we took about — we’ll get about $120 million in savings from the voluntary separation programs we did in 2019 and 2020. The Wirtgen synergy is EUR125 million. You get about a similar amount for the rest of it. So we’re early yet. We’ll talk as we make those decisions, but that’s how we would characterize it at this point.

Jerry Revich — Goldman Sachs — Analyst

And Ryan, the ultimate opportunity set, could it be bigger than that? I guess when we’ve seen these changes in the past, we’ve seen something closer, 200 to 300 basis points of margin improvement. Is that what your benchmarking shows? Or is it too soon to talk about numbers of that size until we — we’re further along?

Ryan D. Campbell — Senior Vice President and Chief Financial Officer

I’d say too soon to talk about that. We’d still point you to the numbers that we talked about to get us to 15%. As we get through it, we’ll certainly provide updates on our quarterly calls.

Operator

Thank you. Our next question or comment is from Joe O’Dea from Vertical Research. Your line is open.

Joseph O’Dea — Vertical Research Partners — Analyst

Hi, good morning everyone. You touched on seasonality of China purchasing of U.S. ag commodities. But as we think about getting into the fall and post the Phase-1 agreement, how are you thinking about that level of activity, whether that should return to a pre-trade dispute type of purchasing, whether it’ll be stronger than that just based on your evaluation of the Phase-1 agreement?

Ryan D. Campbell — Senior Vice President and Chief Financial Officer

Joe, thanks for the question. I think it’s certainly still early. And I think as Brent alluded to, we’re at a period of time where typically now you see that the purchases moved to South America coming back to North America kind of post our harvest time. So we think there is some time lag there. The — I think the real question is as we think about how do we get to a larger number of purchases, and some of the numbers that are out there are roughly two times what we’ve done kind of historically, on historical averages, so I think it’s still early to determine exactly what that looks like.

I think also, what commodities make that up play a pretty big role. Is it a continued purchases of soybeans or do we see other commodities? Things like pork, ethanol and others come into the trade that necessarily haven’t always been there or haven’t been significant. So I think a lot of questions still there in terms of how that comes through as well as in the near term with coronavirus and some of the things that have slowed, just overall activity in China, what impact does that have on their ability to make those purchases.

Joseph O’Dea — Vertical Research Partners — Analyst

Got it. Thank you.

Operator

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

Stephen Volkmann — Jefferies — Analyst

Hi, good morning, everybody. I wanted to dig in a little bit to your view of the ag margins. Obviously, they came in quite a bit better than, I think, some of us expected here in the first quarter. And frankly, it’s a little tough to kind of hold them down into the level you’ve given in terms of guidance for the full year. When we think about the tailwind from the headcount reduction savings and probably some kind of mix improvement, I would assume — and maybe a little bit more production-to-retail versus last year, are there some headwinds that we should be thinking about that kind of offset some of those benefits? Or is that, I don’t know, maybe somewhat of a conservative outlook? Or are we skewing toward the higher end of the margin range or something? Just a little more color on how you’re thinking about that.

Ryan D. Campbell — Senior Vice President and Chief Financial Officer

Yes. Steve, I mean, you’re right. First of all, I think that we’re pleased with the way the first quarter came in, margins up on lower sales. I think that’s a positive. As we think about the full year, I think a few things that we are contemplating. One, it is still early. We’re watching the situation in China with coronavirus closely as well as in Brazil, where, as we’ve noted, we started the year with a little bit slower retail activity. Our view there is that picks up, it’s more back-half loaded, but that’s something we’ll watch pretty closely.

One other thing as we think about first quarter versus the rest of the year. In the first quarter, we had nearly 3 points of price realization. Our full year is about 2 points. So not as much expected there from that perspective. So overall, not a change in our range. We think it’s — there’s still a lot of moving pieces, so we feel like that’s prudent. Maybe one thing to call out in particular as we think about the second quarter — and Brent alluded to in his comments is our second quarter, we have a few, I’d say, maybe unusual seasonal impacts in the quarter. One, we see much lower cotton sales in 2Q of this year because they came through one — or the first quarter. So that’s really just timing of production. But also, we have new product transition in Waterloo for our brand-new 8R tractor as well as limited production builds for our new combine. And the result of those two things will certainly impact what we’re able to produce and ship during the month.

And then one last thing to think about in 2Q is as we think about coronavirus and some of those impacts, one of the things that we’ve thought about is the impact on our supply base there and the ability to get parts to our operations internationally. So we’ve actually, in our second quarter, included about $40 million of cost of expedited freight to make sure that we’re able to have that availability to get parts into the operations. So that will, all of those things, result in probably a lighter top line and margin line for 2Q than what we seasonally would see.

Josh Jepsen — Director, Investor Relations

Yes. So Ryan, maybe overall just to summarize, we certainly feel good about the performance in the first quarter, but there’s a few moving pieces for the rest of the year, and it’s too early for us to change our range at this point.

Stephen Volkmann — Jefferies — Analyst

Got it. Okay, that’s helpful. I appreciate guys.

Operator

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

Timothy Thein — Citigroup — Analyst

Thank you. And first, Josh, thanks for the added disclosures in these lines. But just to continue along that train of thought, in terms of the second quarter, obviously, historically, the highest seasonal quarter from a margin perspective, do — the factors you just outlined, are those enough to — does that change this year such that third quarter, you think, is higher than the second from a margin perspective? Or — I, again, recognize you don’t give quarterly margin guidance but just to make sure we understand kind of the magnitude of those impacts.

Ryan D. Campbell — Senior Vice President and Chief Financial Officer

Yes. I’d say more similar now between those two than the difference that we’ve seen in the past.

Timothy Thein — Citigroup — Analyst

So — okay. 2Q, 3Q kind of both on par with one another? Is that…

Ryan D. Campbell — Senior Vice President and Chief Financial Officer

Correct. Yes.

Timothy Thein — Citigroup — Analyst

Okay. All right. Thanks a lot.

Operator

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

Jamie Cook — Credit Suisse — Analyst

Just following on to Steve’s question on the ag margins again. I agree with his thoughts that the guide seems conservative. You did also talk about some of the actions you’re taking in Europe within ag. So I’m wondering if there’s any costs associated with that or how much that’s sort of incrementally, if any, weighing on the ag margins relative to how I think about margins in South America or the U.S. for ag. So that’s my first question. I guess my second question, on the flip side, the construction margins were a little weaker than I would have expected, understanding you kept your margins the same, but just sort of your confidence level there, if there was anything in particular that weighed on the construction margins in the first quarter.

Josh Jepsen — Director, Investor Relations

So on the ag side — starting on the ag side, I mean, I think the — as we think about Europe, some of the things we’ve already done, we kind of executed on in 4Q of ’19 and in 1Q. So as we stand today, with where we’re at, nothing additional to call out. If we do further actions, as Ryan mentioned, we’ll play those out and talk through those, but nothing major contemplated right now. As you think about construction — and construction in the quarter, we had lower margins. The voluntary separation expenses, $24 million, have an impact. And then lower volume, unfavorable mix and then just the underproduction component are really the biggest drivers of that lower margin in the quarter.

Maybe just a context then, as we think about the full year and what do we see there, we do expect to see mix improve as we go through the year. As we expect, we’ll — our construction — North American construction equipment, mix will improve as we underproduce less throughout the balance of the year. In addition to that, roadbuilding, which is more seasonally skewed, is a bigger portion of our total C&F business this year and is much more heavily weighted, their seasonality, to 2Q and 3Q in the year. So I think those are probably the biggest drivers on the construction side from a margin perspective.

Jamie Cook — Credit Suisse — Analyst

Okay. Thank you.

Operator

Thank you. Our next question or comment is from Ashish Gupta from Stephens. Your line is open.

Ashish Gupta — Stephens Inc. — Analyst

Hi, good morning. Thanks for taking the question. Appreciated the color on the supply chain impact and the costs you guys are budgeting for the second quarter. Just wondering if you can maybe expand on — I think you said that the components you make in China are for other international markets. I’m just wondering if there’s any supply chain-type impacts that could be — that could come over time with the virus spreading to Japan and South Korea.

Josh Jepsen — Director, Investor Relations

Yes. So when we think about kind of the impacts and potential impacts of the coronavirus, there’s kind of two components that we’ve mentioned. One is direct exposure, our sales into the China market. That’s relatively small for our Ag & Turf business and for our traditional C&F business. Roadbuilding, though, has a bigger exposure there. So roadbuilding in China will tend to be 10% to 15% of their overall sales. So more of an impact there. We did see some reduction in their top line as a result of the lack of activity in that market over the last month or so. So we have seen some of that impact. That’s one.

The second component is on supply chain. And we’ve got suppliers in China that supply our operations across the globe. So those are the spires we’re watching closely. We’re working through our supply management teams, working really diligently to understand where each of those are and the process to either — are they producing or when are they going to begin to produce. So that’s something we’re watching and monitoring closely. As a result of that, as I mentioned, that’s where we did go ahead and set up and get capacity to expedite freight to make sure we can try to get those parts to our facilities during the quarter.

Ashish Gupta — Stephens Inc. — Analyst

If we remain in sort of an extended shutdown or you see impact from quarantining in South Korea or Japan, do you see any impact there? And I guess I should ask also, do you have other component suppliers that you can leverage in other regions in Europe or U.S.?

Josh Jepsen — Director, Investor Relations

Yes. I mean first, I’d say it’s still really fluid and really very early. This is day-to-day shifting in terms of what’s going on. So as we move forward, we’ll certainly update, but that’s kind of what we know today. And as always, our supply management teams are always looking at opportunities to resource and leverage suppliers that have multiple locations. So we’re working through all those potential opportunities.

Operator

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

Andrew Casey — Wells Fargo — Analyst

Thanks. Good morning everybody. Question on cash flow. I mean you had a really good first quarter in terms of cutting the outflow relative to last year on the operating cash flow line. Yes, you didn’t really change the full year guidance. So I’m wondering, a, what do you expect for the balance of the year in terms of working capital; and then b, you didn’t really keep pace with a share repo, and I’m wondering if that’s a signal that you’re going to keep it dampened for the balance of the year or will that reaccelerate?

Josh Jepsen — Director, Investor Relations

Yes. From a cash flow perspective, we maintain the range. We are focused on managing inventory and receivables. We saw really good progress, as you noted, in the first quarter. But I think overall, I’d say it’s early in the year. We didn’t adjust our top line ranges nor our net income range. Felt it was prudent given just three months in that we maintain that from a cash flow perspective.

Ryan D. Campbell — Senior Vice President and Chief Financial Officer

Andy, this is Ryan. We took inventory out throughout the balance of ’19. So that inventory reduction evens out over time. Significant in the first quarter, but it evens out, although we do still project an inventory reduction. With respect to the buyback, we did around $100 million for the first quarter. That’s in line with our historical average. Typically, first quarter is a use of cash for us as we build some working capital. So nothing to read into that. It’s right in line with what we’ve done historically in the first quarter.

Operator

Our next question or comment is from David Raso from Evercore ISI. Your line is open.

David Raso — Evercore ISI — Analyst

I’m just trying to do a margin walk for Ag & Turf for the year. If we just think of the rest of the year, the price/cost. What are you baking in for the year on price/cost for ag or the next nine months?

Josh Jepsen — Director, Investor Relations

It would be favorable.

Brent Norwood — Manager, Investor Communications

And as Josh said, we did about three in price, the first quarter. Full year is 2. So there’s an impact of that going through the rest of the year. So price/cost is still favorable but less favorable than the first quarter.

David Raso — Evercore ISI — Analyst

Well, I’m just trying to figure. Price/cost was $197 million positive for the first quarter when you add the price change and the production cost change. The rest of the year implied pricing is another $340 million or so. Do you think your costs go back up? Because I’m just trying to get the walk here from — you’re implying something about the decrementals on the volume declines for the rest of the year. But the savings from the separation costs within this division in the next nine months roughly should offset the incremental freight in the second quarter. Is that the right way to think about those two moving parts, separation savings versus the $40 million freight cost from coronavirus in 2Q?

Josh Jepsen — Director, Investor Relations

Yes. Well, I think it’s maybe a little more — there’s a little more than trying to just compare one or two components. I mean overall, as Ryan said, price — 2 points of price for the full year. Material and freight are favorable for us in 2020, and that includes the additional…

David Raso — Evercore ISI — Analyst

Is it $40 million?

Josh Jepsen — Director, Investor Relations

$40 million.

David Raso — Evercore ISI — Analyst

Yes.

Josh Jepsen — Director, Investor Relations

So still favorable. We do have a couple of things that would be going against us there. Incentive comp is higher in the year. Pension costs and OPEB costs are higher in the year. So there are some moving pieces there that impact the overall net-net there.

David Raso — Evercore ISI — Analyst

And related to that same question, the underproduction for the year in Ag & Turf, has that changed at all from three months ago, be it high horsepower versus low horsepower, magnitude? Any color there would be appreciated.

Josh Jepsen — Director, Investor Relations

Yes. No change in terms of the expectations of how we produce relative to retail or year-over-year.

Ryan D. Campbell — Senior Vice President and Chief Financial Officer

Yes. So large ag, still roughly in line. Small ag, underproduction.

David Raso — Evercore ISI — Analyst

All right, thank you.

Operator

Our next question or comment comes from Mig Dobre from Baird. Your line is open.

Mircea Dobre — Robert W. Baird — Analyst

Thank you. Good morning. Going back to construction. Can you maybe help us understand sort of what’s baked into your guidance in terms of earthmoving versus roadbuilding? And I’m kind of curious here, as you — if you think about your earthmoving business and you think about the second quarter and beyond, at what point in time do you think you’re going to be in a position where you can produce a little closer to retail demand? Is this maybe late in 2020 or more of a 2021 thing?

Josh Jepsen — Director, Investor Relations

Yes. Thanks, Mig. I think when you think about Construction & Forestry and if we look at kind of North American construction equipment, which I think is where your question really lies, is — for the balance of the year, we will underproduce retail demand. It’s more front half loaded. Up certainly, the first quarter. We underproduced more significantly than we will the balance of the year. So as I mentioned a little bit, talking about mix in that business improving over the year, that’s a result of less underproduction of that CE — that North American construction equipment during the remaining quarters of the year.

Mircea Dobre — Robert W. Baird — Analyst

And is roadbuilding down more or less than the segment average guidance?

Josh Jepsen — Director, Investor Relations

Less.

Mircea Dobre — Robert W. Baird — Analyst

Can you quantify that?

Josh Jepsen — Director, Investor Relations

Yes. I mean it’s 5% or less.

Mircea Dobre — Robert W. Baird — Analyst

Okay, thank you.

Operator

Our next question or comment is from Chad Dillard from Deutsche Bank. Your line is open.

Chad Dillard — Deutsche Bank — Analyst

So I just wanted to go back to the question of small ag. And I just want to understand, where did retail sales end up versus your expectations in the first quarter? And same question on the underproduction, where did that end up versus your initial expectations? And how are you thinking about when you’ll be able to produce in line with retail? Is it in — later in 2020? Or are we thinking about a little bit longer? And secondly, just love to get some comments on how you’re seeing the new 8R adoption unfold. Any indication on penetration uptick — uptake from the farmers?

Josh Jepsen — Director, Investor Relations

Yes. So as it relates to small tractors in North America, and it’s probably easiest or best to look at this on a full year given seasonality, we are — as Ryan mentioned, we expect to underproduce retail demand in 2020 on small tractors, and that hasn’t changed, around 15% for the year. So that’s the plan that we’re executing to, and we think that puts us in a really solid position from an inventory-to-sales perspective when we end the year.

Ryan D. Campbell — Senior Vice President and Chief Financial Officer

Yes. So we would project 2021, we’re producing in line with retail in that business.

Josh Jepsen — Director, Investor Relations

As it relates to overall 8R, the new 8R, we’ve seen good order activity there. We are — we’re ordered out further than we were a year ago. And that’s a little bit misleading just in that we’re impacted by the transition time as we moved — changed the factory over to begin producing the new model. But I think we’ve seen really, really positive response to the 8R. In particular, the new 4-track option has been particularly well received and lots of interest and activity there for what that machine delivers. So we feel good about that.

Chad Dillard — Deutsche Bank — Analyst

Thank you.

Operator

Thank you. Our next question or comment comes from Ann Duignan from JP Morgan. Your line is open.

Ann Duignan — JP Morgan — Analyst

If we could switch back to the fundamentals. I’m curious to hear your thoughts on the strength of the real versus the dollar, I mean it’s up 40% year-to-date. And what you think that might due to U.S. exports as we go forward? And couple that with the Argentinian peso and maybe the — and Ukraine on the corn side versus the Brazil real on the bean side. What are your thoughts in terms of FX and strong dollar and the impact it has on competitiveness of U.S. agriculture?

Josh Jepsen — Director, Investor Relations

Yes. So I think certainly, we’ve seen deterioration particularly in South America and the real and the peso, what has been going on there. So that does impact competitiveness, particularly in the short term. It also benefits profitability for those producers in those markets as well. So there’s puts and takes on both of those. I mean I think importantly, as we think about this from our perspective is where are — the fact that we continue to see demand growing, consumption of grains growing and there are only a few places that produce these grains, particularly soybeans, en masse, at scale in that relatively low cost of production. So we think those places are the U.S., Brazil and Argentina, to a lesser extent, so we think there’s going to be the need for those grains because those are really the only places that they’re coming from.

So certainly, timing-wise, there can be advantages, won or lost, as FX moves. But I think big picture, when we step back, feel like the demand for grains and the fact that these are only grown in a few places at scale is an important thing to recall.

Ann Duignan — JP Morgan — Analyst

And along those lines, just on Brazil again, why wouldn’t farmers be spending money now than if they — if favorable financing is going to disappear at midyear?

Josh Jepsen — Director, Investor Relations

Yes. So, I mean, I think the — well, we talked about a little bit, I think, that some of the caution there has been around trade. And you see a significant shift in China’s purchase pattern, and I think that’s paused the market a little bit. And I think we saw this over the — particularly at the end of last year and into this year, a little bit of the concern on financing. I think one of the things we’ve seen as the government came out and talked about FINAME as we go forward, I think that’s helped eliminate some of the concern as we’ve now talked about a program that begins the transition to less subsidization or less interest rate equalization, as referred to in the market, and getting to more of a free market system. And I think a couple of things that support that. One is, we’ve seen pretty low interest rates. The benchmark rate in Brazil is at very low levels, which has been positive. So that certainly helps. And our largest customers in Brazil for quite some time have had access to bank — private bank financing. So we actually believe longer term, as we begin to transition, that this will create more stability in the market and less volatility in the ag machinery sector because it’s — it will be more driven by actual demand and not finance availability or the like.

As it relates — maybe one other note on Brazil. Lots of folks look at the shipment numbers coming out of Brazil in on Anfavea. And as earlier noted, someone made the comment we’ve seen weakness, as you noted, why are we seeing more activity. And one thing that we have seen as we’ve looked at that market, and you look at by horsepower split or segments, there’s been a pretty big distinction. It’s really been occurring over the last three years where we’re seeing high horsepower — and in their reporting, that’s above 130 horsepower — has been growing, whereas you’ve seen lower horsepower has been declining year-on-year. And then year-to-date, we’re seeing the lower horsepower range is down double digits while we’re up in — on the high horsepower side. So there are a few dynamics there. But certainly, the growth in high horsepower technology, we see it very positive. It’s — over the last few years, that’s certainly helped to drive the market share gains we’ve seen, and we think that continuing trend helps us particularly as you start to deliver more and more precision ag into the market. So long answer, but I think that’s some of how we’re viewing the Brazilian market.

Operator

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

Brendan Shea — RBC — Analyst

This is Brendan on for Seth. I’d like to touch on the higher losses on the lower residuals. You called this out last quarter as well. So I’d like to get — ask if you think that you’ve lowered them to a sufficient enough level where it’d kind of be less of a headwind going forward. And then if you could talk to whether the lower residuals you were seeing, was that on your ag equipment, your construction equipment or both?

Josh Jepsen — Director, Investor Relations

Yes. Thanks, Brendan. So we noted losses in JDF in the quarter on operating leases. Year-over-year, just for context, does a little bit under $10 million, just to size that in terms of what we saw. Primarily, those losses came in through our C&F division really as a result of seeding. So a little bit of pressure on the overall used environment in C&F with higher inventories that have put some downward pressure on prices. And then we did take some action during the quarter to move aged inventory and had relatively significant reductions of our matured lease inventory there that was of an older vintage. So I think those are the things we saw there.

From an Ag & Turf perspective, portfolio was pretty stable, where recoveries, we didn’t see much change and return rates actually improved a little bit for us in the quarter. So we’re really early on now as we start to think about the changes we made a quarter ago, but very, very focused on working with our dealers through the process of retaining more of those lease maturities, programs in place to incentivize both the dealers and customers to engage in managing that inventory at a much higher level.

Operator

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

Joel Tiss — BMO Capital Markets — Analyst

I just wonder, maybe I’ll glue two quick ones together. How far can farmers go before they start replacing their equipment? Like, do you have any history on what the longest kind of drought of buying has been? And then on the focus side, are you contemplating exiting whole geographies like bigger chunks? Or is this just more like tweaking and looking a little more granularly?

Josh Jepsen — Director, Investor Relations

Yes. Maybe start with your second question. I mean I think when we think about there, I’d say it’s much more focused in terms of products and markets, how can we best serve those customers, how we do that in an efficient way while also delivering the customer experience that they expect and deserve and that we want to deliver. So I think it’s more targeted than saying entire geography or product form, but being thoughtful in terms of how can we best serve those customers.

Ryan D. Campbell — Senior Vice President and Chief Financial Officer

Yes. Maybe it’s a little more on how we go to market as opposed to which markets we’re going into.

Josh Jepsen — Director, Investor Relations

Yes. And as it pertains to the age of fleet or how long can someone go until you see purchases, we’re — in the U.S. in particular when you think about age of fleet, we are now pushing past kind of what has been the historical equilibrium going back to, say, 2000. So we’re — on high horsepower tractors, combines, we’re pushing beyond the point that we kind of ran at through really the early 2000s. So we think we’re there in terms of the drivers of replacement demand and, on top of that, technology and productivity to see more of that activity. I think the uncertainty we’ve been dealt with over the last 18 months has paused a lot of that. But I think talking to dealers, talking to our team, I mean, certainly, there’s appetite and interest there. And when we can deliver not only productivity but cost reduction and when you think about overall P&L for a farmer, there’s value there. Canada may be a little bit different situation where we see the age of that fleet is a little younger. And as a result, and Brent alluded to this in his comments, maybe a little bit further out to some of the replacement just given that market did not cycle as much down or up that we saw in the U.S.

Operator

Our next question or comment comes from Courtney Yakavonis from Morgan Stanley. Your line is open.

Courtney Yakavonis — Morgan Stanley — Analyst

Thanks for the question. Maybe first, if you guys can just talk about the pricing expectations. I think pricing was a little bit better than we expect in the first quarter. And you did raise it for the year but still implying that pricing is a little bit worse. So maybe can you just talk about where you saw the strength this quarter and why it should decelerate in ag for the remainder of the year? And then secondly, kind of on the back of the last question, I think when you talked about North America large ag, the industry outlook staying at down 5%, it definitely sounds like U.S. is a little bit better than you were originally expecting and Canada is a little bit worse. So when you have been talking about no change in the equipment replacement schedule, maybe, first, I just wanted to make sure that, that was saying that the pause that you thought happened last year is going to continue into 2020.

And then I think you’ve historically talked about commodity prices and what level you think commodity prices will impact your replacement schedule. And if you can just kind of give us some type of framework for where commodity prices need to go before you start to see that replacement schedule pick up again.

Josh Jepsen — Director, Investor Relations

Yes. So I think as you think about the down 5% in large ag in North America. You’re exactly right in that we see probably a little bit of improvement on the U.S. side and weaker on the Canada side. So that’s very fair. We talked — Brent talked a little bit about what we saw U.S. versus Canada on combines. We see kind of a similar impact as we look at large tractors from an order book perspective. So those are — that’s kind of the dynamic we’re — that we’ve seen there. As you think about price and how we came in, in the quarter, for C&F, we expect 1 point — we got about 1 point in the first quarter, and we expect that for the year. On the ag side, a little bit stronger price in the first quarter than our full year. We actually saw some improvement in overseas markets. So that’s — that was — and the margins helped us a little bit. It’s probably pushed us a little bit above what we had expected coming into the quarter.

Courtney Yakavonis — Morgan Stanley — Analyst

And then lastly, on the commodity prices and impact on replacements?

Josh Jepsen — Director, Investor Relations

Yes. So, I mean, I think the easing of trade tensions and opening up of market access, we think, is really important as a first step. I think — importantly, I think folks want to see grain actually flowing, grain actually moving, purchases occurring. And we think that’s particularly important. I mean as you think about absolute prices, we’ve felt — believe that in the range of $3.50 corn and $9 soybeans can drive replacement demand. That’s supportive of replacement demand. So I think the — if we actually start to see grains move, I think that provides a little more confidence in terms of the access actually being there, and we think it’s supportive of replacement demand.

Operator

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

Ross Gilardi — Bank of America — Analyst

Thanks for squeezing me in guys. I got cut off for a couple of minutes. So hopefully, nobody already asked this, but can you clarify what the year-on-year swing in dealer inventories was in Ag & Turf? Just reason being if you look at your retail sales, it’s hard to tell what the number is in totality, but it looks like it’s down more than the 4% revenue decline you had in the quarter. So any color there, we’d appreciate them. I’m just trying to get at whether or not dealer restocking contributed meaningfully to the maybe less-than-expected revenue decline in Q1.

Josh Jepsen — Director, Investor Relations

Yes. I think when we look at inventory-to-sales and, in particular, if you look at kind of 100-horsepower and above, year-over-year, it came down from, say, 38% to 31%. And combines, we saw come down as well. I think overall, from a small tractor perspective, we’re relatively in line with the industry and maybe down a little bit from where we were a year ago. But I think overall, I’d say we — we’ve continued to feel good about where we are from a large ag perspective and the plans to execute for small tractors.

Operator

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

Jerry Revich — Goldman Sachs — Analyst

Thanks for taking the follow-up. I’m wondering if you could talk about the margin improvement plans for C&F specifically. So a lot of what we’ve spoken about, precision ag and their pricing, is really focused on the ag part of the equation. I’m wondering if we’ll just have a little bit of a discussion on the opportunities for the C&F side beyond the Wirtgen synergies to get closer to that 15% corporate target.

Josh Jepsen — Director, Investor Relations

Yes. Thanks, Jerry. I mean I think maybe at a high level, when we think about 15%, that is the margin level we expect to deliver. Our businesses may not all be exactly that number, but all contributing to getting there is probably an important distinction. But as we think about our construction business and particularly as we add in roadbuilding, which we feel like has a strong margin profile as well, it gives us an opportunity. I think from a technology perspective, we do see opportunities to be able to leverage some of the things that we’ve done in our ag business into our construction business. So we think there is opportunity to add and create value there for customers, which is an important component. That’s further out, but we think there’s opportunity there.

I’d say today, very, very focused on managing the business. Managing inventories, integrating Wirtgen and delivering on those synergies, I’d say, would be the near-term focus areas.

Jerry Revich — Goldman Sachs — Analyst

Thank you.

Josh Jepsen — Director, Investor Relations

Yes. And maybe one last thing. We talked about it at our Analyst Day at CES, is the aftermarket opportunity in retrofit. And I think in — particularly in construction, the ability to take care of that product over the life cycle from a parts and service perspective, leveraging telematics and those sorts of things that we have today, we think, can deliver margin opportunity for all of our businesses as we go forward.

Jerry Revich — Goldman Sachs — Analyst

Thanks.

Josh Jepsen — Director, Investor Relations

Thank you. Well, that concludes our call. We appreciate all the interest. Please reach out if you’ve got questions. Thank you.

Operator

[Operator Closing Remarks].