Nov 20, 2013
Operator
Good morning, and welcome to Deere’s fourth quarter earnings conference call. (Operator instructions) I would now like to turn the call over to Mr.
Tony Huegel, Director of Investor Relations. Thank you.
You may begin.
Tony Huegel
Hello. Also on the call today are Raj Kalathur, our Chief Financial Officer; Marie Ziegler, Deputy Financial Officer; and Susan Karlix, our Manager of Investor Communications.
Today we’ll take a closer look at Deere’s fourth quarter earnings, then spend some time talking about our market and our initial outlook for the fiscal 2014. After that, we will respond to your questions.
Please note that slides are available to complement the call this morning. They can be accessed on our website at www.johndeere.com.
First, a reminder. This call is being broadcast live on the internet and recorded for future transmission and use by Deere and NASDAQ OMX.
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 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 also may include financial measures that are not in conformance with accounting principles generally accepted in the United States of America, or GAAP. Additional information concerning these measures, including reconciliations to comparable GAAP measures, is included in the release and posted on our website at www.johndeere.com/financialreports under Other Financial Information.
Susan?
Susan Karlix
Thanks, Tony. Today John Deere wraps up 2013 with the announcement of our fourth quarter results.
All in all it was an excellent quarter and marked the end of what CEO Sam Allen called another year of impressive achievement. Fourth quarter earnings were $807 million, the highest ever for the final quarter of the year and our 14th straight quarterly record.
The improvement was led by ag and turf which had another strong performance. Financial services had higher income as well, and construction and forestry profit held steady despite rocky conditions in some of its key markets.
Results for both the quarter and full year reflected a disciplined approach to hearing out the company’s plan and the continuation of positive conditions in the North and South American farm sectors. For the year as a whole, John Deere had its highest ever level of sales, earnings, shareholder value added and operating return on operating assets.
That last metric, operating return on operating assets doesn’t get a lot of headline attention, but it may be the single best indicator of our success delivering profit, while controlling costs and asset levels. In fiscal 2013, ROA as its known reached the new high of just under 32% with inventories of standard costs.
It was in summary a terrific quarter and year and it puts the company squarely in position but what we see as another solid performance in 2014. Now let’s take a look at the fourth quarter in detail beginning on slide three.
Net sales and revenues were $9.5 billion in the quarter, down 3% from the very robust fourth quarter last year. Recall last year shipments were unusually high due to Interim Tier 4 transition especially in combined and our factories were running at very high rates to catch up with customer orders.
In spite of the decline sales net income attributable to Deere & Company was up 17% to $807 million, which is noted earlier of the highest fourth quarter results the company has ever recorded. EPS was up even more 21% to $2.11.
On slide four, total worldwide equipment operations net sales were $8.6 billion, down 5%, again in comparison with last year’s particularly strong fourth quarter results. This includes an unfavorable impact from currency translation of 2 point, price realization in the quarter was a strong 4 point.
Before looking at Ag and Turf in detail let’s touch on two events in the quarter that will have an impact on the divisions results going forward. On slide five, in October, Deere entered into an agreement for the future sale of 60% of John Deere Landscapes for approximately $300 million.
Initially, Deere will retain 40% of the business and we’ll report results as an equity investment in unconsolidated affiliates. John Deere Landscapes distributes irrigation equipment, nursery products and landscape supplies, such as seed, fertilizer and hardscape materials, primarily to landscape service professionals.
The sale is in line with our strategy to focus resources on our growing core businesses. An example of this focus is illustrated on slide six.
In September Deere completed a purchase of Bauer Built Manufacturing allowing us to leverage our global dealer network, manufacturing capability and management skills to continue growing this business. As you may know, Bauer has manufactured co-branded planters with Deere since 2002 under a design and manufacturing partnership.
These planters range in size from 44 to 120 feet in width. The latter being the largest planter in the industry.
We have seen demand for the Deere Bauer Series planters grow quickly in the last few years predominantly in North America. Going forward, not only do we anticipate further market growth in North America, we see a lot of potential in Brazil and Argentina where large farms demand highly productive machines such as this.
We have already localized production of the Deere Bauer Series planters at our Horizontina factory in Brazil and have created a local supply base. These steps supports further growth and add to our highly successful product lineup in the country.
Now let’s turn to review of our individual businesses starting with Agriculture and Turf on slide seven. Sales were down 4% in the quarter, primarily due to lower shipment volume and unfavorable currency translation, partially offset by price realization.
In spite of the sales decline, operating profit was up 7% to approximately $1 billion. We believe this is a testament to the execution of our business plan, which stress the rigorous management of costs and assets.
Before we review the industry sales outlook let’s look at fundamentals effecting the Ag business. Slide eight outline U.S.
farm cash receipts, which are forecast to be down somewhat from 2013. Grain production levels are expected to be up in 2014, resulting in lower prices.
Livestock receipts are forecast to be about flat with 2013 level. As a result, our forecast calls for 2014 cash receipts to be approximately $380 billion, down about 4% from 2013, which was the second highest level ever recorded.
2014 cash receipts, the number one predictor of farm equipment sales, are expected to remain at a historically high level, which should help keep farmers in a financially sound position. On Slide 9, global grain stocks used remained at historically low level.
Due in part to good weather globally, yields will be higher resulting in lower commodity prices. However global corn stocks used are only expected to increase by about 2%.
According to our consultant Informa [ph], there is already talk about among U.S. farmers looking ahead to the 2004 [ph] planting season, about adjusting corn acreage down by about 4% in favor of soybeans.
Looking at South America, Informa is forecasting a cut in planted corn area of about 10% in Brazil and of about 30% in Argentina. The drop in Argentina is due to planting delays for corn as well as economics of lower corn prices relative to beans.
If 2014 brings unfavorable growing conditions in any part of the world, the U.S., Brazil, and Argentina in particular, corn stock fees [ph] would fall, suggesting the commodity prices would stabilize. Our economic outlook for the EU 28 is on Slide 10.
Beef and pork prices are at historic highs and milk prices are favorable, supporting livestock and dairy farmers. While remaining near long term averages, grain prices and farm income are expected to be lower in 2014.
While it appears that short term economic stress has diminished for now, concerns over slow European Union growth are weighing on farmer confidence. As a result, farm machinery demand is expected to be lower in 2014.
On Slide 11, you will see the economic fundamentals outlined for other targeted growth markets. In the CIS, import policies continue to affect combined sales in Russia, Kazakhstan and Belarus.
In Russia, heavy rain affected fall planting, putting some of the 2014 winter crop at risk. And credit availability there continues to weigh on equipment sales.
Turning to China and India, government support as well as a favorable monsoon season in India allowed for slightly improved industry outlook. Slide 12 illustrates the value of agricultural production, a good proxy for the health of agro business in Brazil.
The 2014 value of ag production in Brazil is expected to increase about 3% over the 2013 level. Brazil soybean production is expected to increase again in 2013-2014 on the heels of historically high prices and margins.
Government financing is expected to remain favorable but likely at higher rates. On the other hand, lower global commodity prices will reduce farm income.
Our 2014 ag and turf industry outlook are summarized on Slide 13. In the U.S.
and Canada, we expect an industry decline of 5% to 10%, mainly reflecting lower sales of large equipment such as high horsepower tractors and combines. The EU 28 industry outlook is down about 5% due to lower commodity prices and farm income.
In South America, industry sales of tractors and combines are projected to be down 5% to 10% from 2013’s strong levels. South America continues to grow in importance for Deere.
Our tractor market share has grown considerably there and our strong position in other products such as combines, sugarcane harvesters, sprayers and feeding equipment should not go unnoticed. Shifting to the CIS, we expect industry sales to be down slightly, while in Asia, sales are projected to be up slightly.
Turning to another product category. Industry retail sales of turf and utility equipment in the U.S.
and Canada are projected to be up about 5% in 2014. Market conditions are improving in tandem with the slow economic recovery.
Also the pent-up demand seen in late 2013 is expected to continue, mainly benefiting the riding lawn equipment and utility vehicle segments. Putting this all together on Slide 14, fiscal year 2014 Deere sales of worldwide Ag and Turf equipment are forecast to be down about 6%.
As discussed earlier, the forecast contemplates the sale of 60% of John Deere landscape’s operations. In the year-over-year comparison of net sales, landscapes accounts for about four points of A&T’s change.
On a comparable basis, the change in worldwide Ag and Turf sales is down about 2% in 2014. 2014 operating margins for the Ag and Turf divisions is forecast at about 15%.
The one point decline from 2013 is a result of implementation cost of Final Tier 4 on large Ag equipment and a return to more normal product mix. As you may recall, we have talked for some time about mix benefiting margins by one to two points due to the strength of large ag.
Finally, Ag and Turf price realization is projected to be positive. Let’s focus now on construction and forestry on Slide 15.
Net sales were down 8% in the quarter and operating profit was down 2%. The $132 million decline in sales with only $2 million reduction in operating profit is a reflection of price realization, good execution and lever pulling to control cost in response to slower demand.
On Slide 16, looking at the economic indicators on the bottom part of the slide, the economy continues slowly moving forward. Although government construction continues to fall and the situation in Washington remains uncertain, we are beginning to see some positive indicators.
Home sales and prices are improving and residential construction is growing. Some markets are seeing building lot shortages and architect and builders are reporting more activity.
Global forestry markets are expected to be up about 5% in 2014. Following double-digit growth in 2013, North American forestry markets are expected up about 5% while Europe and Russia are expected to improve from the depressed levels of 2013.
Fiscal 2014 net sales in construction and forestry are forecast to be up about 10%. The increase reflects increased shipments following the low levels of 2013 in response to an improving U.S.
economy. As we move into 2014, Deere’s inventories of new fresh machines as a percentage of sales are at all-time lows.
That gives us the ability to quickly respond to improving market conditions. Division also will benefit from increased international sales as its factories in Brazil and China began low levels of production.
C&F full-year operating margin is projected to be about 9%. Let’s move now to our financial services operations.
Slide 17 shows the financial services provision for credit losses at 3 basis points based on the percentage of the total average-owned portfolio at the end of the year. This reflects the excellent quality of our portfolios and recoveries from prior year’s write-off.
Our 2014 financial forecast contemplates the loss provision of about 16 basis points as a percentage of the average-owned portfolio. The increased provision is a result of unsustainably low loss levels of the last three years.
Even with the forecast increase, losses would remain well below the 10-year average of about 28 basis points and a 15-year average of 48 basis points. Moving to Slide 18, worldwide financial services net income attributable to Deere & Company was $157 million in the fourth quarter, versus $122 million last year.
2014 net income attributable to Deere & Company is forecast to be about $600 million. That compares with $565 million in 2013.
Slide 19 outlines receivables and inventory. For the company as a whole, receivables and inventory ended the year down $276 million, equal to approximately 24.8% of prior 12 month sales, compared with 26.8% a year ago.
Receivables and inventories ended the year at about 25.9% of prior 12 month sales, including the impact of $372 million of receivables and inventories for John Deere Landscapes that were reclassified to assets held for sale. Ag and turf ending receivables and inventory were up $269 million, including the assets held for sale mentioned above.
Construction and forestry ended the year with $173 million – ended the year down $173 million, putting us in prime position to react to improving markets. We expect to end 2014 with receivables and inventory down about $150 million, reflecting strong asset management in both divisions.
Our 2014 guidance for cost of sales as a percent of net sales is shown on Slide 20, and of course, it has to be about 74%. When modeling 2014, keep in mind the following: price about 2 points and unfavorable mix of product as we talked about earlier, here for product costs, overhead spend due to higher employment levels and lower pension and OPEB expense.
Looking at R&D expense on Slide 21. R&D was up about 1% in the fourth quarter compared with the same period last year and up about 3% for the full year.
Our 2014 forecast calls for R&D expense to be down about 3% for the full year. Moving now to Slide 22.
SA&G expense for the equipment operations was down about 1% in the fourth quarter and up about 5% for the full year. SA&G expense is forecast to be down about 4% in 2014.
In the year-over-year comparison of SA&G expenses, Landscapes accounts for about 8 points of the change. On Slide 23, pension and OPEB expense was down about $5 million in the quarter compared with last year and up about $65 million for the full year.
Pension and OPEB expense is forecast to be down $150 million in 2014 due to a higher discount rate and strong asset performance. Turning to Slide 24.
The equipment operations tax rate was approximately 35% in the fourth quarter and about 36% for the full year. For the full year 2014, the effective tax rate is forecast to be in the range of 34% to 36%.
On Slide 25, you see our equipment operation’s history of strong cash flow. Cash flow from equipment operations was approximately $4.7 billion in 2013.
Our 2014 forecast is about $3.9 billion. Slide 26 outlines our use of cash priorities which are unchanged and no doubt familiar to many of you.
Our number one priority is to manage the balance sheet, including liquidity to support the rating that provides access to low cost and readily available short and long-term funding. Thus Deere is strongly committed to its A rating.
Our second use of cash priority is funding value creating investments in our operation. Our third priority is to provide for the common stock dividend, which we have raised 82% since 2010.
Over time we want to consistently deliver a series of moderately increased dividends while targeting a 25% to 35% payout ratio on average. In this regard, we are mindful of the importance of maintaining the dividend and not growing at a point that can be [indiscernible] by our cash flow.
Share repurchase is our method of deploying excess cash, once the previous requirements are met and as long as such repurchase is value-enhancing. From 2004 to 2013, we have returned about 58% of cash from the equipment operation to shareholder through dividends and share repurchase.
On Slide 27, we outline our 2014 outlook for the first quarter and full year. Our net sales forecast for the first quarter is down about 2% compared with 2013.
This includes about 3 points of price realization. In a year-over-year comparison to the first quarter sales Landscapes accounts were about two points of that change.
The full-year forecast held for net sales to be down about 3%. In the year-over-year comparison of worldwide net sales, landscapes accounts were about three points of the change.
On a comparable basis, the change in 2014 net sales is about flat with the strong level of 2013. Price realization is expected to be positive by about two points.
Finally, our full-year 2014 net income forecast is about $3.3 billion. In closing, John Deere enters 2014 on a strong pace.
As mentioned, we are expecting the world’s Ag market to relax a bit next year and the sales of farm machinery to be somewhat lower. But we also expect to see improvement in our construction business and benefits from our global investment and new factories.
At the same time, our plans will continue, moving ahead to pursue new market at productive new models of equipment and expand our global customer base. John Deere in our view remains well positioned to respond to the needs of the growing world, and equally well positioned to provide significant benefits to our investors in the years ahead.
I will now turn the call over to Raj.
Raj Kalathur
Yeah. I will take a minute to recognize Marie Ziegler.
As many of you know, Marie Ziegler, Deere’s long time Head of Investor Relations and currently Deputy Financial -- Chief Financial Officer, will be retiring soon after 35 years with the company. Over this time, she has become well-known to the investment community as Deere’s primary face and voice.
She initiated Deere’s quarterly conference calls in 1990s, and has been knowledgeable and authoritative presence on them ever since. Indeed, Marie essentially created the Deere IR function and has developed quite a reputation in the field for efforts to build strong relations with the company’s investors.
She has also developed employees and capabilities at Deere to sustain our reputation in this field for the long-term. This is Marie’s final call.
She'll be missed by all of us, but her many contributions to the company, its investors and to the practice of Investor Relations itself will no doubt be felt for years to come. I'm sure Marie’s friends in the analyst community join those of us at Deere and wishing her much health and happiness as she enters next chapter of her life.
Thank you, Marie.
Tony Huegel
Okay. Now, we are ready to begin the Q&A portion of the call.
The operator will instruct you on the polling procedure. But as a reminder in consideration of others, please limit yourself to one question and one related follow-up.
If you have additional questions, we ask that you rejoin the queue. Operator?
Operator
Thank you. (Operator Instructions) The first question comes from Jamie Cook.
And please state your company name.
Jamie Cook
Hi. Good morning, Credit Suisse.
And congratulations, Marie, we will miss you a lot. I guess just my question relates to -- if you could provide a little more color on what your assumptions are?
You said within -- when we think about the Ag business, we should think about Tier 4 and what the implications are? Can you just give us a little more color on what you’ve seen in the costs are sort of associated -- associated with that as well as what you are assuming with material cost this year?
I guess I will start off with that.
Raj Kalathur
Sure. And as you are aware last year, we did change our guidance somewhat and we are giving an overall cost of sales number and so we are no longer giving the details of the moving pieces.
I think, as Susan went through the list of things to keep in mind in terms of those items that are creating a higher cost mix would be the largest and then Tier 4 emissions cost would be the second largest. You will know the absence of a reference to material costs, which I think from there, you can infer that the impact is not material enough to mention.
Jamie Cook
All right. I guess my second question, what struck me about your forecast in a down Ag market, the earnings that you're going to be able to put up.
So you talked about R&D being down I think 3% or something like that year-over-year. Can you just talk about sort of structurally should R&D continue to come down as a percent of sales with some of the major expense initiatives over, your ability to hole up profits and potentially a much softer ag equipment market?
Thanks and I will get back in queue.
Raj Kalathur
Sure, I think with the R&D reduction, it’s fair to note first of all, Susan had mentioned the reduction in pension and OPEB expense and that does impact R&D to some degree, so that’s part of the reduction. And so I would argue we are really not flat, or little below flat but closer to that if you take out the impact of the pension and OPEB.
But it does reflect our focus on continuing to maintain the cost to your point as we move through final tier 4 now and as we – 2015 we have a significant number of products coming in as well, and as we continue to move through that, it would be fair to expect, all things being equal, to start to see some reduction in R&D, and of course, that’s assuming there aren’t other additional opportunities with new products of sorts of things.
Marie Ziegler
Chime into that, when we look at our R&D spend, Jamie, we are looking at the long term and the opportunities and we are investing for growth. And while, of course, depending on business conditions, we’re going to be very mindful of that, we really have our eye on the long term when we consider that.
You shouldn’t really look at a near term market condition per se and correlate that to the R&D spend, because the lead times and investment horizon is much longer. Thank you.
Operator
Thank you. The next question comes from Adam Uhlman and please state your company name.
Adam Uhlman
Hi, it’s Cleveland Research. I was wondering if we can start with the revenue forecast for the global ag market – was the market forecast down 5% to 10% or so but revenue is down only a little bit less than that.
The price realization outlook does look like that’s going to be easing as the year progresses with pricing 3% for the company going down to 2% for the year. So I was wondering if you could walk through some of those moving pieces.
Tony Huegel
Yes. Keep in mind that the industry guidance would not include, you pointed out pricing, so as we are forecasting 2 points of positive price realization for 2014, of course, ag would be contributing to that.
So that wouldn’t be included market share gains and expectations also would not be included in those industry outlook. The other thing and Susan highlighted that is keep in mind, South America is only focused on – in terms of our outlook only referring to combines and tractors.
And for Deere, there is significant opportunities for a full product offer – have a full product offering in South America, things like sugarcane harvesters, planters, Susan also mentioned the Deere power plant which is localized in Brazil now, sprayers that we have recently localized, that we have a lot of opportunity beyond that there. And of course, CIS and Asia are not numerically represented.
So those are a few items that cause some disparity between the industry outlook and end of year guidance.
Adam Uhlman
And then Tony, could you also address what the order book looks like right now in total and also for the large ag product please?
Tony Huegel
Yes. Most of the commentary we would have would be around a large ag in particular as we look at the one most, or a couple that most are focused on are combines and large tractors.
In the early order program for combines, keep in mind it’s a little hard because of some of the timing differences in our 2013 and 2014 early order programs. We have a much earlier start this year as part of our final tier 4 transition.
But what we will tell you is combines today are down year over year on orders. That’s reflected in our outlook.
As you look at large tractors, however, it’s still a very, very strong order book. It is open through the end of May today.
And so if you look at 8R tractors, our availability on 8R tractors is out to basically early June this year on the wheel tractor. Last year that would have been around April timeframe and then if you look at our 9R tractors again on the wheel variety, available is March this year, of 2014 last year, we would have been in the February timeframe.
So both of those are running a little ahead. Track tractors conversely are about a month or so lighter than where we were last year.
So 8R trac availability in April versus May last year and then nine hours of February versus May of last year. But still overall a pretty strong order book as we look out into especially the first half of next year.
Adam Uhlman
Great. Thank you.
Tony Huegel
Thank you. Next caller?
Operator
Thank you. The next question comes from Rob Wertheimer and please, state your company name.
Rob Wertheimer
It’s Vertical Research Partners. Good morning, everybody.
Tony Huegel
Hey Rob.
Rob Wertheimer
So, let me just see if I can follow up on that, so it seems as though your more cautious outlook on industry volumes next year is a little bit more driven by assumption than it is by orders on the ground, unless you have got production cuts embedded in those longer -- longer lead times year-over-year? Is that correct or is the comp much down enough to offset that?
Tony Huegel
No. You would be correct and as we talked about tractors, you would have, if you looked at a numeric basis, you are -- more apple-to-apples if anything you have a little bit higher volume in terms of numbers of tractors in the 2014 order book versus the 2013.
So it would actually be the opposite on tractors.
Rob Wertheimer
Yeah. Perfect.
And then can you walk through a little bit just the timing of pricing as you go from Tier 4 I to Tier 4 Final, especially in Europe [indiscernible] have Ag technical at least some people have sort of engines stock piled both in large public competitors than smaller ones? And then I think you have done a stub pricing on combined starting in November for the old tier but not -- but can you kind of walk through when you started raising pricing?
And then I assume as your volume outlook for unit sales fades throughout the year what is offsetting us that is pricing, so I just wanted to see if you go market by market when that pricing kicks in? Thanks.
Tony Huegel
Yeah. If you think about, the pricing, certainly you are right.
We did as we started our model, yeah, we did have some stub price, some lighter price increases and the Interim Tier 4 product that we are producing ahead of the transition…
Rob Wertheimer
That starts in November, sorry.
Tony Huegel
… and we will have, pardon me, yeah, that would have been effective in November on combined.
Rob Wertheimer
Yeah.
Tony Huegel
And then when we begin our transition in January and start shipping final Tier 4, of course there will be a bit of another bump in pricing with the final Tier 4 product. Similar situation with the 8R Tractors, you have a smaller price increase beginning in November on the IT4 product.
Again that 8R as you might recall transitioned in April timeframe. 7R is a little less impacted, it is similar to combined it’s transitioning in January timeframe.
Marie Ziegler
But remember that the price increases that are associated with the final Tier 4, it was the compliance are not included in price because we consider that buy-in because you are getting something different or new with that and so it is all stripped out and reclass into volume. So you won't see that in that 2% number.
Rob Wertheimer
No. For summary.
Thank you very much. Are you able to say on Europe, I don’t know whether you are going to go over the new machines in January or more like on average on July, August, September?
Marie Ziegler
Europe is the market -- primary market in Europe is the smaller horsepower, so that’s really not the first phase of final Tier 4. I think, I can’t remember what it’s called in Europe stage 4 or something like that.
But that’s really a 2015 now phenomena, yes.
Tony Huegel
Yeah. Exactly.
And to your point though, keep in mind in Europe, it’s based on when the effective date is based on when the engine is produced not when in the U.S. where it is based on where when the equipment begins final production.
So there is a little bit difference strategy in terms of how you plan for those transitions for Europe versus the U.S.
Marie Ziegler
Yeah. I call this is -- I think I said smaller market initiatives…
Tony Huegel
Lower…
Marie Ziegler
Lower horsepower tractors.
Rob Wertheimer
Okay. Thanks, Marie, and good luck.
Marie Ziegler
Thank you.
Rob Wertheimer
Thanks Tony.
Tony Huegel
Thank you. Next caller?
Operator
Thank you. The next question comes from Steve Volkmann and please state your company name.
Steve Volkmann
It’s Jefferies. Good morning, everybody.
Marie Ziegler
Good morning.
Steve Volkmann
Maria, thank you. You are the first person I met in 1998 when I started covering this group.
So I appreciate all of your insights.
Marie Ziegler
Thank you.
Steve Volkmann
So on to business. I’m wondering if we could focus just a little bit on Brazil, I am curious if you think that the market share gains in Ag that you had down there will continue or do you sort of recheck a balancing point at some point?
And then maybe on the construction side, how much do we think we’ll actually get out of those plants down there in 2014?
Tony Huegel
Sure. And the answer to the first question is specifically related to tractors in terms of market share, absolutely.
We believe we will continue to gain traction and gain market share in that market. We continue to localize products.
We talked about the 8R tractor will be localized by the end of 2015, but as we continue to leverage that dealer distribution, as we continue to leverage our full product offering that we have available in country, we fully expect that, that market share trend will continue. As it relates to construction, of course, as with any new factory we will ramp up a little slower but in terms of important for Deere, keep in mind that this is also the first full year that we will have our distribution in place in Brazil.
So as you look at the sales increase for construction and forestry, certainly you are beginning to see – and I think Susan mentioned in the opening comments, we are beginning to see some benefit from those investments like Brazil, of course our China facility, we exported significant portion of that into the Russian market. So we will see some benefit there, and then of course, forestry starting to recover outside of the U.S.
and Canada as well. But certainly we will begin to see some benefit from those operations.
Steve Volkmann
Okay, and then I guess my related follow up, there seems to be quite a bit of confusion about the availability of tsunami financing in various end markets down there in 2014. Do you have any intelligence for that?
Tony Huegel
Yes, at this point we still feel that the tsunami program will continue to be very supportive to sales. I think there was some confusion or some concerns around the recent announcement that was made that’s limiting a bit of the 2013 – the remaining 2013 financing that’s available.
Really as we look at that our view is it’s really regulating kind of that year end process as they transition to the 2014. What’s happened is that – there’s two ways you can apply for that financing under the conventional application process which is a little bit longer term, you also have longer lead time.
That basically was the standard you have it until the end of November to deliver product. But there is still the opportunity to get that 3.5% interest rate through the simplified application process.
So the funds are still available. As you look out into 2014, maybe more to your question, we fully expect that there will be a tsunami program in place at the beginning of 2014.
While nothing specifically has been announced, most are expecting that, that interest rate will increase. And our best estimate is somewhere in the 4.5% to 5.5% interest rate versus the 3.5% this year on the back half of 2013.
But again continue to believe that it will be very supportive for equipment sales. And that is all fully factored into our outlook.
Operator
Thank you. The next question comes from Ross Gilardi and please state your company name.
Ross Gilardi
Yes, thanks very much. Bank of America.
Hey, I was just wondering – can you elaborate a little bit more on Europe on the back of Agritechnica and sort of demand levels there in your forecast are a little bit weaker outlook for 2014 and any color on the UK versus other parts of Europe versus Scandinavia, for example?
Tony Huegel
Sure. I think generally speaking, again we are looking for the market – the industry to be a little softer and it’s really reflective, I think, overall as you look at lower farm income as a result of the lower commodity prices.
But certainly that’s still at very strong level and very supportive levels that year over year it would be down somewhat. Livestock margins, of course, will benefit from those lower commodity prices.
So you are seeing some strength there as well. As you look at some of the moving pieces, certainly the UK we would expect to see some recovery.
As you might remember, 2013 was a down year on demand in the UK as a result of some of the weather impact that’s a very wet, both harvest of 2012 and into the planting season of 2013, actually seen some recovery in Spain as well. Conversely, you’re seeing France one of our larger market that you’re seeing a little bit of weakness there.
Again, following a very strong 2013, so still a good level, but seeing a little bit of weakness as we go into 2014, year-over-year.
Marie Ziegler
And I will just add that France actually is the largest agriculture equipment market in the EU 28, so as they go that does have an impact on the overall outlook.
Ross Gilardi
Okay. Thank you.
And then just on construction and forestry, clearly you’ve managed your profitability very well in your working capital. But you seem to be going into 2014 as with others on a somewhat weak note from a topline perspective.
So aside from the different macro indicators and so forth, what gives you the confidence in a construction outlook to call for 10% growth at this point?
Tony Huegel
Well, I think as we mentioned before, certainly as you look at the U.S. market, U.S.
and Canada markets and look at the underlying fundamentals, they are much improved as we go forward. You look at things like GDP forecast at 2.5% versus the 1.5% in ’13.
Marie Ziegler
If you can call that much improvement.
Tony Huegel
But it’s in a right direction. Housing starts being -- yet again in the forecast for 2014.
We are starting to see some site development, financing we’re not picking up. You’re not seeing that continuing to drop off, so you have the underlying fundamentals.
But again keep in mind as we look at that up 10%, that also is reflecting some strength outside of the U.S. and Canada as well, as we continue to invest in those businesses, we’re starting to see that payoff in sales.
Marie Ziegler
And the fact that we’re able to build demand as opposed to reducing inventory, which we did during 2013, so the combination collectively gives us and up 10%.
Ross Gilardi
Great. Thanks very much.
Raj Kalathur
All right. Thanks.
Next caller?
Operator
Thank you. The next question comes from Eli Lustgarten.
And please state your company name.
Eli Lustgarten
Longbow Securities. Good morning, everyone and obviously Marie, we’ve had a long relationship.
I’m going to miss you an awful lot. I wish you the best.
Marie Ziegler
Thank you, my pleasure.
Eli Lustgarten
Can I have one clarification with the sale of John D of the landscaping, portion of ownership in the 2014? You took a $45 million impairment charge in the fourth quarter.
That is about $0.08. Is there a gain that’s going to be associated with the $300 million that you’re going to get in your 2014 forecast?
You said, it’s part of it, but is there a gain associated with the $300 million?
Raj Kalathur
No.
Marie Ziegler
No.
Raj Kalathur
No. There would not be.
Eli Lustgarten
In the fair value, is it -- which you own is $80 million, employing is worth $90 million
Tony Huegel
The $45 million would reflect what the fair value is based on the terms of the agreement.
Eli Lustgarten
Yeah. So there would be no gain on the $300 million that you’re getting?
Tony Huegel
Correct.
Eli Lustgarten
And as we talk a little bit at the outlook, I mean the biggest change that happen on Friday night was the ethanol ruling on the national fuel standard to reduce the amount of corn ethanol that’s going to be likely for 2014 and that’s going to raise the carryover somewhat materially if it actually goes through, have you embedded that your forecasting outlook for this year?
Marie Ziegler
Absolutely. That was done actually, even though it was leaked in October, the rumors and the expectations have been in play long before that.
So that is fully factored into our outlook.
Eli Lustgarten
You expect to see that. And can you talk about -- I mean the profitability Ag was far higher than the guidance we got initially.
We were 15% -- we came in at 16% with a very, very strong fourth quarter. Was that just strictly volume going -- volume and pricing going through and the difference declined to 15%, is the same thing as the changes that you gave us?
Or is there anything else happening in the quarter that gives us a strong profitability?
Tony Huegel
Again, I think as you look certainly, you had production costs were -- as you look at the fourth quarter, our price realization was the biggest piece we did. [S&G] was down year-over-year in the quarter as well.
So, I think kind of the spending price and spending was the biggest impact.
Marie Ziegler
We come in a whole point better on the price and what we would have purposely projected.
Raj Kalathur
Eli, on the John Deere landscapes, you are right that there is no accounting gain. But I want you to understand that economically it was a good decision for us.
Eli Lustgarten
I know, absolutely there was no accounting gain embedded in the guidance that you gave us. And the 9% margin in construction is due to the higher volume --
Tony Huegel
Largely driven by better volume, absolutely.
Marie Ziegler
We have a little more favorable mix, that’s been an issue this year. So but the mix is primarily volume.
Operator
Thank you. The next question comes from Nicole DeBlase and please state your company name.
Nicole DeBlase
That is Morgan Stanley. I was hoping you might be able to talk a little bit about – within the 5% to 10% decline forecast within the U.S.
and Canada ag, what is the outlook for large versus small and medium ag?
Tony Huegel
Yes, I think certainly as we mentioned in the opening comments and you are looking at a greater decline, closer to lower double digits in the large ag and some strength in small ag.
Nicole DeBlase
And then can you just give a sense of how used equipment inventory is tracking on the ag side?
Tony Huegel
Sure. As you look at used, again I think the two categories, most are asking about the large tractors and combines.
As you look at used equipment levels in the quarter, combines’ actually inventories dropped very considerably during our fourth quarter, about a 25% drop from July to October. So that’s been a very good sign.
Used tractor inventory on the flip side is up, and certainly that’s reflective of the higher demand level we’ve had on new equipment. But we are seeing higher levels of tractors and certainly are focused on that and monitoring that closely.
Marie Ziegler
But pricing on used tractors is actually up single digit and the turnover continues to be very good. Combines are down a little from very high level but still at good level.
Operator
Thank you. The next question comes from Mircea Dobre and please state your company name.
Mircea Dobre
Good morning. Robert W.
Baird & Company. Marie, first congrats and good luck going forward.
I guess the first question from me was kind of a housekeeping question. Looking at JD Landscapes, can you help us with operating income impact on 2014, you helped us with the revenue?
Marie Ziegler
There is not much of an impact. I would – you can just consider them neutral.
They were profitable but the absence of the impairment is probably a [indiscernible].
Raj Kalathur
Just think of it as slightly accretive going forward.
Mircea Dobre
And sort of in the same vein, looking at financial services, income is expected to increase slightly about 35 million versus 13. But ag volumes generally speaking are challenged.
I guess I am wondering what exactly is it to drive this growth next year in financial services?
Marie Ziegler
The portfolio was up significantly, we are up about $5 billion this year. And so you get the benefit of having that larger portfolio for the year.
Mircea Dobre
So you are not really expecting a contraction in the portfolio given lower volumes?
Marie Ziegler
Correct. We expect that – in next year we are actually projecting further growth in the portfolio.
Mircea Dobre
Then the last question for me would be one on pricing. I am trying to sort of equate your expectations for pricing in ’14 given that most ag end markets are expected to actually see decline in volume.
What is --
Marie Ziegler
Remember when you talk about a portfolio for credit, the notes are written with five year life and I think our average life is in the range of 2 to 2.5 years. So one year’s activity in terms of sales will impact that portfolio for up to five years.
Does that help?
Mircea Dobre
It’s helped. Thank you.
And I don’t know if you caught my last one on pricing. I am wondering what’s the dealer’s perspective in your conversations with your dealers, how are they thinking about their ability to push through the price increases that you are talking about?
Tony Huegel
Certainly that would be – as we set our pricing and so on, that would be one of the factors we are considering. So it’s all included in our outlook, and so that up to 2 points of price realization in the year is what we would anticipate being able to do.
Marie Ziegler
We just had a larger number of new product introductions. We believe we will be adding significant value into the market and we think that will that -- certainly help support our ability to get that price realization.
Mircea Dobre
Thank you.
Tony Huegel
Okay. Next caller?
Marie Ziegler
Thank you.
Operator
Thank you. The next question comes from Seth Weber and please state your company name.
Unidentified Analyst
Hi. This is actually [Daniel] on for Seth of RBC Capital Markets.
Marie Ziegler
Hi Daniel.
Unidentified Analyst
Hi. So I guess my question was on pricing.
This year it's up 2%, I guess it's a little lower than prior year. So I guess, is this kind of a function of mix with less big equipment or are markets getting…
Marie Ziegler
Yes, that would certainly have -- play a very big role in it. As you see the large Ag softening a little and small Ag stepping up a bit.
You don't necessarily have the same impact on pricing and a lot of new product introductions of the last year really were targeted at large Ag and again price introduction schedules have been driven by the compliance with the Final Tier 4 missions. So you will see a round of activities in the coming year or two related that had smaller things -- smaller products that will help support pricing there as well.
Tony, do you have anything to add?
Tony Huegel
I do not.
Unidentified Analyst
All right, Have markets been getting more competitive at all as well or it's just really the mix?
Marie Ziegler
I think its mix. I wouldn't say the markets however are not competitive.
Unidentified Analyst
Okay. And I guess one quick follow up just on Bonus Depreciation, is this kind of based in your forecast or…?
Tony Huegel
Yes. We certainly -- as we are looking into next year our base case would assume, the Bonus Depreciation does not get renewed.
Unidentified Analyst
Okay.
Tony Huegel
And on Section 179 just, you know, obviously there is a -- as you look at Section 179, we believe there is a better or potentially you would see some extension there. Our base case given the uncertainty in at least in our outlook is based on kind of in the middle ground where it would be extended but it would be at $250,000 versus the 500 this year.
Okay, next caller?
Operator
Thank you. The next question comes…
Tony Huegel
This will be our last question.
Operator
Thank you. The final question comes from Andrew Kaplowitz, and please state your company name.
Andrew Kaplowitz - Barclays Good morning guys. It’s Barclays.
Nice quarter. Marie, congratulations and enjoy.
Marie Ziegler
Thank you, Andy. Andrew Kaplowitz - Barclays So can you talk about your cash generation in the quarter, it was way higher than we modeled.
I know there is some noise, I guess from JD Landscapes in the accounting but is anything you did differently in the quarter or it just lower inventories and just better working capital management when it comes down to it?
Marie Ziegler
Actually, we had better income. You have the impairments which actually further helped fizzle through our non-cash charges.
Our accrued taxes came in a little lower and payables also were favorable. Those are really the big items affecting the cash flow generation in the quarter, that versus our expectations.
Andrew Kaplowitz - Barclays Okay, so Marie I’m going to try and ask a share repurchase question and I know Tony is going to not want to give me the answer but I am going to ask it anyway. Could we think at least that your recent share repurchase behavior is more representative of what we might expect going forward versus your cautiousness of the beginning of FY ‘13 despite what we’ve seen from corn prices lately and continued uncertainty but how do we look at what was a very strong 4Q, I thought in repurchases?
Marie Ziegler
I think as we got confidence and certainly saw the cash flow coming in better in the quarter you saw, able to respond better. In any given quarter, it's very difficult to read anything into our future plans.
I am going to tell you, in first quarter you can expect that we are going to typically be fairly cautious because remember we are big users of cash in that first quarter. So you again want to look at our activities over the course of the year.
This year we returned 50% of our cash through dividends in share repurchase and over the last decade we have been running more like 55% to 60%. We are very proud of that track record.
And we have always said that we are interested in being known as the company that has a long history of making dividend increases and we kept our word on that. It's not necessarily every year at a fixed period but consistently.
And then secondly, we very much view share repurchase as the way we return our cash and looking at the cash projections, there would be some hope for those of you cheering on share repurchase but you will continue to see that.
Raj Kalathur
So Andy I would add that the seeds from the sale of John Deere Landscapes are $300 million in cash. That is something that you should expect us to use for our share repurchases over the next 12 months as well?
Marie Ziegler
Yeah. And that is not in our cash flow number because that’s cash generated by industry activity, so that would be [indiscernible].
And with that, we’re going to need to wrap up. So I’m going to just sign off on my 83rd conference call.
Thank you all.
Operator
Thank you. This does conclude today’s conference.
We do thank you for your participation and you may now disconnect you lines.