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Deere & Co  (NYSE:DE)
Q4 2018 Earnings Conference Call
Nov. 21, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Deere & Company's Fourth Quarter Earnings Conference Call. (Operator Instructions)

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

Josh Jepsen -- Director of Investor Relations

Hello. Also on the call today are Raj Kalathur, our Chief Financial Officer; John Lagemann, Ag & Turf, Senior Vice President of Sales and Marketing for the Americas; Ryan Campbell, Vice President and Corporate Comptroller; and Brent Norwood, Manager, Investor Communications.

Today, we'll take a closer look at Deere's fourth quarter earnings, then spend some time talking about our markets and our current outlook for fiscal 2019. After that we'll 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/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 comments concerning the Company's plans and projections for the future that are subject to important risks and uncertainties. Additional information concerning factors that could cause actual results to differ materially is contained in the Company's most recent Form 8-K and periodic reports filed with the Securities and Exchange Commission.

This call may include financial measures that are not in conformance with accounting principles generally accepted in the United States of America, GAAP. Additional information concerning these metrics, including reconciliations to comparable GAAP measures, is included in the release and posted on our website at www.johndeere.com/earnings under Quarterly Earnings & Events. Brent?

Brent Norwood -- Manager, Investor Communications

John Deere had another solid quarter with contributions from both our equipment operations and financial services group. This strong performance has enabled significant investment in new products, services and technologies, as well as a return of $1.8 billion to shareholders through both dividends and share buybacks. In agricultural markets, replacement demand continues to drive sales activity for our early order programs, while construction equipment sales benefited from increased construction investment and a healthy order book.

Now, let's take a closer look at our year-end results for 2018, beginning on Slide 3. For the full year, net sales and revenues were up 26% to $37.358 billion, while net sales for equipment operations were up 29% to $33.351 billion. Net income attributable to Deere & Company was $2.368 billion or $7.24 per diluted share. The results for the year included an unfavorable net adjustment to provisional income taxes of $704 million. Excluding this item, adjusted net income was $3.073 billion.

Slide 4 shows the results for the fourth quarter. Net sales and revenues were up 17% to $9.4 billion. Net income attributable to Deere & Company was $785 million or $2.42 per diluted share. The results for the quarter included a favorable net adjustment to provisional income taxes of $37 million. Excluding this item, adjusted net income was $748 million.

On Slide 5, total worldwide equipment operations net sales were up 18% to $8.3 billion. Price realization in the quarter was positive by 2 points. Currency translation was negative by 3 points and the impact of Wirtgen was 11 points.

Turning to a review of our individual businesses, starting with Agriculture & Turf on Slide 6. Net sales were up 3% in the quarter-over-quarter comparison, primarily driven by higher shipment volumes and price realization, partially offset by the negative impact of currency. Operating profit was $567 million, down 5% from the same quarter last year, as the benefit of increased volumes and price realization were balanced by higher production cost, currency headwinds and increased R&D expense. Operating margins for the quarter were 10.1%.

Before we review the industry sales outlook, let's look at some fundamentals affecting the Ag business. Slide 7 outlines that US principal crop cash receipts, an important indicator for equipment demand. Through 2019, principal crop cash receipts are estimated to be about $120 billion, roughly flat with 2018. Record yields and higher prices for corn are forecasted to offset softness in soybean prices. Additionally, improved prices for cotton and wheat continue to be supportive of crop cash receipts as well. It's also important to note that the receipts include about $4 billion, representing the first tranche in the USDA aid distributed to farmers. To-date, just under $1 billion has already been paid out in 2018.

On Slide 8, corn stocks-to-use ratio is expected to decline in response to increasing global demand and drought conditions experienced during the first crop in Argentina, which lowered the country's corn production by roughly 25%. Wheat stocks-to-use ratio is projected to decline in 2018 in response to intensifying drought conditions in Europe, Australia and the Black Sea region. As a result, US farmers are seeing increasing export demand for the year.

Conversely, soybean stocks-to-use ratio is forecast to build, in response to higher than expected yields in the US and the ongoing trade dispute between the US and China. Over the last six months, there has been much uncertainty as to how China would source soybeans and where displaced US exports would go. While trade flow patterns are still in process of rerouting, it is possible that we could see Brazil, Argentina and Paraguay ship the majority of their exports to China, in addition to a drawdown of Chinese stocks and use of protein substitutions. In that scenario, the US soybean exports would likely increase to the former trading partners of South America and result in some building of stocks in 2018. We expect farmer sentiment continue to be fluid as trade flow patterns continue to adjust.

At this point, I would like to welcome to the call John Lagemann, the Ag & Turf Senior Vice President of Sales and Marketing for the Americas. He will provide comments on the current environment for Ag in North and South America, as well as the 2019 industry outlook for the Ag and Turf division. John?

John Lagemann -- Ag & Turf, Senior Vice President of Sales and Marketing for the Americas

So thanks, Brent. Moving on to Slide 9, let's focus on the current backdrop for North American large Ag, including farmer sentiment, replacement demand and the status of our 2019 early order programs. Over the past several months, I traveled extensively, meeting with both dealers and farmers. And I've had a chance to discuss general business conditions and their outlook for next year. In the US, overall, both farmer and dealer sentiment remains cautiously optimistic. While there is uncertainty in the soybean market, there is optimism around improved fundamentals that Brent just referenced, in the corn, wheat and cotton markets.

In addition, we're seeing notable excitement from dealers and customers in our core Midwest markets concerning the 2018 crop, where there are record yields in both corn and soybeans. Dealers believe this crop will positively influence equipment demand for 2019. But despite this optimism, it is also important to acknowledge the ongoing uncertainty the industry faces regarding unresolved global trade issues. While many farmers believe these issues will be resolved before next year's harvest, there's no doubt trade concerns have had an impact on farmer sentiment over the last several months.

Now let's talk specifics on the industry and the reasons for our constructive view for 2019, which reflect the following four aspects. Number one, we are in a replacement market. Number two, replacement demand is being augmented by today's precision Ag technology. Number three, our approach in delivering this technology is uniquely and seamlessly integrated. And finally, the initial response to our 2019 early order programs has been supportive of our view.

Now let's take a closer look at these drivers. First, it is still a replacement market. That's because the fleet age has reached its highest point since 2013, and customers are increasingly signing a need for newer requirement due to hours and the age on their machines. Further, to the second point, we see evidence that replacement demand has been amplified by the latest precision technology with many examples across our entire large Ag portfolio. And through the course of my conversations with customers the last few months, it is clear these advanced technologies are driving operational efficiencies and tangible economic values.

Also, evident in the growth of our advanced technologies is the critical role being provided by Deere's proprietary and foundational precision technologies, such as guidance, telematics, onboard computing and our digital operations center, all of which represent up to 20 years of investment. These foundational elements serve as key enablers for our latest advanced technologies. And the combination creates the most differentiated and integrated solution in the marketplace. Deere's advantage in this area is further enhanced by the unmatched capabilities of our dealer organization delivering these solutions.

Let's start with product support, which is fundamental to our strategy, because it ensures our customers get the most performance and uptime from their equipment. Perhaps the best example is a feature we call John Deere Connected Support, which allows us to remotely help customers monitor their equipment through integrated telematics. We deployed this strategy two years ago and it is now included in the base package for all of our self-propelled large Ag equipment. Through John Deere Connected Support, we deploy expert alerts, which route predictive maintenance alerts through Deere systems to the local dealer. This allows dealers to proactively contact customers before a predicted failure occurs and expedite the repair. This is just one example, but in general our dealers are centralizing their service capabilities, so they can take full advantage of the technology we bring to the equipment in order to prevent downtime and maximize our customers' equipment investments.

Overall, our dealers also play a critical role in the adoption of precision Ag by our customers. Many of our large Ag dealers now employ certified agronomists and are beginning to mainstream precision Ag expertise across their dealerships with the intent of helping customers plan and execute their agronomic decisions. Importantly, our dealers are making significant investments in both product support and precision Ag capabilities. Deere's dealer advantage in this area distinguishes our channel in the industry.

Furthermore, we firmly believe a successful precision Ag strategy requires a substantial investment from both the OEM and the channel, as well as significant collaboration between these two parties, and we are committed to doing just that. I came across an example of why this is so important just last month when visiting with a very large Midwestern farmer, who is in fact in the process of converting from a multi-colored fleet to all green. He cited the economic advantages of utilizing an all green fleet across his entire production system, from planting, spraying, and harvesting, all leveraging the same integrated technology and seamless data platform. And equally as important for this customer was the local dealer's ability to supply and support the advanced technologies of this entire fleet.

This example also highlights how our strong dealer network has been critical in facilitating replacement demand seen in 2018 and continuing into 2019, with the latest results of our early order programs, which I will speak to now.

In September, the final phase of the planter and sprayer early order program concluded with orders up mid-single digits over 2018. In addition to higher volume year-over-year, the program included a healthy price increase and resulted in materially higher take rates for advanced precision features, like ExactApply sprayers and ExactEmerge planters, which were up significantly from last year.

Moving to our combine early order program. Results through phase 2 are mixed, with volume ending up in the US, but down in Canada, largely due to a delayed harvest and some other weather related issues. Importantly, adoption rates for premium features, like Active Yield and Combine Advisor were both higher than last year. Overall, replacement demand continues to drive order activity and we are pleased with the initial response to our early order programs. Furthermore, the 2019 large tractor order book is building and currently running into the second quarter. Customer demand to date supports our expectations of a continued gradual recovery for large Ag equipment in North America, which is still closer to trough volumes than mid-cycle. Key to this gradual recovery is either the continuation of trade flow readjustments, which we've seen already some progress in, or a trade resolution between the US and China.

Turning to Slide 10. I'd like to elaborate on Deere's journey in Brazil and provide insights into the current environment. Deere began its Brazilian operation in 1979 with a 20% acquisition of SLC and the production of combines only. By the 1990s, we foresaw the country's enormous Ag potential and began investing heavily in the region. Launched our financial operations and established the region's preeminent dealer channel. Over the last decade, Deere has tripled its tractor market share and now enjoys the leading brand position. We've also localized the complete soybean production system portfolio, including tractors, planters, sprayers, and combines, while achieving very attractive margins. Further augmenting this complete production system portfolio is our best in class distribution channel and Deere's latest precision Ag offerings, which also lead the industry and further widened our competitive advantage.

After recently traveling to Brazil this month and visiting with both dealers and customers, I can report the environment in Brazil is quite positive with farmer sentiment boosted by recent election results and the outlook for expanding acreage. Despite some modest near-term pressure on freight and input prices, we remain very optimistic on the region's long-term prospects and we'll continue to execute our product, technology and channel strategy.

By region, our 2019 Ag & Turf industry outlooks are summarized on Slide 11. Industry sales in the US are forecast to be flat to up 5% for 2019. As I mentioned already, expectations for the year are largely driven by replacement demand, as customers need to update their age fleets and upgrade to more efficient technologies. Further supporting new equipment demand, used inventories are down over one-third from their peak in 2014, while pricing has remained stable with good lower hour Deere machines selling quickly and bringing strong prices. As mentioned, Midwest dealers are reporting the high yields of this fall's crop should have a positive impact on equipment demand, particularly as customers begin reviewing their tax scenarios.

For our small Ag segment, compact tractors saw a strong order book for 2019, driven by a healthy economy and GDP growth. This is helping to offset softness for our livestock and dairy customers, although the order bank for utility tractors and round balers has been very solid.

Moving on to the EU28. The industry outlook is forecast to be flat in 2019, where strength in the UK and France is offsetting weather related challenges in Northern Germany and Scandinavia. In South America, industry sales of tractors and combines are projected to be flat to up 5% for the year. This is primarily driven by solid industry fundamentals in Brazil, which is benefiting from a positive reaction to the political election, commodity price premiums and expanding acreage opportunities. However, growth in Argentina is likely to remain challenged in the near term as the country battles high inflation and political uncertainty.

Shifting to Asia. Industry sales were expected to be flat to down slightly, as key growth markets begin to cool. Lastly, industry retail sales of turf and utility equipment in the US and Canada are projected to be flat to up 5% in '19, based on the general economic factors mentioned earlier.

Putting all of this together on Slide 12, fiscal year 2019 Deere sales of worldwide Ag & Turf equipment are now forecast to be up approximately 3%, which includes a negative currency impact of about 2 points. Furthermore, we anticipate sales in '19 to mirror a similar quarterly seasonality as we saw in 2018. The Ag & Turf's division operating margin is forecast to be up approximately 12.5%.

I'll now turn it back over to Brent.

Brent Norwood -- Manager, Investor Communications

Yes. Let's focus on Construction & Forestry on Slide 13. Net sales for the quarter of $2.7 billion were up 65% compared with last year, driven by strong demand for Construction & Forestry equipment, as well as by the acquisition of Wirtgen, which contributed 45% of the positive improvement. Fourth quarter operating profit was $295 million, largely benefiting from the Wirtgen acquisition, higher shipment volumes and net price realization, partially offset by higher production costs. C&F operating margins were 10.8% for the quarter, but 10.9% excluding Wirtgen.

Moving to Slide 14. The economic environment for the construction, forestry and road-building industries looks solid and continue to support increase demand for new and used equipment. For 2019, US GDP and total construction investment are forecast to grow, while housing starts and oil activity remain at supportive levels for equipment demand. Importantly, our US customer base remains quite optimistic on next year's prospects, starting backlogs extending through much of the year.

Lastly, global transportation investment this year is forecast to grow about 5%, driving increased demand for road construction equipment, such as milling machines, rollers and asphalt pavers, which are all important product lines for Wirtgen. These positive economic indicators are reflected in a strong order book, which is now extending about six months into 2019.

Moving to the C&F outlook on Slide 15. Deere's Construction & Forestry sales are now forecast to be up about 15% in 2019 as a result of stronger demand for equipment, as well as an additional two months of ownership of Wirtgen. The net sales forecast includes about $3.8 billion attributable to Wirtgen. The forecast for global forestry market is up about 10% as a result of improvement in sales in the US and Canada and strong demand for cut-to-length products in Europe and Russia. C&F's full year operating margin is projected to be about 12%. Excluding Wirtgen, C&F projects operating margins to be about 11.5%. With regards to Wirtgen, integration continues to go as planned and the business is enjoying healthy backlogs and performing to the high end of our expectations. Operating margins are now forecast to be about 14% for 2019.

Let's move now to our Financial Services operations. Slide 16 shows the provision for credit losses as a percentage of the average owned portfolio. The financial forecast for 2019, shown on the slide, contemplates a loss provision of about 17 basis points, 4 basis points higher than 2018. This would put loss provisions for the year below the 10-year average of 23 basis points and the 15-year average of 24 basis points.

Moving to Slide 17. Worldwide Financial Services net income attributable to Deere & Company was $261 million in the fourth quarter. The results for the quarter included $109 million of net tax reform-related charges arising from the remeasurement of deferred tax assets and deemed earnings repatriation. Excluding tax reform-related items, adjusted net income in the fourth quarter was $153 million, up about 19% compared to the same quarter last year. For the full year in 2019 net income is forecast to be about $630 million.

Slide 18 outlines receivables and inventories. For the Company as a whole, receivables and inventories ended the quarter up $3.5 billion. In the C&F division, the majority of the increase is attributable to Wirtgen, as well as the higher order book and production schedule for 2019. For Ag, the increase is due to better inventory positioning with our supply base and continued demand for small Ag products, which require adequate inventory to sales ratios.

Moving to Slide 19. Cost of sales for the fourth quarter was 76% of net sales. And our 2019 guidance is about 75%, down 2 points from 2018. R&D was up about 18% in the fourth and forecast to be up 6% in 2019, or 4% when excluding Wirtgen from the results. The increase in 2019 primarily relates to strategic investments in precision Ag, as well as next generation new product development programs for large Ag product lines. SA&G expense for the equipment operations was up 8% in the quarter and 15% for the full year on a reported basis. The year-over-year increase is mostly attributable to the impact of acquisitions. Our full year 2019 SA&G forecast expense is up about 7% or 4% excluding Wirtgen.

Turing to Slide 20. The equipment operation tax rate was 34% in the fourth quarter, which included an unfavorable adjustment of $72 million arising from tax reform. For 2019, Deere's year full year effective tax rate is projected to be between 25% and 27%.

Slide 21 shows our equipment operations history of strong cash flow. Cash flow from the equipment operations is now forecast to be about $4.8 billion in 2019, up from $3.3 billion in 2018. Keep in mind that 2018 cash flow included about $1.4 billion in voluntary contributions to pension and OPEB.

The Company's financial outlook is on Slide 22. Our full year outlook now calls for net sales to be up about 7%. Guidance includes about 3 points of price realization and 2 points related to an additional two months of Wirtgen ownership. On the negative side, we expect currency to be about a 2 point headwind next year.

With respect to cost inflation, we anticipate the price realization forecast in 2019 will offset both material cost and freight inflation experienced in 2018 as well as any additional increases forecasted in 2019. Finally, our full year 2019 GAAP net income forecast is now about $3.6 billion.

I will now turn the call over to Raj Kalathur for closing comments. Raj?

Rajesh Kalathur -- Senior Vice President, Chief Financial Officer and Chief Information Officer

Before we respond to your questions, I'd like to share some thoughts on capital allocation, Deere's ongoing strategy and the long-term tailwinds underpinning our business outlook.

First, it's important to note that continued demand for both Ag and construction equipment has resulted in excellent cash flow generation and allowed us to increase the capital returned to shareholders. In 2018, the Company returned almost $1.8 billion through an increase in dividend and the repurchase of approximately $950 million in stock. In 2019, we are forecasting a strong $4.8 billion in cash flow from operations. These measures reflect our optimism on the future prospects for the end markets we serve.

With regard to our dividend, we aim to maintain a payout ratio that targets 25% to 35% of mid-cycle earnings and can be sustained through the cycle. Based on our performance in the previous cycle and the inclusion of Wirtgen, we will consider further dividend increases in fiscal year 2019.

Second, in our recent review of the John Deere strategy, we revised our 2022 financial aspirations to reflect our higher expectations for the business. As a result, we raised our mid-cycle operating margin target from 12% to 15%, and modified our operating asset turn aspiration to keep us focused on managing assets effectively. These goals reflect our continued drive to make further improvements and overcome headwinds, such as currency or inflation. Also, the new goals incorporate Wirtgen's potential contribution and will keep us focused on its successful integration. Furthermore, Deere has a good track record of achieving high levels of performance, so we are confident the Company will quickly drive toward these new aspirations. Importantly, incentive compensation is aligned to these higher goals as you may have already noticed in our last proxy.

Lastly, although global agricultural markets continue to face uncertainty over trade, the underlying fundamentals and tailwinds remain intact. It's important to keep in mind that global demand for grains continue to grow even as trade flows adjust to accommodate changes in government policy and forecasts show demand outpacing supply for the '18/'19 season. We are encouraged by the level of replacement demand driving sales at the present time and believe our business will continue to benefit from a gradual recovery in the North American large Ag market and the rapid adoption of precision technologies. As a result, we look forward to delivering strong results in 2019 and beyond.

Josh Jepsen -- Director of 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 in the call, please limit yourself to one question. If you have additional questions, we ask that you rejoin the queue. Sherly?

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from Tim Thein with Citigroup. You may ask your question.

Tim Thein -- Citigroup -- Analyst

Great. Thank you and good morning. And first, thanks to John for the color that was really helpful. Just coming back, Raj on what you just finished with in terms of the updated goals, specifically the 15% at mid-cycle operating margin target. The Company is -- I don't think it has ever hit that just in any year in the past. So maybe just -- obviously the inclusion of Wirtgen adds a different component to the sales and profit mix from what you've had historically. But maybe if you can just give us some kind of -- a little more color in terms of what helps to give you confidence in the Company's ability to hit that mid-cycle margin target, at least in terms of the maybe changes to the cost structure et cetera? So that's my question. Thank you.

Rajesh Kalathur -- Senior Vice President, Chief Financial Officer and Chief Information Officer

Sure, Tim. One, we talked about technology investments we've been making in the last few years and precision Ag is an example. These types of technologies and their solutions and the products that come out of these have significant value to the customers and such products should allow us to not only generate higher revenues, higher share, but also much higher margins, given the kind of value this will generate for the customer. That's one.

The second would be, John talked about Connected Support. These type of technologies that we are incorporating now will help us develop a much higher share of the aftermarket business going forward. Okay? This -- you have to work with the channel and you heard about the investments the channel is making and we are making to enable that.

Third, you mentioned Wirtgen, I think the synergies of Wirtgen, both on the cost side and the sales side and some of the growth prospects there will also allow us to improve our margins. And four, the example would be just all the journey that we can do internally in terms of improving efficiency and effectiveness of our operations just leveraging digitalization, for example. A small start would be in shared services and accounting, we use robotic process automation. There are so many places we intend to actually use such digitalization technologies to improve the effectiveness and efficiency.

And finally, one example -- the other example would be, we'll continue to work on direct material cost reduction, indirect material cost reduction and so on that will also yield an additional opportunity for us to improve margins. So those are the types of things we are envisioning. There'll be a lot more like that. So thank you.

Josh Jepsen -- Director of Investor Relations

Thanks. Next question.

Operator

Thank you. Our next question comes from Jamie Cook with Credit Suisse. You may ask your question.

Jamie Cook -- Credit Suisse -- Analyst

Hi. Good morning. Couple of questions. One just on -- can you comment on the Ag margins in the quarter? They were I think a little light relative to what you guys had guided and also the margins for the full year for Ag for '19 at 12.5%. I think the implied incrementals are mid-to-high 20s, which is a little lighter than I think we were thinking. So if you could provide color on that. And then my follow-up question is just on the pricing front for 2019. I understand the full -- it's 3%, but can you help us get some better clarity on what -- how we should think about Ag versus construction? Thank you.

Josh Jepsen -- Director of Investor Relations

Yes, Jamie, when we look at the Ag margins and I think it's really a similar story kind of what we saw in 2018, as well as the guide for 2019. FX was a significant headwind in the fourth quarter, we're seeing that carry through into 2019. So when you think about kind of the full year of 2018, about 12.1%, ex FX that's about 12.5%. So we saw some drag there. Similarly as we look at 2019, FX is about a 0.5 point drag on our Ag margins. So that's been a pretty significant impact over where were forecasting a quarter ago. I think as you think about '19, the other components, FX is the biggest piece. We do have the impact of R&D and SA&G. Really, R&D focused on some of the things that John and Raj have mentioned in terms of precision Ag, as well as next generation large Ag products that we think over the long term help us achieve those ambition, goals in terms of margins, as well as growing share. So those are the major puts and takes.

Embedded in that guide, as you noted, is the price realization that we've talked about. So we're 3% next year for the equipment operations in total. Both divisions really participating. So we talk a lot about pricing on large Ag. John alluded to it, we've seen that on our early order programs, in our order books that are available now. So we feel good about that and our ability to offset the material and freight cost inflation we've seen in '18 and '19.

And on the construction side, we put through some discount reductions, so we took additional action there that went into effect in November to get price realization on the construction side of the business. And I think it's important to note there, we also expect that we're going to get price that offsets the material and cost inflation we're seeing on that side. So, I think that's probably the way how we look at '19 overall from a margin and price perspective. Thank you. We'll go ahead and go to the next caller.

Operator

Thank you. Our next question comes from Seth Weber with RBC Capital Markets. You may ask your question.

Seth Weber -- RBC Capital Markets -- Analyst

Hey, good morning. For Raj, I guess maybe just going back to the capital allocation. As you noted, cash from ops is going to be up 50% or so this year. I mean, is the increase in buyback that you did in the fourth quarter is -- do you feel like that that's a decent run rate for us to be thinking about going forward for -- through 2019. Thanks.

Rajesh Kalathur -- Senior Vice President, Chief Financial Officer and Chief Information Officer

Seth, I think, we use the same cash use priorities that we have used in the past. And first, as we maintain a mid-single A rating throughout the cycle. We have a strong balance sheet right now to support it. And second, as you know, we'll invest in growth, both organic and inorganic. You've seen us invest in very promising technologies like in precision Ag. We've also invested in -- very selectively -- in adding to areas like crop care, the type of companies to either gain market position or importantly new capabilities. So you'll see us continue to do some of those. And then you also notice that we've increased dividend by 15% in May 2018 to $0.69 per quarter. We plan to keep the dividends at 25% to 35% on mid-cycle earnings. And as our mid-cycle earnings go up, we'll continue to consider increases. As mentioned earlier, we'll be considering further increases in fiscal '19.

And finally share repurchases, we'll definitely consider if there's cash left. And you said $4.8 billion, that should leave a lot of cash. But we'll also be very opportunistic about it, with our purchases, and time it appropriately in a cycle. And we tend to look at the long-term shareholders benefit when we repurchase shares. Now, with $4.8 billion, the full cash for next year and the current level of share prices, we think it will be a very good value in terms of share repurchase consideration from a longer-term shareholder perspective. I think I'll limit it to that right now, Seth.

Seth Weber -- RBC Capital Markets -- Analyst

Okay. It's just -- I mean obviously over the last two quarters, the cadence has picked up fairly materially from where it had been. So it seems like a natural progression. It seems like this maybe you're -- kind of how you're thinking about the run rate going forward, that's all I'm asking.

Rajesh Kalathur -- Senior Vice President, Chief Financial Officer and Chief Information Officer

I think it's a good statement you make.

Josh Jepsen -- Director of Investor Relations

Thanks Seth. Next question please.

Operator

Thank you. Our next question comes from Ann Duignan with JPMorgan. You may ask your question.

Ann Duignan -- JPMorgan -- Analyst

Hi, good morning. I guess my question is for John. I'm just curious, frankly, your outlook for cash receipts by commodity, what are you contemplating in terms of planted acres by major crop? And the same question I kind of ask for (ph) CNH, with the North Dakota, South Dakota guys, you've got 12 million acres of soybeans this year with no export programs. Is it conceivable that they rotate completely out of beans next year and into other crops? I'm just curious what your thoughts are John and what you're hearing out there in the Midwest in terms of planted acres by major crops?

Josh Jepsen -- Director of Investor Relations

This is Josh. I'll start and then John will add on. I mean, I think as we think about the major crops, I mean certainly a lot of eyes on what this forecast, this harvest is going to look like, what happens in South America. I think, by and large, as we think about the crop cash receipts we're seeing -- certainly seeing the benefit of the improvements in corn, cotton, and wheat this year in North America and that probably does drive some shifts in acreage out of soybeans, but probably not all to one commodity, some to corn, some to wheat. I think, importantly, as you go to South America, at least what our expectations are now is you see shift out of corn into cotton. So I think there's going to be a lot of puts and takes as we think about this globally and how farmers make their decisions and think about this from their specific economics as we start planning for next year.

John Lagemann -- Ag & Turf, Senior Vice President of Sales and Marketing for the Americas

Yes. And thanks for the question, this is John. I think it's highly dependent upon where it is. I think in those areas that can grow corn successfully and have grown corn successfully, you'll probably see somewhat of a shift to corn, but I think the point that Josh made about South America is important, because my conversations down there, the folks that plant second crop, which is a significant piece of the Brazilian Ag business, they're leaning heavily toward cotton, because of the current conditions and that's going to, we think, provide a buffer on any increase corn here in the US and we're seeing early estimates, corn may be up 3 million to 4 million acres in the US. So I'll limit my answer to that.

Josh Jepsen -- Director of Investor Relations

Thank you. We'll go ahead and move on to the next question.

Operator

Our next question comes from Andy Casey with Wells Fargo Securities. You may ask your question.

Andrew Casey -- Wells Fargo Securities -- Analyst

Thanks. Good morning. I wanted to go back to Jamie's question a little bit. You've been dealing with elevated production costs in Ag & Turf during 2018. Do those -- first, do those dissipate in 2019 and then the higher R&D and SA&G that you're looking to incur in 2019, should we view that as partially precision Ag market development that really should come back in terms of future payback?

Josh Jepsen -- Director of Investor Relations

Yes, I mean I think you're right. I mean there are couple components of higher production costs in 2018. Certainly, material and freight that we've seen. As we look at '18 versus '19, we saw a bigger impact in '18 than we're foreseeing in '19. And then when you think about R&D and SA&G, you're exactly right. I mean the large portion of the R&D are indeed focused on precision Ag, as well as next generation large Ag products. And then, SA&G, there is a significant component there that is related to our customer and product support technologies and capabilities and really working seamlessly with our dealer to deliver those solutions. so that's a piece. You've also got -- down, smaller than that some things like incentive comp, some marketing type of things like that, but those would be the biggest items.

Andrew Casey -- Wells Fargo Securities -- Analyst

Okay, thanks very much.

Josh Jepsen -- Director of Investor Relations

Thanks. Next question.

Operator

The next question comes from Jerry Revich with Goldman Sachs. You may ask your question.

Jerry Revich -- Goldman Sachs -- Analyst

Hi, good morning and Happy Thanksgiving everyone. I'm wondering can you expand on your comments on used inventories in the prepared remarks. So we're hearing about rising used inventories off of a low level, or combines and for excavator product line specifically, so can you just talk about what you're seeing in the channel and your comfort level on the construction equipment outlook? Strong production growth next year within the context of inventories starting to rise off of a low base, but certainly starting to rise.

Josh Jepsen -- Director of Investor Relations

Yes, thanks Jerry. I think when -- starting maybe on used, on both sides of the business, think large Ag used were down a third from the peak of the market. I think importantly we feel good about inventory levels and we've seen prices stabilize. So I think that's been positive. On the construction side, we've also continued to see used inventory come down. Because of the tightness in terms of supply, we've actually seen a number of our dealers putting used into their rental fleets to leverage those machines they have to be able to drive that. So I don't think on the construction side we've seen any product category be particularly concerning or an issue there. John on the used side, on the --

John Lagemann -- Ag & Turf, Senior Vice President of Sales and Marketing for the Americas

I think you nailed it on the Ag side. We're off a third, as you said. It's really the lowest point it's been over the last four years and I think we're in a comfortable zone if you look at the inventory ratio. So I really have nothing else to add.

Jerry Revich -- Goldman Sachs -- Analyst

And that includes combines John?

John Lagemann -- Ag & Turf, Senior Vice President of Sales and Marketing for the Americas

Correct.

Jerry Revich -- Goldman Sachs -- Analyst

Okay, alright. Thank you.

Josh Jepsen -- Director of Investor Relations

Thanks Jerry. Next question please.

Operator

Thank you. Next question comes from David Raso with Evercore. You may ask your question.

David Raso -- Evercore -- Analyst

Thank you. A quick clarification first, though. The John Deere strategy, the bumping up the operating margins, was there any change to your view of mid-cycle revenues in that analysis ?

Rajesh Kalathur -- Senior Vice President, Chief Financial Officer and Chief Information Officer

So David, as we think through this, we look at '18 through '22 and these are forecasted numbers for the future and as our business expands, you would expect approximate seven year average to expand as well in terms of sales. So our modeling mid-cycle has not changed in this process. So you would expect '18 to '22 some growth in the mid-cycle.

David Raso -- Evercore -- Analyst

I mean just if you even account for the Wirtgen bump up to the margin, you sort of just bumped up your implied EPS mid-cycle by almost $2. I'm just making sure I understand was that maybe as you lower the revenue assumption to the margin bump is less powerful, but to be clear, you're saying you didn't change your view of mid- cycle revenues?

Rajesh Kalathur -- Senior Vice President, Chief Financial Officer and Chief Information Officer

We didn't change our process to calculate mid-cycle revenue, the mid-cycle revenues will change based on what we post on a yearly basis.

David Raso -- Evercore -- Analyst

(Multiple speakers) Did they go down, I guess, Raj, because if you held them where they were, adding about 200 to 250 bps of core margin improvement, so again exclude the Wirtgen benefit, because it's a higher margin business, it does appear you bumped up your implied EPS mid-cycle by almost $2. I just want to make sure we understand that is the idea or no, did you lower the revenue assumption while raising the margins, so the benefit is not quite as much?

Rajesh Kalathur -- Senior Vice President, Chief Financial Officer and Chief Information Officer

Dave, I think, this is kind of -- it might be an endless answer here -- answer to your question. But we are not going to talk about exactly what the change in EPS is on a year-by-year basis, but what -- we are not assuming any lower revenues in this process. Like we said --

David Raso -- Evercore -- Analyst

That's also I need to clarify.

Rajesh Kalathur -- Senior Vice President, Chief Financial Officer and Chief Information Officer

This is not going to bring things like precision Ag. They're going to bring new products, additional growth. Wirtgen brings additional growth. There are technologies that we talked about, brings more growth on the aftermarket side, like the customer support pieces we talked about. So this looks at additional growth opportunities and thereby, additional margin opportunities.

David Raso -- Evercore -- Analyst

Thanks for that. So real quick, my question is on the guide for Ag & Turf for the year. You're saying organic sales up 5%, but when you back out pricing, it's almost implying volumes are almost not up at all, and given your end market outlook and you obviously sure sounded confident in your ability to outgrow the market, given all the technology benefits you have, just trying to understand why are we assuming volumes globally for your business barely up at all in this guidance? That's my only question. Thank you.

Josh Jepsen -- Director of Investor Relations

Yeah, David, I mean, I think as you look across those -- the guidance in Ag, largely flat to up 5%, and I think as John has pointed out, there is uncertainty there and I think just recognition it's early. And we want to make sure that we're not getting ahead of ourselves there. But I think I wouldn't read too much into that on top of that. And we have the FX headwind that we talked about. That's significant on the top line.

Rajesh Kalathur -- Senior Vice President, Chief Financial Officer and Chief Information Officer

And thank you David. Not more than one question.

David Raso -- Evercore -- Analyst

Thank you. Bye-bye.

Josh Jepsen -- Director of Investor Relations

Thanks. Next question please.

Operator

Thank you. Your next question comes from Joe O'Dea with Vertical Research Partners. You may ask your question.

Joe O'Dea -- Vertical Research Partners -- Analyst

Hi. Good morning. Just looking for any insight on where we stand on the farm aid payments. You've talked about know how much has been paid so far on the first tranche, but what's your visibility is into any announcement on the second tranche? And so the timing of that, the amount of that and how that might be spread across commodities?

Josh Jepsen -- Director of Investor Relations

Thanks Joe. I mean I think as you've noted, there's been conversations, there's expectations it could come out December, similar amount. I think probably importantly, as we think about that we're seeing, as noted, some of that payment come out quicker. So the expectation we see some of that come through maybe more here in the next month or two on the first tranche. So we'll see the timing of that, but the announcement in December, you could see that in the first couple of months then of calendar '19.

Joe O'Dea -- Vertical Research Partners -- Analyst

Okay. Thanks a lot.

Josh Jepsen -- Director of Investor Relations

Thanks. Next question.

Operator

Thank you. Your next question comes from Courtney Yakavonis with Morgan Stanley. You may ask your question.

Courtney Yakavonis -- Morgan Stanley -- Analyst

Hi, thanks. Just wanted to get some clarification on the margin guidance for A&T and for C&F next year. Do those -- how much headwind are you guys assuming from the Section 232 and 301 tariffs and are you assuming the 25% goes into effect?

Josh Jepsen -- Director of Investor Relations

Yeah, great question Courtney. So I think when you think about steel overall, we're seeing higher-- we saw a bigger impact in 2018 than we do in 2019. A couple of couple of things at play there. As you think about hot rolled coil on the Ag side of the business, our fourth quarter is kind of where we saw the higher level of steel pricing. We've actually -- that's what we forecast as we look into 2019. So we're at a more elevated steel level. As it comes down, as is forecast, that would be beneficial.

On the C&F side, plate steel has actually been higher and we've not really seen that move a whole lot. So that's a -- that's in our forecast, but it appears to look like it'll stay at higher levels throughout the year. So I mean '18, '19 all in, '18 is a little bit higher. We're seeing that impact in '19. I think importantly, we're getting price in both divisions to offset that inflation.

As you think about the 301 tariff, so we've estimated about $100 million to $125 million for the enterprise across the year in 2019 and that's at the 25% level. And what our teams would tell you is they're working really hard on -- with suppliers and negotiations to try to beat that number, but that's what we got embedded in the forecast, it's about $100 million to $125 million. Next question, please.

Operator

Thank you. Your next question comes from Mig Dobre with Baird. You may ask your question.

Mig Dobre -- Robert W. Baird -- Analyst

Yes, thank you. Good morning. Just want to talk about C&F a little bit. You talked about order book extending six months into 2019. Can you frame that? And then on your implied core growth of 12% (ph), can you help us understand how you're thinking about Wirtgen versus your legacy construction business? Thanks.

Josh Jepsen -- Director of Investor Relations

Yeah. So I think, when we think about the order book, yes, we talk about it. We've got six months of orders in hand. That's well beyond what we typically run somewhere a month to less than two on a regular basis. So quite a bit more visibility. That's really just based on orders we're seeing come in, the backlog of work that our contractors have. So I think when we step back and look at the economic indicators affecting that industry they're still supportive. You think about -- I mentioned the backlog. Housing has been -- continue to be supportive. And so I think that's been positive. Rental utilization, rental rates have been strong. So I think that's what is driving and informing that outlook. As we think about legacy C&F versus Wirtgen, I think Wirtgen, as we talked about and I think Brent mentioned about $3.8 billion of sales next year. So solid growth, healthy backlog there. Underlying that is about 5% growth expectation in global transportation -- road transportation spending. I think that's positive as well. So I think all of those factors, kind of economic drivers are what would be informing the forecast there and we feel good about where that's at right now. So thanks. We'll go ahead and move on to the next question.

Operator

Thank you. Our next question comes from Steve Fisher with UBS. You may ask your question.

Steve Fisher -- UBS -- Analyst

Thanks. Good morning. I wonder if you could talk about the 30% increase in CapEx, roughly, that you're planning for 2019? What's in that, how tied is that to some of the things you mentioned on R&D, and how much maybe incremental depreciation is flowing through 2019 net income as a result of that higher CapEx?

Josh Jepsen -- Director of Investor Relations

Yeah. Steve, when we think about CapEx, it's really -- it is, as you noted, a similar story to R&D, in that we're focused on advancing our capabilities in precision Ag, large Ag products, the next generation. You know I think in our view we've got an opportunity to extend our leadership position and continue to move forward there. So that's really what we're doing. And I think those are -- those would be the biggest components of that increased spend.

Steve Fisher -- UBS -- Analyst

Is there a big incremental to -- go ahead.

Josh Jepsen -- Director of Investor Relations

Sorry, go ahead, Steve.

Steve Fisher -- UBS -- Analyst

Yeah, I was just going to ask a clarification about the incremental depreciation flowing through in the 2019 net income as a result of that 30% increase?

Josh Jepsen -- Director of Investor Relations

Yeah. I mean I think we're up -- it's up less than $100 million if you look at Slide 26. It's about $75 million of increased D&A next year.

Steve Fisher -- UBS -- Analyst

Okay perfect. Thanks a lot.

Josh Jepsen -- Director of Investor Relations

All right, thank you. Next question.

Operator

Thank you. Your next question comes from Rob Wertheimer with Melius Research. You may ask your question.

Rob Wertheimer -- Melius Research -- Analyst

Hey, thanks and good morning. My question is just on the volume contribution from precision Ag features and options. How much is that contributing to volume this year and do you have any comments, what's been the penetration rates overall? What the potential contribution to that feature set is, whether it's a 10% increase in your volumes or 5% or 20% or what?

Josh Jepsen -- Director of Investor Relations

Rob, we haven't sized that exactly. What I'd tell you is, it is impactful when we think about things like ExactEmerge and ExactApply. We're seeing those up significantly from a take rate perspective over a year ago, in some cases 50% increase in the take rates there. Similarly, on the combines side where we're seeing Combine Advisor and Active Yield be extremely high penetration rates and adoption. And so, it's difficult to size what does that mean toward our top line, but we think it is part of the impact there and also it helps our ability to get price, because of the value -- the economic value we create for the customers. And I'll let John --

John Lagemann -- Ag & Turf, Senior Vice President of Sales and Marketing for the Americas

I think that's the main thing. It's -- because it's really integrated into the product, I think it's hard to measure the incremental value of it, but it really helps sell the value with product. So I think that's the main perspective.

Josh Jepsen -- Director of Investor Relations

Yes. So I think Rob that doesn't probably answer your question perfectly, but I think at this point we'd say it is impactful and as noted by our investments in R&D and capital, we think it'll continue to be more important as we go forward.

Thank you. We'll go ahead and jump to the next question.

Operator

Thank you. Your next question comes from Chad Dillard with Deutsche Bank. You may ask your question.

Chad Dillard -- Deutsche Bank -- Analyst

Hi, good morning everyone. Just wanted to dig into the inventory increase that you saw exiting the year for '18. Just want to understand the mix between large and small Ag, and then how you're thinking about Deere inventories exiting 2019. And then secondly maybe you can just comment on how you're seeing the dealer channel evolve and how you're expecting that to exit the year?

Josh Jepsen -- Director of Investor Relations

Yes, thanks Chad. When we think about the working capital and where we ended the year, up where we'd expected earlier this year, actually it's really driven by a few things. One is kind of timing and weather, so later harvest has certainly impacted some of the timing of when we would expect things to retail. So I think that's been a significant impact. You've also got small Ag there where we're building inventory. It's important in terms of the customer purchase patterns that we've got inventory to sales and availability throughout the year, so I think that's a piece. And then lastly, we're in a much better position with our supply base now than we were a year ago. So last year we did not have as much parts and component availability and this year we're in a much better position and it allows us to go into '19 producing more effectively and efficiently as we move forward. But I'll ask John to add a comment.

John Lagemann -- Ag & Turf, Senior Vice President of Sales and Marketing for the Americas

Yes, I think I'd add two things Josh. Number one the small tractor and small Ag is a strategic play for us, because of the focus we're putting on that market. And I think on the large Ag piece, it's really timing. And the reason I say that is because when you look at November retail sales, frankly they're up significantly over 2018. So I think the late harvest made it more of a timing issue. So we're very encouraged by the early sales in November as we look at 2019.

Josh Jepsen -- Director of Investor Relations

Yes and I think overall, to your comment of kind of where do we end with field inventory, I think that's where we feel we get 100 horsepower (ph) plus of combines, slightly higher inventory sales where we were a year ago. And again as John pointed out, we think some of that's just timing of when those retails are occurring.

So thank you. We'll go ahead and take one more question.

Operator

Thank you. Our last question comes from Ross Gilardi with Bank of America Merrill Lynch. You may ask your question.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

Yes, thanks guys for squeezing me in. So the feedback from our dealer survey last week that Deere is gathering $2,000 to $3,000 of annual subscription revenue from customers, if not more, on a cumulative basis from all of your various precision Ag technologies. Last quarter you talked about 130,000 connected Ag machines. So if you just multiply $3,000 of sub revenue times 130,000 machines, you'd get nearly $400 million in revenue. And then some of these things, you seem to be charging activation fees, you've got other hardware revenue streams. Is it unreasonable to think that precision Ag is a $500 million revenue business for Deere today, if not larger, at substantially higher margins than the rest of the Company? And where are you accounting for that subscription revenue base, is it in your 300 basis points of pricing or is it somewhere else? Thanks.

Josh Jepsen -- Director of Investor Relations

Yes, thanks, Ross. I think it's a big picture right now. We're not at the level where we want to break that out in terms of that business. And one, it's particularly -- it's not easy to break out, because of the integration. But we do think it's really important, I think as we go forward we'll continue to dig into that and provide more color. But at this point, you really -- you do see that and you think about monetization in the base equipment, in premium features and then in those subscriptions. So we think it's a significant opportunity to create value for customers and we think as we do that we're going to be able to participate in that value.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

Where's the sub revenue (multiple speakers) Is it buried inside of just your volumes, or is it in the pricing, or is it on top of the pricing, the 300 basis points of pricing that you're forecasting this year?

Josh Jepsen -- Director of Investor Relations

Yes, it's really a combination. There's components of the hardware that would be in base and there's other things that would come through premium features. So it's a little bit of a mix, it's not as clean as just one simple line item.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

Okay, thanks.

Josh Jepsen -- Director of Investor Relations

All right. Thanks, Ross. All right. Well thanks everyone, we appreciate your participation. I hope everyone has happy Thanksgiving and we'll be available today for callbacks. Take care.

Operator

Thank you. And this does conclude today's conference. We thank you for your participation. At this time you may disconnect your lines.

Duration: 62 minutes

Call participants:

Josh Jepsen -- Director of Investor Relations

Brent Norwood -- Manager, Investor Communications

John Lagemann -- Ag & Turf, Senior Vice President of Sales and Marketing for the Americas

Rajesh Kalathur -- Senior Vice President, Chief Financial Officer and Chief Information Officer

Tim Thein -- Citigroup -- Analyst

Jamie Cook -- Credit Suisse -- Analyst

Seth Weber -- RBC Capital Markets -- Analyst

Ann Duignan -- JPMorgan -- Analyst

Andrew Casey -- Wells Fargo Securities -- Analyst

Jerry Revich -- Goldman Sachs -- Analyst

David Raso -- Evercore -- Analyst

Joe O'Dea -- Vertical Research Partners -- Analyst

Courtney Yakavonis -- Morgan Stanley -- Analyst

Mig Dobre -- Robert W. Baird -- Analyst

Steve Fisher -- UBS -- Analyst

Rob Wertheimer -- Melius Research -- Analyst

Chad Dillard -- Deutsche Bank -- Analyst

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

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