By Bob Tita
Deere & Co.lowered its sales outlook for the year,
predicting that a stronger U.S. dollar will further trim sales
already reeling from slumping demand for farm machinery.
Deere, the world's sales leader in farm equipment, easily topped
profit expectations for its fiscal first-quarter from aggressive
cost reductions. But the Moline, Ill., company said demand for
high-horsepower tractor models and harvesting combines remains
sluggish.
The company predicted that sales of farm machinery this year
will be down 23% from last year after forecasting a 20% decline in
November. Overall sales for the fiscal year ending Oct. 31 are
likely to be off 17%, compared with a 15% decrease anticipated
earlier.
The company predicted net income for the year of about $1.8
billion, or about $5.25 a share, compared with its previous outlook
of $1.9 billion, or about $5.50 a share. The company attributed the
lower revisions to the strengthening value of the U.S. dollar
against foreign currencies.
"It is putting significant pressure on sales made outside of the
United States," said Susan Karlix, manager of investor
communications, during a during a conference call with analysts
Friday.
Dozens of other U.S. companies have cited unfavorable exchange
rates for squeezing their sales and profits when overseas business
is converted into U.S. dollars. Deere, though, is facing the added
hurdle of a severe slump in farm machinery demand that started last
year after a nearly decade of elevated sales fueled by record-high
prices for corn and soybeans. Falling crop prices, weakening
overseas sales and the curtailment of U.S. tax incentives have
dampened demand for farm equipment, particularly for large models
in the U.S. and Canada where Deere dominates the market. Deere
expects industrywide sales of farm machinery in the U.S. and Canada
to be down 25% to 30% this year from 2014. The company continued to
forecast lower machinery sales in Europe and South America as
well.
Deere's first-quarter sales of farm equipment declined 27% from
a year earlier to $4.08 billion, while operating income plunged 66%
to $268 million. Deere continued to cautiously back a market
scenario in which farm equipment sales bottom out this year and
start recovering in 2016.
"If you assume more normal weather patterns...and with expected
lower acreage that most are anticipating for corn, you could see
stocks brought down and prices being more supportive" for equipment
purchases, said Tony Huegel, director of investor relations. "We're
playing it conservatively, even though we're optimistic as we look
forward" at 2016.
Deere has aggressively scaled back equipment production and
slashed costs to align the company with lower demand. Deere last
month said it plans to lay off 910 workers at plants in Iowa and
Illinois after announcing in August that more than 1,000 jobs would
be cut.
Deere's first-quarter results did little to ease some analysts'
concerns that the company is in a prolonged stretch of dismal
demand for farm machinery.
"There's no reason to believe that things get better in 2016,"
said Eli Lustgarten, an analyst for Longbow Research. "You can make
the big [tractors] look better next year by substantially
underproducing them this year. But 2016 will have its problems for
Deere."
Deere has been benefiting recently from higher sales of smaller,
lower-horsepower tractors to dairy farmers and livestock producers
flush with cash from higher prices for milk and meat. But Mr.
Lustgarten expects sales of small tractors to soften by next year
because milk prices are already under pressure and meat prices are
likely to weaken as well as livestock herds expand.
Deere's construction equipment business has been helping to
offset the company's weak farm machinery business. Sales of
construction and forestry equipment rose 13% during the quarter
from a year earlier to $1.52 billion. Operating profit from the
business surged 55% to $146 million. But Deere expects sales from
the construction unit to rise just 5% for the year, as the business
encounters tougher sales comparisons figures later in the year and
sales come under increasing pressure from lower demand by the
energy industry.
Overall for the quarter ended Jan. 31, the company reported a
profit of $386.8 million, or $1.12 a share, down 43% from $681.1
million, or $1.81 a share, a year earlier.
Total revenue, including the company's finance unit operations,
fell 17% to $6.38 billion. Net sales excluding the finance arm fell
19% to $5.61 billion.
Analysts polled by Thomson Reuters had projected 83 cents a
share in earnings and $5.6 billion in revenue.
Deere's stock was recently trading up 0.13% at $91.90 a
share
Write to Bob Tita at robert.tita@wsj.com
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