Deere Tightens Terms for Leases, Trims 2016 Profit Forecast -- 2nd Update
May 20 2016 - 5:07PM
Dow Jones News
By Bob Tita
Deere & Co. said Friday it has tightened conditions for
equipment leases as a slump in farming incomes has led customers to
prefer leasing machinery over purchasing it.
The slide in global commodity prices has already eaten into
Deere's sales and profits for nine straight quarters. The farm and
construction machinery market slump has bled into Deere's
customer-finance arm, where leases now account for a growing
volume, forcing the company to tighten the terms for renting
equipment that has rapidly depreciated in value. Leases have
accounted for about a quarter of the company's customer financing
deals lately, compared with about 15% in the past, according to
estimates by industry analysts.
Farmers in the U.S., South America and elsewhere have cut back
sharply on equipment spending over the past two years, despite
planting big crops, as lower commodity prices reduced farm
income.
Deere has stepped up its leasing activity in recent quarters,
but its finance unit and dealers have been left with even more used
equipment as customers walk away when leases expire. The company
took a write-down on the residual value of used equipment in the
latest quarter. Deere said it is restructuring leases to share more
of the risk of further declines with dealers.
New leases will likely cost farmers more, as the company lowers
residual equipment values at the end of the leases to reflect the
depressed prices for used equipment.
"The focus is on how do we reduce some of that risk, primarily
around the short-term portion of the business," Deere investor
relations director Tony Huegel said on a call after the company
reported a 28% drop in second-quarter profit and cut its 2016
guidance for a second time this year.
Deere shares were down 5.4% at $77.74 as its downbeat outlook
outweighed quarterly profits that beat analyst expectations.
The company warned of steeper declines in the full-year sales
outlook for its construction machinery business and trimmed the
profit forecast for its finance unit by 9% to $480 million.
Earnings from that business fell 39% to $103 million in the latest
quarter.
Deere's overseas sales remain under pressure, especially in
Brazil, where like peers it faces a strong U.S. dollar alongside
economic and political turmoil. Deere now expects industrywide
sales of farm equipment in South America to fall by 15% to 20% from
last year, 5 percentage points steeper than its prior forecast.
The Moline, Ill.-based company expects profits of about $1.2
billion for the fiscal year ending Oct. 31, down around $100
million from its February forecast and below analyst
expectations.
For the quarter ended April 30, Deere reported a profit of
$495.4 million, or $1.56 a share, down from $690.5 million, or
$2.03 a share, a year earlier. Equipment sales declined 4% to $7.1
billion.
Deere's construction and forestry equipment unit was especially
weak during the latest period as sales fell 16% to $1.4 billion and
operating profit plunged 61% to $74 million. Deere now expects
construction equipment sales to fall by 13% this year after
previously predicting an 11% sales decline.
Its farm-machinery business performed better than expected
during the quarter, thanks mostly to the timing of recent sales.
Farm equipment sales slipped 0.4% to $5.7 billion, well above
analyst expectations for $5.2 billion. Operating profit dropped 4%
to $614 million. The company now expects farm equipment sales to
decline 8% this year after previously forecasting a 10%
decrease.
Lisa Beilfuss contributed to this article.
Write to Bob Tita at robert.tita@wsj.com
(END) Dow Jones Newswires
May 20, 2016 16:52 ET (20:52 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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