DE Deere and Co

By Bob Tita 

Deere & Co. said Friday demand for its farm machinery is improving, offering fresh optimism that the three-year long slide in equipment sales is beginning to ease.

Deere, the world's largest manufacturer of tractors and harvesting combines, raised its sales growth forecast for 2017. The company topped sales and profit expectations in its fiscal first quarter with help from the sale of a portion of its distribution business for landscaping supplies.

The company predicted that sales of its farm and construction machinery will rise about 4% this year to about $24.3 billion, after forecasting a 1% expansion in November. The company also bumped up its net income forecast to about $1.5 billion from $1.4 billion, implying earnings per share at about $4.54. Analysts were expecting $4.53.

The Moline, Ill.-based company offered an upbeat outlook for its farm-equipment business, despite a continued weakness in the U.S. market where Deere dominates. The company said it now expects sales of its farm equipment to increase by about 3% this year after earlier predicting a 1% increase. Deere executives said dealer inventories have shrunk, allowing Deere to accelerate factory production to resupply its dealers and fulfill orders from farmers. The company said the used equipment market is stabilizing as well, giving farmers better trade-in prices on older equipment when they order new models.

"We aren't seeing a significant decline in that retail environment as we had both in 2015 and 2016," said Tony Huegel, investor relations director for Deere, during a conference call Friday with analysts.

Deere still expects industrywide sales of farm machinery in the U.S. and Canada to fall by 5% to 10% this year from 2016. Lower prices for farm commodities have squeezed farmers' incomes, driving down demand for tractors and harvesting combines since 2014. Deere predicted that U.S. cash receipts from farming will be flat this year with 2016.

Deere is counting on significantly better machinery demand this year from farmers in Latin America, especially Brazil, where the company sees rising crop prices and available government-sponsored financing that fueled robust equipment sales in past years.

For the quarter ended Jan. 29, sales of Deere's farm machinery were flat from a year earlier at $3.59 billion, while operating income rose 48% to $213 million with a one-time income infusion from the sale of a portion of the SiteOne distribution business.

Sales of Deere's construction and forestry equipment dropped 6% during the quarter to $1.1 billion as operating income plunged 51% to $34 million. Deere expects a sharp turnaround in the lackluster business as the year unfolds, predicting sales will increase 7% this year. Deere said first-quarter orders for construction equipment in the U.S. and Canada were up by one-third from same period the year before. The company said equipment rental companies have accelerated their orders recently and the company expects housing construction and slightly better U.S. gross domestic product growth to drive higher sales during the second half of the year. Deere's construction business is largely concentrated in North America.

"What we saw in the [first] quarter was a very, very strong order book," said Mr. Huegel. "That's what's driving that confidence in terms of where that outlook improved."

Rival construction-equipment maker Caterpillar Inc. reported Friday that retail sales of its construction equipment during the three month months ended in January slipped 13% in North America from a year earlier.

Overall for the first quarter, Deere reported a profit of $193.8 million, or 61 cents a share, down from $254.4 million, or 80 cents a share, a year earlier.

Machinery sales fell 1.5% to $4.69 billion. Total sales, which include revenue from Deere's finance unit, rose 2% $5.62 billion. Analysts had forecast earnings of 55 cents a share with $4.68 billion of equipment sales.

Imani Moise contributed to this article

Write to Bob Tita at robert.tita@wsj.com

(END) Dow Jones Newswires

February 17, 2017 14:21 ET (19:21 GMT)

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