Tractor sales off, Deere strategizes to be ‘nimble’
Deere & Co. isn’t selling as many tractors these days, with trade wars raging and crop prices near multiyear lows. Because many of its farmer customers aren’t buying, the company is now looking for ways to save.
The Moline, Ill., company said Friday that it’s conducting a thorough assessment of its cost structure and taking actions to be more “nimble and efficient.”
Steps include boosting organizational efficiency and making investments “with the most opportunity for differentiation,” including precision agriculture, which uses specialized equipment, software and informationtechnology services to ensure that crops and soil get exactly what they need for optimum health and productivity.
Executives said the company had already taken some measures in the third quarter, and was contemplating some for the fourth. All in all, these total just $25 million. More details will be available in the fourth-quarter call, executives said.
The reductions could be more long-term structural changes to adjust to current market dynamics, which could take years, said Chris Ciolino, an analyst at Bloomberg Intelligence.
The pledge came during the company’s quarterly earnings call Friday morning.
The company cut its profit expectations for the second time this year as beleaguered farmers and an escalating trade war with China cut into sales.
Widespread and heavy flooding severely delayed planting this year for thousands of farmers. In the 18
states that grow most of the nation’s corn, only 58% of the crop had been planted by the last week of May, far from the 90% in a typical year. Less than half of the normal soybean crop had been planted in that same period, leaving many farmers to decide whether to plant at all.
Rising trade tensions have exacerbated the situation.
China this month abruptly cut off purchases of U.S. farm products in protest of tariffs and tariff threats from President Donald Trump’s administration.
China bought $6 billion in U.S. farm exports last year, according to the U.S. Census Bureau. It is the world’s biggest soybean buyer and it purchased about 60% of U.S. soybean exports in 2018.
Soybean prices have been deteriorating since the trade war began.
Deere now anticipates profits of about $3.2 billion. Its previous outlook was for earnings of $3.3 billion. Deere still foresees a full-year revenue increase of about 5%.
In May, the company lowered its profit expectations from $3.6 billion, and lowered revenue expectations as well.
“Concerns about exportmarket access, near-term demand for commodities such as soybeans and overall crop conditions have caused many farmers to postpone major equipment purchases,” Samuel Allen, Deere’s chairman and chief executive, said in a statement.
Sales of agricultural and turf equipment, Deere’s biggest operation, slid 6% in the third quarter, and profit fell 24%, the company said.
Deere earned $899 million, or $2.81 per share, for the period that ended July 28. Excluding certain items, earnings were $2.71 per share, or 9 cents short of per-share projections from industry analysts, according to a survey by Zacks Investment Research.
It was also short of last year’s quarterly profit of $910 million.
Revenue fell 3% to $10.04 billion, with adjusted revenue totaling $8.97 billion. That was also short of expectations.
Operating profit in the company’s biggest moneymaking segment, agriculture machinery, fell 24% from a year ago. Higher production costs was one of the culprits, along with lower shipment volumes. Deere also is forecasting slightly higher costs as a percentage of net sales for its equipment operations — about 77% compared with 76% previously.
Deere & Co.’s pledge to lower costs boosted the company’s shares on Friday.
The world’s biggest tractor maker gained the most in seven months, climbing 3.82% to recover some of its losses earlier in the week.
While fiscal third-quarter earnings trailed the average analyst estimate, its guidance and a vow to boost organizational efficiency may have comforted investors worried the company wasn’t reacting well enough to a significant, continuing downturn.
“We view Deere’s 3Q results and outlook as more resilient than feared,” Goldman Sachs analysts said in a note to clients.
American growers are resisting major purchases as the U.S.-China trade war stretches into a second year with no clear end in sight, and after a season when wild weather battered their crops. Corn prices tanked on Monday when the U.S. government came out with acreage and yield numbers that exceeded estimates.
“There’s been so much negative sentiment with the erosion of the trade environment and then the disastrous WASDE report,” Ciolino said, referring to the World Agricultural Supply and Demand Estimates, the Agriculture Department’s report on global agricultural supply and demand. “People were bracing for more doom and gloom.”
For fiscal 2019, equipment sales are now projected to rise about 4%, with net income forecast at $3.2 billion, Deere said in a statement. Three months ago, it predicted 5% equipment-sales growth and $3.3 billion profit.
While Deere remains positive on general economic conditions, it lowered guidance for construction and forestry and now expects fiscal 2019 economic growth in the U.S. to be in line with 2018, downgrading a previous forecast for acceleration.