By Bob Tita
Farm-equipment supplier Deere & Co. easily topped quarterly sales and profit expectations on Wednesday and said it expects declining sales of its agricultural machinery will start to ease next year.
Deere continued to forecast weakening demand in North America where it dominates the market for large farm tractors and harvesting combines. But the company sees an upturn in South America propelled by resurgent sales of farm equipment in Brazil and Argentina.
Lower prices for farm commodities and a glut of used equipment have held down demand for new machinery for the past three years. Farmers have grown increasingly cautious about buying new equipment following years of elevated demand for equipment when farm incomes and commodity prices were high.
The Moline, Ill.-based company forecast that sales of its farm and construction equipment would fall by 1% during the fiscal year ending Oct. 31, 2017. Wall Street analysts were expecting sales to drop by about 3% after declining 9.3% to $ 23.4 billion in 2016. The company predicted profit next year will be down 1%, following a 21% decline in 2016 to $ 1.5 billion.
Sales of the company’s farm and landscaping machinery fell 5% during the fourth quarter from the same period a year earlier to $ 4.44 billion, but profit from the business surged 37% to $ 371 million from a combination of higher prices on machinery and lower expenses. Deere reported that prices for new and used equipment firmed in the quarter, taking pressure off dealers to offer discounts that squeeze margins.
“This happened to be a quarter where we had a lot of little things that were positives,” said Tony Huegel, director of investor relations, during a conference call.
Income from Deere’s financing unit dropped 27% during the quarter to $ 164 million, reflecting losses on the sale of equipment that had previously been leased. Deere has stepped up its leasing activity in recent years to offset falling sales. Low prices on used equipment are making it difficult for Deere to recover all of the leftover costs on leased equipment when farmers return it to the financing unit. The company said it has raised lease rates to result in smaller residual values at the end of the leases that are more in line with used-market prices.
Deere expects retail sales of farm machinery in 2017 to fall 5% to 10% industrywide in North America, but anticipates about a 15% increase in industry sales of tractors and combines in South America, a key growth market for Deere and other farm-equipment companies.
Deere’s construction-machinery business continued to struggle during the fourth quarter, losing $ 17 million as sales slipped 5% to $ 1.21 billion. The company attributed the loss to higher costs for production and sales incentives and an impairment charge for its equipment operations in Brazil and China. Deere said demand for its construction equipment in the U.S. is being weighed down by reduced spending by equipment-rental companies and building contractors. Deere expects sales of its construction and forest equipment to increase by 1% in 2017.
Deere sidestepped questions from analysts about the effects of potential tax cuts or trade policy changes anticipated under the new Trump administration. But Mr. Huegel said Deere executives are strategizing for a variety of possible scenarios. “At the end of the day, we want to be prepared for whatever becomes reality,” he said.
In all for the fourth quarter, Deere reported net income of $ 285.3 million, or 90 cents a share, compared with $ 351.2 million, or $ 1.08 cents a share, in the year-ago period. Analysts expected the company to earn 40 cents.
Overall equipment sales fell 5% from last year to $ 5.65 billion, better than the $ 5.38 billion expected by analysts.
–Joshua Jamerson contributed to this article.
Write to Bob Tita at robert.tita@wsj.com
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