Production delays for new combine harm Deere profit

Wed Aug 15, 2012 10:51am EDT

A new John Deere tractor waits for a buyer at a dealer in Longmont, Colorado in this August 18, 2010 file photo. REUTERS/Rick Wilking/Files

A new John Deere tractor waits for a buyer at a dealer in Longmont, Colorado in this August 18, 2010 file photo.

Credit: Reuters/Rick Wilking/Files

(Reuters) - Deere & Co (DE.N), the world's largest agricultural equipment maker, reported a lower-than-expected quarterly profit on Wednesday and cut its outlook, citing production delays and weak sales in China and India.

Shares of Deere slid 7.5 percent to $74.20 in morning trading.

The company delayed shipments of some new combine harvesters by as long as 14 days during the quarter and admitted some of its deliveries would come after the harvest begins for some farmers. Deere has let some dealers cancel orders, it said.

The new combines Deere introduced earlier this year have 40 percent more parts than the previous model, which puts stress on the company's supply network.

"The key is that these are not quality or customer-satisfaction issues," Chief Financial Officer Jim Field said on a conference call with investors. "They are execution issues, problems we at John Deere know how to fix."

Agricultural sales should be "down moderately" this year in India and China, and off 5 percent to 10 percent in South America due to a drought in Argentina, the company said.

Deere said it expected European sales to be flat.

"Sales to farmers were weaker than expected," Longbow Research analyst Eli Lustgarten said. "The volume was clearly a drop."

Lustgarten had forecast operating margins in the agricultural unit at about 15 percent for the quarter, but they came in at 14 percent. In the construction unit, the margins were 6.8 percent, missing his 8 percent estimate.

For the third quarter ended July 31, the company posted net income of $788 million, or $1.98 per share, compared with $712.3 million, or $1.69 per share, a year earlier.

By that measure, analysts on average had expected earnings of $2.31 per share, according to Thomson Reuters I/B/E/S.

Revenue rose 15 percent to $9.59 billion. Analysts expected $9.53 billion.

But revenue missed the company's own forecast by $700 million, mostly due to "softening market conditions outside the U.S.," Field said.

Deere said it expected sales of all equipment to rise 13 percent for the fiscal year, which ends in October. In May the company had forecast a 15 percent annual jump.

DROUGHT ADVANTAGE

Broiling heat has blanketed much of the U.S. Midwest this summer, causing the worst drought in more than 50 years and decimating corn and soy crops.

Parts of Asia and South America are also suffering from drought, harming harvests of wheat, soy, sugarcane and other crops.

In Argentina, the world's No. 3 soybean exporter and No. 2 supplier of corn, a drought in the recently concluded 2011-12 crop year slashed soybean output to 40.1 million tonnes, far below the record 52.7 million tonnes produced in the 2009/10 season.

Corn output in 2011-12 will be 21 million tonnes, according to the country's Agriculture Ministry, below the 23 million tonnes collected in 2010-11.

Investors have worried that sales of tractors and combines from Deere, as well as rivals Agco Corp (AGCO.N) and CNH Global NV CNH.N, could slip in 2013 as farmers conserve cash after the fall harvest.

Despite the drought, Deere expects business in the United States and Canada -- roughly 60 percent of its sales -- to be up 10 percent this year.

Lustgarten, the Longbow Research analyst, said he expected the next few quarters to be rough for Deere, with a rebound in demand next year.

"Because of the drought, you've got crop supply tightness globally," he said. "You better get a big crop next year because of that. So you're looking at a dramatically improved farm equipment sector in 2013."

Deere Chief Executive Officer Sam Allen said he would be cautious about the drought for the next several months, but thought the company would benefit as farmers try to grow even more grain next year to offset 2012's weak harvest.

The comments echo those from Agco CEO Martin Richenhagen, who said last month that the U.S. drought should not harm his business.

(Reporting by Ernest Scheyder; Additional reporting by Alejandro Lifschitz in Buenos Aires; Editing by Gerald E. McCormick, Lisa Von Ahn and Jeffrey Benkoe)