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Deere upgrades 2018 outlook on improving equipment demand

Demand for large tractors way below mid-cycle levels

Reuters — U.S. farm equipment maker Deere and Co. on Friday boosted its sales outlook for fiscal 2018, citing strengthening conditions in agricultural and construction markets, sending its shares higher.

For the past four years, Deere has been battling weak demand for farm equipment as a global grain glut pushed down prices, sending U.S. farm incomes plunging.

Yet, it expects higher demand for large agricultural equipment to lift industry sales in the U.S. and Canada, the company’s biggest market, by 10 per cent during the year.

“Despite rangebound commodity prices, the industry is experiencing stronger replacement demand,” said Brent Norwood, manager investor communications at Deere.

Higher housing starts in the U.S. and increased activity in the oil and gas sector are projected to boost global construction equipment sales by 80 per cent in fiscal 2018.

The Moline, Illinois-based company now expects full-year sales to be up 29 per cent from a year ago, a seven-percentage-point increase from its previous estimate, helped by its acquisition of Germany’s Wirtgen Group last year and a favourable currency effect.

Equipment sales in the second quarter are expected to increase by 30-40 percent.

However, Deere cut the full-year net income estimate to $2.1 billion, from $2.6 billion earlier, on U.S. tax reform-related adjustments of $750 million (all figures US$). Adjusted net earnings for the year are projected to be $2.85 billion.

Supply chain bottlenecks

Deere’s robust sales guidance comes weeks after Caterpillar’s upbeat earnings, which benefited from a strong global economy, particularly strength in the U.S.

But strengthening demand is also causing supply constraints. Delays in shipping products to dealers hemmed in sales growth in the fiscal first quarter ended Jan. 28 at 27 per cent, below earlier guidance of 38 per cent.

Deere hopes to fix the bottlenecks by the third quarter.

It forecast a five per cent year-on-year drop in U.S. net farm cash income this year. But the projected decrease is smaller than earlier estimated.

Declining incomes are weighing on demand for large tractors, which Deere said remains well below mid-cycle levels.

The company swung to a net loss of $535.1 million, or $1.66 per share, including a $965 million charge related to U.S. tax reform in the first quarter. Adjusted net income was $430.0 million, or $1.31 per share.

— Reporting for Reuters by Rajesh Kumar Singh.

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