Deere (DE) Q2 2016 Earnings Call

posted in: Earnings Call, Notes | 0

Deere’s Joshua Jepsen said both of the company’s end markets, agricultural and construction, are displaying weakness

“Deere’s performance for the second quarter and first six months reflected the continuing impact of the downturn in the global firm economy as well as weakness in markets for construction equipment.”

Expecting a weak farm economy as well for this year

“Given the record crop harvest of the last three years and the resulting lower commodity prices, our estimates for 2015 cash receipts remains down about 10% from 2014 peak levels. Our 2016 forecast contemplates total cash receipts to be about $375 billion down only slightly from 2015.”

There’s an excess of farm equipment

“Low commodity prices, stagnant farm incomes, and elevated used equipment levels in U.S. and Canada are continuing to pressure demand for farm equipment. The decline is most pronounced in the sale of high horsepower models. Our forecast for industry sales in the U.S. and Canada remains down 15% to 20%, with large Ag equipment sales down 25% to 30%.”

Lower spending by companies in the energy sector is starting to seep into other industries

“The industry continued operating at a slow pace. Contributing factors are rental utilization rates continued to decline. Weak conditions persist in the energy sector. Used equipment is readily available and continues to be redeployed from energy producing regions to other parts of the country.”

Experiencing higher credit losses in their equipment that they lease out

“Recent experience have seen both the higher rate of matured lease inventory being returned to John Deere Financial in addition to higher loss rates upon the remarketing of these lease returns. We’ve taken a number of actions to mitigate risk on our operating lease portfolio, a few examples include lowering residual values for future leases most heavily impacting short-term leases, significantly restricting our short-term lease offerings, and increasing risk sharing with dealers.”

Customers are increasingly preferring to lease equipment as opposed to buying it outright 

“I think there’s a little bit of misunderstanding or information in the marketplace around the level of leasing too. I’ve heard numbers as high as 50% is going into operating lease today. We would tell you year-to-date if you look at operating leases versus retail note its closer to a quarter of the volume is operating lease. Now again to be fair that is higher than what it would have been historically, but it is nowhere near that half type of range that some are talking about.”

Using their financial strength during this agricultural downturn to opportunistically acquire other companies

“o in this type of an industry environment where we have a very strong financial position, some of these inorganic options become more actionable for us. And if they are in the long-term interest of our shareholders for profitable growth in the long-term, we will act on some of those.”