Dive Brief:
- John Deere posted the lowest tractor and combine inventory to sales ratio in five years in the fourth quarter of its fiscal year 2019, CFO Ryan Campbell reported on an earnings call Wednesday.
- Low inventory levels across agricultural product segments is part of a cost-cutting strategy the company hopes will protect it from continued uncertainty in the agriculture industry. That cost reduction strategy includes 163 layoffs across three factories in Indiana and Illinois announced in October, and a voluntary buyout program for salaried employees announced on the call. The two programs combined will save the OEM $150 million per year after $140 million in initial costs.
- More cuts may be on the way, Campbell said: "We are undertaking an assessment of our overseas footprint as we work to serve our customers more efficiently." The company announced an up to 20% production cut at some facilities in June and those cuts will stay in place.
Dive Insight:
In August, Deere executives thought the OEM would end the fiscal year with inventory up $450 million overall and $100 million in agriculture and turf products, but the true result has been drastically different. Total inventory at the end of FY2019 was up $245 million and agriculture and turf inventory was down $85 million.
Deere executives have been saying for the better part of a year now that the current global trade environment makes accurate forecasts nearly impossible for the OEM. The firm has opted to deal with continued uncertainty in global agriculture markets by keeping a tight lid on inventories for 2020.
Analysts expressed concern about the lower inventory levels, especially in smaller agricultural machines, which are less likely to be ordered ahead, but executives assured that at least in this segment, improvements in production and fulfillment processes allow for a faster turnaround and lower inventory levels without jeopardizing sales.
"We’ve made some pretty significant improvements to the overall order fulfillment process on small tractors. And, frankly, with those changes, we're confident that we can bring the inventory down," said John Lagemann, senior vice president of ag and turf sale and marketing.
The company offered a wide forecast range for net income in FY2020 ($2.7 billion to $3.1 billion) — down from FY2019's $3.26 billion at either end of the range. Still, Lagemann expressed optimism that farmers made hesitant by trade conditions may be forced to make equipment decisions eventually, with no end in sight for thee trade war with China.
"We do see some evidence that U.S. farmer sentiment is beginning to improve, as farmers acclimate over time to planning in a more uncertain trade environment," Lagemann said.
