AGCO Corporation (AGCO) Earnings Call Transcript & Summary

Good morning. My name is Greg Peterson. I head up Investor Relations for AGCO. I'd like to welcome you to AGCO's 2021 Virtual Analyst meeting. Thank you for being with us and for your interest in AGCO. For those of you who joined through our link on our website, you'll be able to follow slides and view the speakers on the webcast player. You'll also find PDF files posted there that you can download. We'll also have a replay of the meeting later today on the Investor page of our site. So starting on Slide 2. You can see our agenda for today. Eric will start with an overview of our strategic priorities, focused on creating value for our shareholders. Following Eric's presentation, Seth Crawford, our Senior Vice President of Precision Ag and Digital will provide an overview of our Smart Farming platform focused on satisfying our customer needs, and then he'll give you an update on the progress and benefits of our digital initiatives. Andy will follow Seth and give us an overview of the financial aspects of our strategic plan and provide some long-term targets. We scheduled a short break following Andy's presentation. After the break, we'll be back to take your questions. [Operator Instructions] The Q&A option is open now, so I encourage you to submit your questions as they come to mind during the presentations. That way, you'll save yourself a place in the queue. Our presentation this morning is going to include some non-GAAP measures. The non-GAAP measures we use are reconciled to GAAP measures in the appendix of Andy's presentation. We'll also make forward-looking statements this morning, including information about our strategic plans and initiatives as well as our financial impacts. We'll discuss demand, product development and capital expenditure plans and timing of those plans in our expectations with respect to the costs and benefits of those plans and timing of those benefits. We'll also discuss production levels, share repurchases, dividend rates, our future revenue, price levels, margins, earnings, cash flow, tax rates and other financial metrics. We do wish is to caution you that these statements are predictions and that actual events may differ materially. We refer you to the periodic reports that we file from time to time with the Securities and Exchange Commission, including the company's Form 10-K for the year ended December 31, 2020. These documents discuss important factors that could cause the actual result to differ materially from those contained in our forward-looking statements. These factors include, but are not limited to, adverse developments in the agricultural industry, including those resulting from COVID-19, which might be plant closings, workforce availability, supply chain disruption and product demand. The other risks include weather, commodity prices and changes in product demand. We disclaim any obligation to update any forward-looking statements, except as required by law. Now, it's my pleasure to introduce Eric Hansotia, AGCO's new Chairman, President and Chief Executive Officer. Eric, please go ahead.

Thank you, Greg, and good morning. It is great to be with you virtually, and we appreciate your time to be with us today and your interest in AGCO. I want to start this morning by letting you know how excited I am to be AGCO's new CEO. The senior leadership team and I have been focused on bringing the best ideas together to move this company forward. Our goal this morning is to share with you the meaningful changes we have made to AGCO's transformative strategy and the plans we have to deliver significantly improved results through deep focus on the needs of our key stakeholders. Our farmers who rely on our solutions to succeed in their evolving landscape, our employees and dealers who serve those farmers and societies need for sustainable agriculture practices that feed a growing population. Our refreshed strategy is result of an eventual year of thoughtful collaboration. In fact, we interviewed over 10,000 employees during this process. It's been very inclusive, including not only our employees, through a lot of focus groups and so on, but also dealers and customers and people outside of our industry. We incorporated input from all across AGCO and beyond. Personally, I drew on my own background growing up in Wisconsin, working on a dairy farm, involved heavily in 4-H and FFA, being -- presence of both of those organizations, had a close affinity for the industry, which is informing the shift to a farmer-first mentality. The process started with a new purpose and vision that anchors our farmer-first strategy. I'll start my presentation this morning with a look at both of these. I'll spend the rest of my time this morning addressing the key elements of the strategy designed to build the next generation of AGCO, a strong focus on optimizing our existing business and accelerating our Precision Ag and digital capabilities to provide profitable growth. I'm going to start with our new vision and purpose that was really the anchoring point or the foundation of our strategy. We created 2 things. Purpose is the reason for AGCO's existence. It states our farmer-focused solutions to sustainably feed our world. Now we're going to talk a lot about farmers are at the heart of everything that we do and we intend to be the most farmer-focused company of anybody in our industry. So we led with that in our purpose. Solutions represent the fact that we need to be very close to our farmers, understanding the agronomy, the farmer economics and their pain points to then to be able to deliver solutions to them in the form of products or other solutions. And then sustainably feeding our world became an absolute deep passion right in the heart of our DNA of our employees this past year, and it got accelerated during the COVID crisis. Now our vision is different from our purpose. Our vision is really a waypoint, a milestone along the journey to our ultimate ambition. And our vision at AGCO is to be the most trusted partner for industry-leading, smart farming solutions. Trusted represents the relationship we intend to have with our farmers, working side-by-side with them, understanding their business, forming deep trust and bonds. And in this establishing -- we've already got a great foundation of these smart farming solutions, but we want to establish a leadership position, really be seen as the one that stands out among all others in that industry. We also recognized as we built our strategy that we're building on a very nice, strong footing. We've got 21,000 employees that get up every morning going to work, developing these smart solutions and connecting with our farmers. And the work they've been doing and the way they've doing is recognized broadly across the industry. In fact, just in the last few months, we've won 3 of the top 4 Tractor of the Year awards in Europe. In North America, the Agriculture Engineering Program -- Awards Program. They have -- they give out 50 awards a year. We won -- AGCO won the most of any OEM company in the competition. Just yesterday, the Commodity Classic awarded AGCO the prestigious award for -- one of the top-level awards for our IDEAL combine and the Draper Header and automatic cooking up of that header, the only one in the industry that can do that. In South America, our Momentum planter was recognized as Machine of the Year. So these are just some examples of the industry recognizing the great work being done by our AGCO employees and the way they're connecting to farmers. These products are distributed through our 3,200 dealers all around the world. We participated in 140 countries globally. Our business has grown to the point where it's now -- last year was over $9 billion. Our aspiration is to be over $10 billion this year. And we are continuing to focus on investing in these high-tech solutions and creating value for our farmers. Our operating performance over the last several years has been strong as well. The industry, as a general, has had a lot of headwinds and has been fundamentally flat over these last several years in terms of demand. But in that flat demand environment, our operating margin has grown by 160 basis points in the last 2 years. And in that same period, our earnings per share has grown by 40%. So we're doing a lot to -- and continue to not only get close to our farmers, but also do it in a more efficient way and deliver a better return to our shareholders. The company is only 30 years old, very young company, and it's gone through a couple of chapters. We're starting the third chapter now. The first chapter was created by our founder. He built the company from scratch, starting from essentially nothing and started the first piece and then went through rapid succession, lots of acquisitions, 40 acquisitions to build out the base of the company, filled in the product line, filled out our dealer portfolio, acquired a lot of pieces and puzzles. Essentially what we ended up with a patchwork quilt of a collection of a lot of good stuff. Chapter 2 was all about bringing all of those pieces together in harmony and turning a holding company into an operating company. We used our platform strategy to harmonize our products. We consolidated our distribution network where we had overlaps and gaps, and we harmonized a lot of our processes to try and become more streamlined in how we do business and take advantage of our global scale. But now we're on the eve of our third chapter, it's really all about accelerating performance, leaning into our farmers, getting very, very close to them, understanding their business better than anybody and then delivering great solutions to them and accelerating our margin performance for our investors. So let's talk about our refreshed strategy. I'd like to walk you through that and the pieces of it. If we started at essence, it's about 3 things. We intend to deliver consistently exceptional experiences to our farmers better than anybody else in the industry. Secondly, we have a focus on high-quality, smart solutions, really having machines understand their environment, their onboard calculations and optimize their performance. And third, it's a recognition that our industry is still largely a brick-and-mortar industry. It hasn't gone through the digital transformation yet. We believe it will, and we aim to lead in that digital transformation, creating an environment where farmers can connect through our distribution in the way they choose to and we call it a customer connected distribution approach. I'm going to walk you through the details behind each one of these. So if we talk about our strategy, we've built out a number of initiatives, very detailed plans, robust actions, and getting us from where we are today to our aspiration. We've grouped these initiatives into 3 categories. The first category is about capitalizing on our growth businesses. These are today's high-margin businesses that do a great job for our customers and deliver great returns for our shareholders, but they have big growth potential. So we're going to maximize the heck out of growing those businesses globally. The second category is all about delivering some operational improvements to some of our core businesses that have room to improve. And the third area is identifying the small number of new competencies within the company to capture these growing trends in the industry. I want to make sure that we are building the talent today, the competency so that we can compete for the elements of our industry in the future. So let's unpack each one of those. The first one to unpack is our first lever -- our first category called growth businesses. We have 4 elements of these growth businesses already within AGCO that we aspire to grow like crazy. Fendt full-line, Precision Planting, North America Large Ag and Global Parts & Services are strong businesses today. We've been making great traction on them over the last couple of years in terms of delivering growth and maintaining the high margin, and we have aspirations to continue to grow them steadily into the future. I'm going to walk you through those one by one. Fendt is a fantastic business that has really emanated from Europe. It started as a business largely focused on our tractor product line. So we've got 2 dimensions of growing Fendt full-line. Number one, is that over the last few years through either organic development, developing products on our own or from acquisitions, we have filled out the full product line of Fendt, both in row crop and in hay tools. And you can see the picture on the slide here. We have the best product line we've ever had, and some would say that anybody has ever had in terms of our Fendt lineup. So we have growth opportunity where we are already strong in tractors to sell the rest of the product line, like in Europe. And the second dimension is to take this full portfolio of products and extend it into other regions of the world where we have the most demanding customers, those customers that expect the highest technology, the highest quality and the best support available in the industry. We call that the Fendt experience. Places like North America, South America, Australia, New Zealand, South Africa and others, are ripe with these sorts of customers. The customer needs -- the profile of those farmers are exactly what the Fendt product line is aimed to do. So that's our strategy for Fendt growth. In North America, really, we see 2 -- if we simplify it now, we have 2 big customer segments here: commercial hay on the one hand and then row crop on the other. We've always been a very strong performer in commercial hay. We have market-leading positions in large square balers, small square balers, wind rowers and so on. AGCO knows hay. We've even got some more growth opportunity with those hay businesses to add new technology, new features, new smart capabilities to our hay lineup. But we haven't reached our full potential in the row crop business. Now with bringing Fendt full-line into North America, we've got the Fendt tractors, the Momentum Planter, the IDEAL Combine, our RoGator Interrogator application equipment. And you see a picture here of the Fendt 1 user interface. This is the best in the industry of connecting the onboard experience, the experience you have when you're in the cab of the tractor with the off-board experience, the experience when you're in your farm site or remotely connecting to your machine. Seth will talk about that in more detail. We've got the best lineup we've ever had. And in many cases, the best products in the industry. Our focus here is to really build brand awareness and help our customers understand not only the product line, but this full Fendt experience they get when they work with us in the future. The third element of this category is Precision Planting. Now this has been a tremendous addition to the AGCO family. We just bought this company 2 or 3 years ago and we've already doubled it in size. But the growth doesn't stop there. We have a tremendous growth trajectory in front of us, and it comes in multiple ways. The first one is we have the best retrofit channel of anybody in the world, bar none, not even close. So we want to maximize the use of that retrofit channel with the experts that we have out in the field, working hand-in-hand with our farmers to solve problems, to make sure that we're feeding that channel with the most solutions possible. The second dimension is this innovation secret sauce that's in Precision Planting, being really close to farmers, being extremely innovative and in delivering those solutions back, speaking to the farmer in language of agronomy and farmer economics, is something that we want to expand beyond planting into the rest of the crop cycle, into spring, harvesting and so on. And then the third dimension is to take that growing portfolio and globalize it. Largely, our biggest business has been in North America, we've been making big investments now in terms of feet on the ground, agronomy data, field trials and so on to be able to establish our footprint in Europe, South America, Asia and so on. Lots of growth opportunity here for the Precision Planting business, but we're also having that culture permeate back through the rest of AGCO as we become more and more innovative and more and more farmer-focused. Just to -- you can -- it's one thing to hear from me, but I think it's even more exciting to hear it directly from the folks with their feet on the ground. And so I'd like to tee up here a video to hear directly from them. [Presentation]

I tell you, I get chills when I see that video. It is so exciting to be right near farmers as you can work with them, understanding their pain points and then helping talk through solving their problems with new technology. It's fantastic, feeding off the energy that they have. And then our last growth lever in this category is really about growing our Global Parts & Services business. Now we've had a nice growth trajectory over the last few years, growing it by about 5% a year. And our primary focus over the last period has been about fill rate. Now this is -- what we mean by that is when a customer comes into a dealership and orders a part, how often is it there ready for them to buy right over the counter? We've been improving fill rate over the last several years to the point where now we have industry-leading fill rate in places like Europe and North America, our core markets, and that's delivered a lot of good growth. Going forward, we want to use -- add to that focus and leverage the power of technology. The point here is our connected machine fleet is growing rapidly. Seth will talk to you about that quite a bit. By being able to remotely connect into these machines, we can understand when they're coming upon a service interval and be able to proactively do a service call or when a component is about ready to fail, we can proactively replace that component on and off times; or digital tools like a recommendation tool using data analytics that we've provided to our dealers. This one's already in place. And essentially, what it does is uses artificial intelligence to look at the fleet of machines in the area of the dealership, the history of what's been sold and recommend to the dealer what service parts they should be stocking. The dealers that have signed up for this program, this data analytics tool, have had their fill rate go up, which drives more profitability for the dealer and more satisfaction for the customers, and there are parts that they don't need go down, they call these dead parts, parts that they would have ordered, but they don't actually end up selling. So it's a great efficiency tool, growth tool and a customer satisfaction tool. These are the kinds of things we'll be leveraging going forward to continue to turbocharge this growth in service parts and lean into our customers even closer. The second pillar of our strategy is optimizing some of our key core areas of the business. We've got a business in South America, we've got a Grain & Protein business that are not reaching the financial returns that we expect. And we've been talking to you about this for the last few years. We've added sustainability here, and I'll cover that one in some detail. And we've also added Matthew Ferguson. So let me walk you through each one of these. South America, we've talked about that, it wasn't delivering like we wanted it to. And we made a commitment to you a couple of years ago when we said, we're going to put together a very detailed robust transformation plan and how to get this business turning in the right direction. And I'm proud to say that we're delivering on that plan now. We were losing market share for many years. We were losing profitability. We were losing money in South America for several years. The tune about $30 million a year. Our mission for 2020 was to breakeven, but the team shot right on past that and actually made almost $30 million in South America, a great first step on their path to recovery. Now we're not where we need to be yet, but we like the fact that not only is the business result returning -- trending in the right direction, but we've gained market share in all core products, planters, sprayers, combines, tractors last year. So this transformation plan and the team's delivery on that is headed in a good direction. We created a similar transformation plan or improvement plan for Grain & Protein. And I'm excited to tell you that even though there's a lot of headwinds for Grain & Protein, probably more headwinds here than anywhere else in our business last year because of the impact on our processing plants around the world. Those have a direct correlation to hitting our protein producers. Even with down sales, we improved margin by 100 basis points in our Grain & Protein right on pace with our improvement plan. We also implemented a lot of footprint consolidation here as part of our overall footprint consolidation manufacturing strategy across the company. And you probably are asking -- some of you have asked in the past of us, does Grain & Protein fit in your portfolio? We believe it absolutely does. The industry is headed for some key trends, adding a focus on animal welfare, which I'll touch on in a minute, and other things. There's an opportunity to bring technology. You know what I've talked about this smart farming solutions on our machines? There's that same opportunity to bring smart farming solutions to our Grain & Protein business. We think we've got the right transformation plan, we're delivering on that plan, and there are some trends that we need to capitalize along with the fact that there's some underpenetrated parts of the world, South America, Eastern Europe and so on. Those are great markets for us to go capture, and there's some potential synergies with our machinery business. I'm going to touch on sustainability on the next slide, so I'll skip over it here. But just I want to let you know, we embedded it deep into the DNA of our culture, of our overall strategy plan and it was a source of a lot of passion for our employees over the last year. Massey Ferguson is a business that's probably one of the best-known brands in the entire industry. Everybody knows Massey Ferguson. It's got its footprint all around the world. But you know what, as we went through the refresh, we decided, our thinking here is to got to be doing fewer things better. We've got to simplify our portfolio, take some of the cost out of our business and also sharpen our focus on where we participate, especially in some of our emerging market areas. We want to really zero in on where are those areas we should play and how can we win. So we sharpened our focus and redistributed how we go to market with our Massey Ferguson plant. Sustainability is such an important topic that I wanted to spend more time on that one. So the way we look at it is we added a sustainability leader, put together a team, did some broad benchmarking and so on. Sustainability is a complicated topic. It's got a lot of different ways to measure it and monitor it. So we're committing that we are going to measure ourselves in all the different ways that are going to be measured. We're going to report that out with our annual report this year. But within that broad array, our 4 focus areas that we're going to go deep, and we're establishing a leadership position from AGCO. They're shown here. The first one is advancing soil health and soil carbon sequestration. What a great combination where you can help farmers have better soil fertility and soil health. At the same time, we're capturing some of the carbon that's up in the atmosphere through photosynthesis of the farm plant, capture it down in the soil and trap that carbon where it's not causing any problem, it's actually helping the soil health. The second category is decarbonizing our operations and our products. This is creating a lighter touch from our facilities and our products in the environment. Third one is accelerating our position in terms of employee health and safety. We've always had a good performance here. We want to double down on that. So we put a whole initiative around this, touching every single employee around AGCO. And finally is prioritizing animal welfare and food production. I talked about this one. This is essentially the book end, like the soil carbon opportunity for arable farmers or row crop farmers, we've got that same opportunity for protein farmers where we can combine high productivity for low cost that our consumers want with animal welfare on the one hand or soil capture -- carbon capture on the other hand. When we do that, we recognize, when we take a leadership position and deliver results for our farmers through mapping, measuring new technology, which is where our field trials have already been, we delivered great results for our society in terms of the kind of company that we are and helping societal impacts. We also -- we view this as a growth engine. These solutions that add value to our farmers, add value to our protein producers are ones that can generate revenue growth and margin improvement to our company. And we also fully intend to be on the list of those companies that investors who want to provide a sustainable investment, we want to make sure AGCO is at the top of that list. Our key differentiators going forward are the new capabilities that we intend to build within the company to capture the most value out of the trends coming forward. We want to be the most farmer-focused, lead and high-quality smart solutions and this customer connected distribution. High-quality smart solutions has 2 parts, Part A and Part B. The Part A is about smart machines. These are machines that have onboard sensors, understand the environment they're operating in, make onboard calculations to optimize their performance as they go through the field. And essentially, you can put them in autopilot mode where they automatically adjust perfectly for the conditions. Now we've got a lot of machines that do this, Momentum planter, IDEAL Combine and so on, but we're also adding to that focus this opportunity for sustainability, where we can make onboard calculations for sustainability. Let me give you a quick video here of a machine that really embodies the spirit of our smart machines, and that's our ideal combine, highly award-winning machine. [Presentation]

So you can see when you get these smart machines right, the value is clear and evident to our farmers and our dealers. And so it's an exciting evolution in the industry. Part B of Smart Solutions is really all about this digital connection. And there's a few different elements of digital connection. On the left side of this picture is our digital connection to our machines. On the one hand, we have smart machines that can onboard, calculate what they need to do and optimize themselves. But there's a second element, and that is remotely monitoring how they're doing through telematics. So connecting through the data of that machine, you can be able to understand how it's operating, when it's coming up on a service interval and fundamentally shift the relationship between reactive to proactive. The second one is -- we've talked about for the last couple of years this effort we've had underway of digital customer experience. Through that -- Seth's is going to talk a lot more about that one. But through that, we're creating digital highways to our customers and to our dealers, allowing them to interface with the company. Well, as those highways are built, it allows the flow of digital information back and forth with our customers. We can then do analytics on that data to be able to better understand how we can serve them better through service parts, service opportunities and so on. And then once that data is available from our machine or from our customer interactions, we can bring that data back into the company and change how we're doing our product development, our manufacturing and so on. So this is the second element of high-quality Smart Solutions, it's really leveraging all of that data to make our machines, our customer interactions and our company perform more effectively. And then the third differentiator is this customer-connected distribution. I've talked about the fact that our channel is still -- this industry is still pretty much -- still a brick-and-mortar situation. And yet, our farmers really want to interact with companies 24/7. They want to consume their information digitally. They want to interact with the company in the way they want to interact. And so we've analyzed and mapped all the different ways that customers have touch points to the company, either to the dealer or us directly. And we've found ways now to digitize and create pathways along that journey such that the customer can work with their brick-and-mortar dealership like they're used to today, they can interface with the company digitally or a combination of the 2 and have those be integrated. So that's the path we're on for that third differentiator. And we felt so strongly about these last couple of areas that I actually changed my leadership team and installed 2 new positions to lead up these areas and be directly accountable for leading these changes for the company. The first one is Bob Crain's new job as Senior Vice President of Customer Experience. Now Bob used to run our North America operations and also had responsibility for South America in the past as well. Bob grew up in the dealership. He's a very, very customer-connected leader. His accountability, his mission now, is to deliver the best end-to-end customer experience of anyone in our industry. And that's going to impact not only our products but all of our go-to-market strategies and so on. Essentially, all the ways that we operate, getting information into the company from our customers and getting -- and then changing how we interact. The second position is one of my coworkers who's here today, and that's Seth Crawford. We created a new position for Seth, Senior Vice President of Precision Ag and Digital. And Seth is going to leverage his lengthy 2-decade time with Deere and the experiences built there to now come to AGCO. He's been here a couple of years. He led our Fuse and DCX business. He's going to take all of those experiences to deliver industry-leading smart farming solutions to our customers. We've got a great running start here, and Seth is going to help us accelerate that even further. And so when you bring all this together, and you put it together on one page, this is what you see. You see our new purpose, the reasons for AGCO's existence: farmer-focused solutions to sustainably feed our world. We have a new vision, a waypoint, on where we're aiming for in the short term and a very detailed execution plan to get from here to there. There's 3 farmer-focused differentiators that are kind of essentially recreating the DNA of the company, new capabilities for our future. A lot of initiatives that are grouped into the various categories that I walked you through. But then they all lead to some new winning outcomes. I'm committing to you here today about those winning outcomes. We're going to grow our Net Promoter Score, that's the best way to measure how satisfied a customer is with you, by 25 points over this time horizon. We aim to be the #1 grower, leader of market share in our core markets: Europe, North America, South America, and deliver at mid-cycle to our 10% operating margin. And now we're adding to that a 35% return on net assets target. Andy will talk to you quite a bit about how that's measured and how it fits into our overall plan. We're going to double-down on our culture with our employees, foundationally strengthening our culture of safety and really invigorating employee engagement. And then, like I said before, we recognize more and more investors want to not only invest in a company that gives them good returns but is doing so in a sustainable way. We want to be at the top of that list, and we want to make sure AGCO is a sustainable, great investment. That's where we're going, that's how we're going to get there, and that's how we're measuring ourselves. I've never been more confident in a strategy nor the team to deliver it nor the Board to support it. So with that, I'd like to turn it over to Seth Crawford, our Senior Vice President of Precision Ag and Digital, to walk you through the details of that element of our plan.

Thank you, Eric. Good morning. It's a pleasure to be with you today, and I'm excited to share AGCO's enhanced focus on Precision Ag and Digital. Our intent is to share our current position as it relates to our Precision Ag and Digital efforts and also to highlight how our focus is shifting to be more farmer focused, delivering solutions that cross the crop cycle, and why we believe it will deliver even greater results to our customers and shareholders. One thing that isn't changing at AGCO is what we are driving for in terms of enabling farmer outcomes. We want to ensure we are a farmer-focused company and not a machine-centric organization. The opportunities are many, but we classify them as yield improvement opportunities or waste reduction opportunities. We've established the target of delivering a 20% improvement in net farm income. This has driven us to focus on building a strong foundation for future growth and focus on things that are important to farmers. The basic building blocks are machine-controlled products with the most well-known being guidance and connectivity. Customers continue to value productivity, reliability and ease of use. We plan to leverage our innovative culture to deliver on these customer value drivers as we form our new Precision Ag and Digital division. We have 3 foundational pillars today in our Precision Ag business, delivering approximately $400 million in revenue at strong margins. Fuse and Precision Planting have approximately a 50-50 split of this total. In many of our recent calls with you, we focused heavily on Precision Planting and the innovative spirit that AGCO -- that this acquisition has brought to AGCO. An area we haven't covered as deeply is our Fuse Connected Services technology group that serves our AGCO equipment brands from an OEM standpoint. We'll provide an update on our growth plans with respect to our equipment brands. We will also look at Precision Planting and how this continues to fuel our growth in the retrofit market as we have the opportunity to not only retrofit AGCO equipment but also all equipment across the crop cycle globally. Finally, we will cover where we are headed with our digital customer experience platform and how this will serve customers the way they want to be served. Fuse is the ingredient brand that serves each of our machine brands within AGCO. From about 2000 to 2015, our approach was to partner with third-party tech providers to offer solutions to our customers. While customers like leading-edge technology, they also wanted the full integration and support that an OEM can deliver. Since that time, we've invested heavily into our own technology to establish a much stronger foundation and deliver on customer needs. This also results in enhanced margins coming to AGCO rather than third-parties. It all starts with the AGCO common electronics architecture, and we're now about 75% complete in deploying this across our global portfolio. When we had our legacy platforms, full systems integration was not possible. This enables significant scalability in offering customers value-added features that they can buy as part of their new tractor, combine, sprayer or planter purchase or as a feature that can be unlocked later in the ownership life cycle. This also unlocks margin growth for AGCO and grows the customer-to-dealer relationship. This makes the customer's life easier and it offers great growth potential for AGCO. With CEA in place, we are seeing rapid growth in our own technologies as evidenced by the nearly 40% growth in 2019 and '20 period. We have greatly enhanced our ability to integrate systems to deliver on our smart machine strategy. We have built our capabilities in this space, and we continue to invest heavily. In terms of our make versus biologic, we now look at it more broadly. We develop what is most critical to deliver customer value, ensure a common user experience and support it fully over the life cycle. A great example of what this is and what we've done is our guidance and rate control technologies. We used to buy complete systems from third-parties. Today, we are sourcing readily available position receivers, and we have developed the rest of the system to ensure a seamless customer experience. As a technology developer and integrator, we realized an improved customer experience, sales growth and margin growth. We are focusing more on acquisitions in this space, to acquire customers that can add immediate value to our overall portfolio. Examples include Precision Planting in 2017 that we've shared with you previously and, more recently, Research 151 (sic) [ 151 Research ] in September of 2020 that greatly enhances our Grain & Protein business, again, acquiring technology that enhances our traditional business. In the area of partnering, we want to work with leading-edge companies around the world where we can jointly solve the most difficult challenges farmers face. Here, we have a few examples, like Solinftec. This agreement was just announced with a direct connection to custom applicators' logistics needs on our application equipment. And then the partnership with NEVONEX and BASF's xarvio, here, we're working together to make application equipment more efficient. Precision Planting is focused on retrofitting late-model products to greatly enhance productivity while avoiding the costly purchase of a new OEM product. Customers can greatly enhance their productivity while reducing their costs. The Precision Planting focus is on the installed base, not just AGCO's installed base. Precision Planting continues to be the Precision Ag innovation hub for us and bringing disruptive technologies to deliver customer value faster than anyone else in the industry. This results in Precision Planting being the leader in the retrofit business. New products continue to drive growth for us, as shown by the SmartFirmer introduction, pictured on the left-hand side of the slide. This first-in-the-industry innovation enables customers to monitor multiple variables as they're planting their crops and leverage edge computing to adjust on the go to maximize their yield potential for the season. Precision continues to take its portfolio global and is achieving some nice growth in areas outside of North America as we build our retrofit channel. Embracing the retrofit-first mentality, allows us to bring market -- to bring products to market faster and scale when we see the customer acceptance, product performance and reliability mature. Once mature, we can move it to the OEM market. The success of our Momentum planter highlights this success in action as we're seeing a 300%-plus growth rate in Momentum sales and stronger customer acceptance. Just like we're perfecting the handoff between the equipment and Precision Ag technologies, we're also focused on optimizing collaboration with our sales partners to ensure customer satisfaction and loyalty. DCX delivers greater engagement over the customer life cycle. Key components of the digital customer experience include our customer portal and dealer workplace. These provide dealers with the right tools to serve customers the way they want to be served, and it provides customers with an easy-to-use interface that is geared to their specific operation. E-commerce enables farmers to select and order parts quickly to keep them up and running. We believe this will open up nice growth opportunities as we are first in front of customers asking for attractive parts and service business. It includes an integrated product and service configure or configure price quote. It's integrated into the dealer workflow, making the life easier and reducing that administrative burden. CRM and marketing automation helps us know our customers better and present offers to customers that resonate based on their position in the life cycle. Master data management organizes our information to seamlessly serve our customers. And data analytics unlocks key insights to better serve our customers while unlocking for our dealers and AGCO. All of this is aided by a 4x growth in connectivity over the last 2 years. Now we're equipping all of our large ag equipment with connectivity straight out of the factory. Now let's hear from an AGCO dealer about our customer portal that we have branded FendtONE. [Presentation]

We will now cover how AGCO's approach is differentiated to best serve our customers. As we look at what differentiates AGCO and what sets us up for success, it is easy to see that there are a few key factors that position us well for the future. First, retrofit first is key. It enables us to disruptively innovate with an eye on the entire installed base, no boundaries. Embracing the dual-channel approach here with a retrofit channel and an OEM channel continues to serve us well. Next, being; farmer focused, digitally enabled, enables us to serve customers the way they want to be served. In this area, our efforts are increasingly focused on delivering an exceptional customer experience by leveraging both our digital and traditional dealer channels. We have specialized ag-focused brands that target specific customer needs across the crop cycle. And our full line of smart farming equipment positions us well as customers look to their brands of choice to fulfill their needs across the crop cycle for a common user experience and integrated easy to use technology. Our customers have responded well to our solution. Let's listen to their feedback. [Presentation]

That's a great summary by [ Brian and Alessandro ] about what our products can bring. Our foundational pillars for Precision Ag and Digital complement our full line of smart farming equipment. Connectivity enables remote accessibility, visibility and management via the cloud. This allows improvement in machine job and agronomic optimization. Automation includes automating tasks that enhance the performance of operators to deliver more consistent results, all on the path to autonomy. Robotics is then used with machine vision and spray drift management technology. Electrification leverages the traditional engine to deliver power differently and more efficiently to implement and machine functions. Edge computing harnesses agronomic potential on equipment in real time. In-field automatic adjustments to field conditions are driving the current generation of productivity gains. Today's smart machines include our IDEAL Combine, Momentum planter and our new Fendt 700 series, just to name a few. Tomorrow's smart machines are in development, including Xaver, where we're exploring what smaller swarms of machines can do for our farmer customers. Our close working relationships between our Precision Ag team and our platforms ensure that we will continue to feed innovations into the overall portfolio and deliver on farmer expectations. Now we will focus on what this means for AGCO with our path forward. We mentioned earlier that our baseline revenue is over $400 million today. The growth outlook is strong for Fuse. While we have rapidly increased our penetration over the last 5 years with our Fuse portfolio, we still have plenty of room to grow. This means that our growth will exceed the underlying machine demand as we increase our presence on our machines globally. With the common electronics architecture approximately 75% complete, we have the base in place to grow rapidly. This means we will be able to significantly grow the basic products and the more advanced features. This enables higher value for farmers and stronger margin growth for AGCO. Precision Planting will continue to expand industry-leading retrofit capabilities with disruptive innovations. We will also continue to expand globally with our current portfolio and introduce products covering additional areas of the crop cycle. We'll also continue to lead the retrofit industry with a focused retrofit channel and the full installed base as our target, not just AGCO products. We believe this path will deliver a doubling of our Precision Ag revenues at attractive margins over the next 5 years. It also provides an even stronger portfolio as we strengthen our channel and serve our customers in the way they want to be served. I'll now turn it over to Andy Beck to cover some of our financial targets.

Thanks, Seth, and good morning to everyone. It's great to be with you today, and we're really pleased that you're participating. And we thank you for all your interest in AGCO. As both Eric and Seth mentioned, our refresh strategy continues to be focused on driving improved performance. And I'm going to start my session with an overview of our financial goals supporting our strategy that Eric outlined. Next, I'll recap the performance of AGCO Finance, our captive finance company joint venture, and I'll conclude my remarks with a review of our plans for capital allocation. Slide 3 lays out our road map to achieve our 10% operating margin goal. You've seen this chart before, but we've made 3 important changes and improvements since our last analyst meeting a year ago. First, it reflects the 160 basis point margin improvement that we've achieved over the last 2 years despite weaker industry conditions. This progress has been made and driven by many factors, including an improved sales mix as well as a successful cost and expense management. Second, it includes the benefits from the strategic focus areas that were outlined by Eric in his presentation. And in the next few slides, we'll give you more specifics on how we and how these initiatives are expected to impact our margins and our returns. Now as you know, industry demand is always an important factor in AGCO's financial performance. Improvement in industry demand levels, like we're expecting to see in 2021, support the achievement of our 10% target and softer demand may extend the length of time to achieve it. Our goal is to achieve this target within 2 to 3 years beyond 2021. Our continued progress with our margins will drive earnings growth, strong cash flow generation and expanded returns. Now Slide 4 gives you an overview of our growth-focused initiatives. These focus areas not only have potential for growth but also carry strong margins. Collectively, these product categories account for about 50% of AGCO's total sales in 2020. In addition, these areas have been growing over the last few years, which has always -- already contributed to our recent margin improvement. Now we expect to continue this growth through further innovation and the global expansion of both our Precision Planting and our Fendt product lines. Our improved premium product offering will also allow us to favorably compete in the North American large ag market. And in addition, our focus on our digital tools and aftermarket support is expected to drive further growth in our parts sales. Since we are targeting these product areas to grow faster than the other portions of our business, we expect these key growth areas to contribute to margin improvement goals over the next 2 to 3 years. Next will cover the benefits of optimizing other portions of our business. At a high level, we continue to focus on leveraging our size and scale, globalizing our operations, expanding our platform and module strategy, simplifying our manufacturing network to optimize capacity and increase cost efficiency. Specifically, we have more opportunities to improve the profitability of our South American operations, our Grain & Protein business as well as expand and improve the efficiency of our Massey Ferguson global offering. Our South American business achieved strong improvement in 2020 by returning to profitability with nearly 800 basis points of margin improvement. We believe we have more potential to improve over the next few years. We'll continue to work on the cost of our recently refreshed tractor lineup. And we expect to further benefit from continued gains in our new Precision Ag products such as the Momentum planter. In our Grain & Protein business, we faced weak market demand over the last number of years, which has contributed to margin pressures from lower capacity utilization and weaker sales mix. Over the last couple of years, we've started a number of initiatives to address our margins. In particular, we are consolidating our Grain & Protein manufacturing facilities, along with rationalizing our product offering. Our North American grain business, which carries strong margins, is expected to benefit from improved farm economics in North America, and our Asia protein business is expected to see growth from the modernization of the hog production facilities in China. Our Massey Ferguson business extends globally and covers an extremely wide product range. Our goal is to continue to simplify and position the Massey product offering to achieve both growth and margin improvement for this important brand. Collectively, we're targeting a 50 to 100 basis point margin improvement from these optimization initiatives over the next few years. AGCO's material spend for raw materials, parts and components makes up about 75% of our manufacturing costs, and we have further opportunities for savings through global purchasing excellence and best cost country sourcing. The benefits of both programs are captured on Slide 6. Our GPE program involves using global commodity teams to better leverage our total material requirements, resulting in lower costs. Another important accomplishment in the area of material cost management has been our best cost country sourcing initiative. Our sourcing from Asia, India and Eastern Europe is resulting in cost reductions compared to our current supply base. The savings from these material cost reduction programs is a key source of margin improvement as it, along with pricing, helps to offset normal material price inflation and adverse changes to hard commodity prices, including steel. As we discussed last year, we have also have initiatives in place aimed at improving our labor productivity in our plants. AGCO's manufacturing optimization program is designed to help reduce delivery lead times and costs while improving quality. Our Six Sigma and lean manufacturing programs are in place across our factory footprint, and we continue to benefit from the sharing of best practices across sites and from employee involvement in the evolution process. We are also investing in digitalization and automation in our plants to provide savings in direct labor and material handling expenses. Each plant has annual productivity goals, and we target our productivity investments to generate $10 million to $15 million of incremental annual savings. Our cost reduction actions also allow us to operate our business more efficiently and will provide long-term benefits to our cost structure. A portion of these savings are planned to be reinvested in developing new products and expanding our technology capabilities. As Eric and Seth outlined, our future plans include accelerating investments in smart machines, our Digital and Precision Ag offerings as well as tools to enhance our customer experience. This incremental funding will begin in 2021. Our 2021 plans include an increase in engineering expense of approximately $50 million to $60 million, which includes an increase in both our Precision Ag and Digital spending levels. Although our spending plans are adjusted annually depending on many factors, we anticipate that our investments in these important capabilities will continue to increase in order to support our strategic objectives. We remain committed to investments in our R&D spend. The objective of these investments is to deliver the highest-quality products and services that exceed customers' expectations. On Slide 8, we detailed the increase in our engineering expense and absolute spending and as a percentage of sales over the last 15 years. We intend to maintain a strong level of investment in our innovative new products, resulting in an R&D spend at about 4% of sales. Our award-winning product lineup is the strongest in our history. And the development of our smart machine and Precision Ag enhanced product portfolio is critical to our future success. As we indicated in Eric's section, we've identified return on net assets, or RONA, as a key operating metric for AGCO. The RONA metric will effectively measure our progress in leveraging our existing operating assets and future investments to produce stronger returns for shareholders. The assets and liabilities included in the RONA calculation are the ones that are under the most management control, those are -- such as inventory and plant investments. We'll use this metric throughout the organization to ensure our team is not only focused on profitability but also on the net assets that they employ in their business. As you can see, our RONA was approximately 20% in 2020, and our long-term target is 35%. We believe that engaging this metric as an important target will support strong cash flow generation and shareholder value. The RONA metric will be an important component in both our short-term and long-term compensation targets. Now moving on to Slide 11, which details our AGCO Finance business. AGCO Finance is owned 51% by De Lage Landen, which is a subsidiary of Rabobank, and 49% by AGCO. De Lage Landen is a wholly-owned subsidiary of Rabobank, as I said, one of the largest ag-focused banks in the world, commanding one of the highest credit ratings for any international bank. Rabobank specializes in the banking of the food and agribusiness sector, so they understand the global agricultural market very well and have been a great partner of AGCO's. AGCO Finance provides financing for about half of AGCO's retail sales in our major markets. On Slide 11, you can see the recent trend of the portfolio. As of December 31, 2020, the total was $10.7 billion. Today, 82% of AGCO Finance's portfolio consists of retail financing for AGCO's farming customers. The remainder is made up of wholesale floor plan financing to our dealers. AGCO Finance has consistently produced strong profits, and we account for our -- those profits in the equity method where our 49% interest is reflected in the equity and net earnings of affiliates line on our income statement. In 2020, AGCO's share of the joint venture earnings was approximately $43 million. The quality of the finance portfolio is reflected by the low level of write-offs. For the 5-year period, 2016 through '20, write-offs have averaged less than 50 basis points as a percentage of the total portfolio. Our AGCO Finance JV plays an important role in our strategy by providing competitive financing solutions to our farming customers. As you already heard this morning, return on net assets and operating margins are currently AGCO's principal financial metrics. RONA development is predicated on strong free cash flow generation. You can see from the chart on Slide 13 that we generated solid cash flow and all the points in the last cycle, with a free cash flow conversion rate over 100% for the last 4 years. This achievement of managing working capital and, in particular, managing our dealer and company inventory levels. Our free cash flow is funding important investments and is supporting our dividend and share repurchases. In the next slide, we list our capital deployment priorities. We intend to continue investing in our business to improve efficiency and maintain the pace of our new product introductions. Over the last decade, we've built a strong capital structure, and we will strive to maintain our investment-grade rating. We'll remain opportunistic in regards to acquisitions in order to add new products or expand our geographic reach. And finally, our healthy balance sheet and strong cash flow generation has enabled us to return cash to shareholders, and we plan to continue with this practice. While we suspended returning cash to shareholders other than our quarterly dividend, following the outset of the COVID pandemic, we currently intend to return cash to shareholders again during 2021. Well, that concludes my prepared remarks. Give me a second to recap what you've heard this morning. We've highlighted the key components of AGCO's farmer-focused strategy. Through our growth initiatives, the optimization of our existing business and the acceleration of our Precision Ag and Digital capabilities, we're targeting mid-cycle operating margins of 10% and a mid-cycle return on net assets of 35%. Now I'll turn the meeting back over to Greg, and he'll have instructions on submitting your questions.

Thank you, Andy, and thanks, everyone, for submitting questions. So far, we have a good list. But I encourage you to go ahead and use the Q&A box at the bottom of your webcast viewer. Go ahead and get those submitted. And we're going to take a break now, and give us a chance to get things organized in terms of our Q&A list, and then we'll be back right about 9:55. So we'll plan on resuming and rejoining you at 9:55. Thank you. [Break]

Welcome back. Thank you for a great list of questions. So we're going to jump right in. Our first question comes from Ross Gilardi from Bank of America Merrill Lynch. Ross is asking why does GSI belong in your portfolio as the company focuses more on smart ag and the business is clearly not as countercyclical as first believed? Eric, why don't you help us with his first question?

You bet. Well, first of all, welcome, thanks, Ross, for your question. That's a good question, and I'm glad to get the chance to answer it. Grain & Protein, I mentioned a bit of this in my presentation but I'm going to go back and expand a little, first of all, we think it's going to go through a similar, I'll call it, Precision Ag and sustainability trend as much of our machinery business. We're going to be bringing technology solutions, like we did with grain biz and bin sites, some acquisitions and technology that we just brought to the market. But also, we're building a facility on the campus of University of Georgia to do trials on the combination of animal welfare and productivity. And so we think that there's margin opportunity and capabilities we can bring that the competitors in this space just don't really have the same depth that AGCO has. And there's also synergies with our machinery business in terms of we're touching the same customers. There's untapped potential in some of our core markets. And there's a financial element, too, that more profitability in North America, which is a bit of a strong base for that Grain & Protein business, is good for our overall tax treatment because we've had some historical losses, it brings our overall tax rate down. So that's good for investors, too, it's a little bit of a heavier punch. So that's how we view it. I've been watching it for the last couple of years, been observing it a lot, I think we've got some good short-term potentials. We've got a transformation plan in place. And like every year, we'll be reviewing it as part of our strategy refresh process going forward.

Great. Our next -- we have actually 2 folks that have asked about the expansion opportunities for our Precision Planting business over the next 3 to 5 years, both in terms of retrofit and on the OEM side. Eric, maybe you can talk about the growth opportunities for the Precision Planting business.

Yes. I talked about 3 different dimensions there. One is expanding their portfolio beyond planting into the rest of the cropping cycle into application equipment, bringing the smart technologies there and retrofit capabilities as well as harvesting and so on. So portfolio expansion, geographic expansion to places like Europe and South America and then leveraging that retrofit channel that Seth talked about, it's the opportunity where a farmer has an existing machine but they want to convert it from, I'll call it, a dumb machine to a smart machine or a more capable machine, a higher precision machine, and they take some of the components off and they replace them with the components from Precision Planting. We see that happening in most machines going forward and in a lot of geographies. What's it take to do that? We've put people on the ground. We've been doing field trials, gathering up our agronomic data, showing farmers how the new approaches and new technology work in their farming conditions. And then we also have to do a little design work, and that is where we have to design the retrofit modules to fit on planter companies that are strong in Europe. We had pretty well covered North America and South America. We're doing some design work to be able to retrofit on the European planters as well.

Great. We have a couple of questions on the 13D that was filed last night by TAFE. Eric, maybe you could spend a few minutes providing some color on that filing that TAFE did last night?

Yes. Well, there were a lot of claims made there. At first review, it's actually a surprising position taken by Mallika since really, most of her comments were already fully covered in the strategy plan. And that strategy plan was deeply reviewed with the Board last October. So let me offer some context around the overall relationship. TAFE is a vendor of low-cost, low-tech, low-horsepower tractors to AGCO. They're also a licensee of ours where they utilize the Massey Ferguson brand in their business, primarily in India. AGCO's strategy is very clear, and it's going in a different direction than where their core business is. It's focused on precision ag and digital solutions and the needs of professional farmers, and we talked a lot about that today from all 3 of us. TAFE knows that our paths are diverging and is trying to assert more control over AGCO. I said before, and I'll say it again, I've got tremendous confidence in our strategy. We've demonstrated results already in 2020 for the key areas that are embodied in our future growth. I have high confidence in our management team because we all built this thing. Our fingerprints are all over it together collectively. We own this strategy and so does the Board to help execute and guide this strategy. I fully believe this is the best plan possible to deliver the highest value to our farmers and to deliver the best return to our investors.

Our next question comes from Nicole DeBlase from Deutsche Bank. Nicole is asking about our precision ag strategy and if we need to step up R&D or M&A to become the industry leader. Seth, maybe you could help us with that.

I'd be happy to. Thanks for the question, Nicole. I think we touched on this a little bit in Andy's presentation, talking about the increases we're already making in R&D. And you can see that in our overall spend rate as a company. But there's outsized growth when we talk about our Fuse business, our Precision Planting business and our digital customer experience platform because we know we need to make those investments. And as it relates to M&A, we're always open to opportunities. I think we've shown that. We've shown that just recently with the Research 151 acquisition that brings technology to our Grain & Protein business. And we'll continue to be open to that as we look to fill in holes in our portfolio, grow our global presence and make sure that we're continuing to feed that pipeline and grow. But it's going to be a balanced approach between our R&D and M&A. And I think that's a winning combination as we go forward.

Great. Thanks, Seth. Next question is from Jamie Cook. Jamie is asking about AGCO's broader portfolio -- Jamie Cook is from Crédit Suisse, and she's asking about AGCO's broader portfolio and how we think about margins and returns across that portfolio. And she's also asking if we're thinking about exiting either lower-margin geographies or lower-margin products. Andy, maybe you could help us with that.

Thanks, Jamie, good to hear from you today. In terms of our margins across our portfolio, they do vary significantly. We touched on some of the areas today that are the highest-margin product lines in our portfolio, the ones that we want to grow the most. So we talked about Fendt and Precision Planting, our aftermarket business as some examples of that. And so those are the ones that are in focus, where we're going to put a lot of investment, a lot of attention. There are some other parts of our business, as we talked about as well, that are experiencing lower margins right now, and that's part of our work as well, to try to improve those margin businesses: South America, we talked about Grain & Protein, we'd like to improve the margins in our Massey offerings. So we're working on that as well. So we're looking at not only growing the high-margin pieces but how can we get improvement in some of these other ones. And really, across our portfolio, we sell large ag equipment, which typically carries higher margins; and all the way down into the smaller equipment, which typically carries lower margins. There's more competition there, less ability to innovate, and it's much more price-sensitive when you get to the lower ends, kind of the low-technology equipment. Now we still want to sell that type of equipment because our dealers need that to have a full line of equipment, and so we need to continue to offer that. But that's not going to be as much of our focus in the future. And so there are areas where we are -- we have looked at and exited a few product lines. None of them are very significant. But part of this process that we've gone through, we've looked at each product line and do we want to discontinue that, are we going to really invest and emphasize it or are we going to have more -- just be a distributor of that product. So we've gone through all that work, and we think we've arrived at the right mix for us going forward.

Thanks, Andy. The next question comes from Steve Volkmann from Jefferies. And it's another Precision Planting question. He particularly wants to know the mix between new and retrofit, which we expect to grow faster and a little more detail on the economics of each of those pieces. So Seth, maybe you can help us with those Precision Planting questions.

Yes. I'd be happy to cover this one. I'm going to break it down a little bit. So the first part of it is the mix of new versus retrofit. As I talked about in the presentation, our mindset is retrofit first. We believe that's the culture we want to continue to build and grow. We really want to focus on that because we think that will drive our innovation. As we get those technologies out, we start to scale it. As there's customer acceptance, as we prove the value and as that reliability matures, then we can move it into the OEM business. And so with that in mind, we've built Precision with the idea of continuing to have the majority of those sales come from retrofit. And today, we see that makes up about 90% roughly of the business. And the OEM business is the smaller piece. But what's interesting there is we now have relationships with over 20 OEMs around the world growing that business because customers are demanding it when they buy new products as well. And so we have OEMs coming to us. So we do see that growing, but we see them growing at balance. We do believe that our retrofit business is going to continue to be the majority share there. And then the other part is around the economics. The economics actually favor the retrofit because that productivity, as it's new, as it's leading edge, there are customers that are willing to pay more for that right upfront and to drive. And so that's why we want to continue to drive in that direction. And that doesn't mean that OEM margins aren't good, they're just not as good as our retrofit business. But both are a great growth opportunity and margin opportunity for AGCO overall.

Thanks, Seth. And Steve's follow-up question is around the IDEAL Combine. Eric already talked about earlier what a great success that's been for us. And Steve wants to know specifically, in terms of number of units, what our plan was as we rolled it out in terms of production both last year, this year and as we look forward. So Eric, maybe you can help us with that.

Yes. IDEAL Combine is continuing to set new records not only on its own right but we do a lot of head-to-head comparisons in the field against other major competitors. And we're really, really happy with the results. Everywhere, we do the testing. Europe, North America, South America, wherever we run, we're really happy with the results and the customers, you saw the testimonials there. So we had a number of things to put in place, and they're all falling into place nicely. We had a product program to develop in terms of high performance. That's embedded, and I talked about the performance comparisons. We continue to innovate on top of that. So last year, we rolled out the first Combine in the world, first ag machine in the world, where we remove the steering wheel, and it's joystick steering. Now we've got an award yesterday from auto header hookup. This has been a feature for a while. So we continue to innovate on the product platform and continue to extend the lead in terms of its performance. A second dimension has been building out the capacity. We're building in both Europe and in South America, and we've been continuing to add capacity as these orders are ramping up. And that was always part of the plan. And the third one is building out our distribution network, getting our dealers really capable, really focused on steadily growing their harvesting business. Now we're still early days. We're still at the low end of the S-curve on this. But it's -- those 3 dimensions are working in parallel, and we like the results of how that machine performs in the field for our customers and how our customers respond.

Our next question is from Jerry Revich from Goldman Sachs. Jerry is interested in our connected machine program. Specifically, he'll like to expand and talk a little more about how we help with preventing -- preventative maintenance, how much higher our parts market share could go and a little more about our plans for the connected machine population. So Seth, maybe you can help us with that.

Yes, thanks for the question, Jerry. So to touch on this, first of all, we move to connecting our machines in 2019. And we started on a limited set of products. And then in 2020, we've expanded. So now all of our large ag equipment between the Massey, Fendt and Valtra brands come out of the factory connected and ready to go. And we've expanded that period to 5 years as part of the base equipment offering for those machines. So that's a step forward that we've made. And the key reason -- the first key reason is we think connectivity can really change the life cycle experience for a customer. We believe we can get in front of issues to the point where a customer will never experience unplanned downtime. That's our focus here. So that's first and foremost. And that will drive customer loyalty and keep them coming back because it increases the overall quality perception with our customers and gives them what they purchased, which is productivity, reliability and ease of use. Now as it comes to growing our overall aftermarket business, there's no doubt that as OEM customers go deeper in the life cycle, we see a steep drop-off. That drop-off has been an estimated to be quite significant, really after the warranty period runs out. So we do a couple of things there. One is we sell extended warranty packages to keep them in the fold, to keep them coming back and to give them peace of mind. But we also believe connectivity will make a difference there. We see our ability to work with customers, stay connected over the lifetime and see when they're approaching key service intervals as critical for us to being first in front of them and having an easy button to push so that they can have the right parts or service completed or delivered to their farm, on their machine in a timely manner. We think if we're first in that equation, we're going to grow that business. The challenge, Jerry, on that is the fact that we really have just a couple of years under our belt. So we're building in that direction. And I do believe we'll see nice growth in this area.

So the next few questions are directed at our 10% operating margin and around our definitions of mid-cycle and some of the mechanics around that journey. Andy, maybe you could help us specifically with talking about how we're going to bridge the gap to 10%, some of the more important initiatives, and then as we go forward, maybe even beyond 10%, what our opportunities are.

Sure. In terms of our margin growth story, we've provided you some of the key tenets of that. It's the growth. It's improving some of our businesses. It's productivity in our factories, reducing costs there and, otherwise, some market growth as well and improving mix. When I look at those different buckets, we provided some of that in terms of we said optimization would get us 50 to 100 basis points. We talked about the productivity goals that are in there. That probably gives you about the same amount of improvement. And so the balance is probably going to come from the growth and the improved mix from growing those high-margin businesses, offset by some of those additional investments that we've talked about. So really, they're all big contributors to the improvement that we're looking for, but probably that growth and mix aspect is the largest one. We obviously -- our first milestone is get to 10%, but we do think we have the capability of getting beyond that. A lot of things Seth talked about in terms of growing Precision Ag and Digital capabilities, having that becoming more penetration in our product offerings, those carry higher margins. So there's things that we didn't talk about and list that also can generate it. So we're trying to be more efficient and improve all aspects of the business to keep driving towards that margin improvement. It's an important part of our company's targets, and we're real -- very focused as an organization to continue to make progress in our margin journey.

Great. Next question from Adam Seiden from Barclays. Specifically, Adam would like to know how AGCO defines mid-cycle on a revenue level or unit sales level. Andy, maybe you can help us with that.

Yes. The way we are defining it is really looking at all the industries that we participate in and looking at defining a cycle as a -- a full cycle as a 10-year average, so where is the current year compared to the 10-year average of that industry. And then we obviously weigh it to our market position in each region, and that gives us some sort of percentage of where the current year is versus the 10-year average of the overall global industry from our perspective. And what we've seen is the last few years have been probably in the low 90% of that calculation. So we've been below mid-cycle. As we see what's happening this year, with some improvements in some of the key markets like North America and South America, we'll get closer to that mid-cycle level. We'll, obviously, wait and see how the year goes, but I think we are approaching that a lot closer here in 2021.

Great. Sticking with operating margins, Joel Tiss from the Bank of Montreal has a question about our operating margin improvement. Specifically, Joel would like to know why our operating margin improvement shouldn't be more front-end loaded given the relatively low starting point. Andy, maybe you can continue our discussion with operating margins.

Sure. Joel, what I would say is we have made some good improvements already. You saw, as we discussed over the last 2 years, 160 basis point improvement in the operating margin. And so I think we are making good progress, and we want to continue that momentum. A lot of the progress that we made over the last 2 years are -- really show us, we think, that the things that we've identified that will take us beyond this will work because a lot of the margin improvement that we've already achieved is from growing some of these high-margin businesses like Fendt and Parts and Precision Planting. And so -- and a lot of the improvement we also saw was getting improvement in South America this year. So it gives us confidence that we're in the right areas and focus areas and that we can continue to build on the progress we've had so far.

Great. And then as a follow-up and Ann Duignan from JPMorgan is asking if our 10% margin is a segment or enterprise-wide. It is an enterprise-wide margin. And so the difference between the 2 is that we intend for the 10% operating margin goal to cover all of our corporate overhead expenses. So yes, we're looking for a full enterprise-wide 10% operating margin in terms of our target. So our next question is from Nicole DeBlase who would like some perspective in terms of the industry. And as it transitions to more autonomous technology, if -- when do we see electric power machines becoming more of a reality for our industry? Eric, maybe you can help us with that.

Thanks, Nicole, appreciate the question. There's a couple of elements in your question from what I -- the way I'm taking it. First one is automating the functions on the machine. That's the heart of our smart machine strategy. For a machine to run without any operator in the cab, we need to be able to automate each function that, that operator does today by doing it manually. So our smart machine strategy are all the building blocks to ultimate autonomy. Electrification, we've got one of the first real tractor machines out there with our e100 Fendt program where we've got a fully electric tractor product line. We think that those solutions are going to be target solutions in certain parts of the marketplace biased towards the low end of the horsepower range because when you start getting up to the highest horsepower ranges of our machines, number one, they're on full duty cycle. So electrification usually makes sense. We've got a variable duty cycle, plus the weight -- the power density of batteries just isn't as good as fuel. So we think it's going to be on the low end of the power range, maybe 120-horsepower and below and in certain applications where there's an intersection of government regulations and a specific machine application. So it could be vineyard applications and things like that. So electrification, we think, is going to come in the next few years. Full autonomy is going to be probably a little further out before it becomes -- there's prototypes running. We've got prototypes running. We've got our swarm concept, we call it Xaver, where we've got multiple small robots autonomously working, coordinating with each other, planting run [ all the time ] or doing crop [ cycling run all the time ]. So we've got the technology developed. But before the market is ready, I think it will be more in the 3- to 5-year time horizon before we start seeing any kind of replacement.

Our next question, a follow-up, from Steve Volkmann from Jefferies. When we're talking about our technology sales, Steve wants to know -- can you tell us about split between recurring revenue? And how much of that is included in your plan? And then in terms of margins associated with this technology sales, would they, in fact, be margin accretive? Seth, maybe you can help us with that question.

Yes. Sure. So to cover this, first of all, yes, we do have some recurring revenue sales. The reality is it's small today. It's recurring revenue when we have subscriptions re-upped for our connectivity, when we have our correction signals repurchased and those types of things, but they're relatively small in the grand scheme of things. What we are doing is trying to build more of that in to make sure that we're able to provide customers what they want at a specific point in time. So one of the things we spend a lot of time on enabling, and we do have available, is being able to unlock features while a customer is in the ownership period, not when they're buying it upfront but after they purchased the tractor or combine or whatever it is that they have features that they can unlock. So even -- it may be a second customer, maybe the first customer didn't need a particular feature, we have it embedded in the machine where it can be unlocked, they can buy that, and they can get more value over time. So we see that maybe not as a recurring revenue but as a point in time to really enhance that -- the value the customer sees and increase our margins at AGCO. And one last thing there, yes, the margins are accretive.

Thanks, Seth. While we're talking about Precision Ag, Chad Dillard from Bernstein would like to know a little more about our product road map in terms of Precision Ag. In particular, Chad wants to know about what gaps we might have in the crop cycle and what we can do to fill those gaps. So Seth, maybe you can help us with Chad's question.

Yes. Overall, I'll start with the retrofit first topic. With our retrofit business, we've been very focused on planters up until now. And Eric mentioned that we're going to expand beyond that. We're going to start looking at other areas of the crop cycle, and we think that's a nice growth opportunity, in addition to the global expansion, some of the OEM growth that we also talked about. Those are all there. So we think that's an opportunity to get into the crop care area, harvesting and field preparation area. There are all kinds of opportunities there. So we'll be looking at that. When we look at our Fuse business, here, it's a little different. Here, we have some of our products that are very much in the leading edge. And so we talked about FendtONE. You heard the dealer talk about FendtONE in the presentation. There, we're really blending the interface between what a customer sees onboard and what they see off-board, making it seamless in how they interact with our products and bringing capabilities where they can plan everything that they want to do. For their particular activity in the field, they can plan it in advance and so that they don't miss a beat, and really taking that whole automation up to a whole new level from an optimization standpoint. So that's a big piece of it. And then we still do have areas of the world where we're growing. We have great penetration with our Fendt brand. We have very good penetration across all brands, really, in Europe and North America. We have some room to grow on the brands other than Fendt. And then in South America, we have a very strong growth plan there. So that's where we see growth rates that will outpace our machine growth when it comes to the OEM business. And we think it's very attractive there, just getting our common architecture 100% across the board and then building on that with our basic products and then our features that we unlock like turn automation and getting customers all the way up to the customer portal that I talked about with FendtONE.

Thanks, Seth. Shifting to distribution, Stanley Elliott from Stifel has a question, specifically wanting to know if we have facilities in place to support our precision efforts, specifically Fendt globalization, parts sales in North and South America and, if not, how quickly can we get up and running in those areas. So Eric, maybe you can help us with some more color around distribution for Stanley.

Okay. Very good. Stanley, good to hear from you. The answer is yes. We're well in place. Our parts facilities are distributed all around the world and have networks that were really close to the customer, so no issues there. We just invested in a new facility on our -- for our Precision Planting business on the farm that I showed you a video of. We didn't show you the new facility, but that just opened a few weeks ago, and it's ready for this harvest season. And it's a state-of-the-art customer welcoming center, technology demonstration center and so on to be able to expand not only our field trials, but we run farmers from all around the world through that demo farm all the way through the cropping cycle. So that's in place. Over the course of time, as Precision Planting continues to grow, we may localize some production, perhaps in Brazil, as that business gets larger. But those are going to be very small investments. Fundamentally, we have the footprint we need.

Our next question is from Brett Linzey from Vertical Research. Brett's asking for us to quantify the margin enhancement related to the Precision Ag pull-through. And based on our current penetration and new product extensions and rollouts, are the company's target -- what are the company's targets for how large the revenue from the Precision Ag business can become over the 2- to 3-year planning horizon? Andy, maybe you can touch on that for us.

Sure. As you saw in Seth's presentation, when we say what is our current revenue for our Precision Ag and Digital products, we said it's about $400 million. Now what's included in there is the Precision Planting business. That's about half of that amount in 2020. And the rest is revenue that is primarily in the equipment that we sell. So it is the guidance systems or additional terminals and things like that, that are delivered from our -- and support the Precision Ag technology that the customer is looking for in that unit. So it's part of the individual units' sales and margins. So it's a little bit hard to pull out sometimes. But our estimate is that those additional features on the products plus the precision planting business, about a $400 million business. As you saw, our goal is that we double that over the next period of time. So 2 to 3 years, maybe out to 2025, we think we can double that revenue. And so how are we going to do that? That's obviously developing new products but getting more penetration of the existing products as well. Seth talked about how we're rolling out a lot of these features in new products and new geographies each year. So that should grow. Now from a margin standpoint, as I said before, these margins on these -- on the Precision Ag business is more like an aftermarket margin. And also, these add-on extensions to the products that we're selling, these options that we're putting into the product, they are also typically an aftermarket-type margin. So all of this is going to greatly enhance the margin on each individual unit that we sell, and we want to grow that Precision Planting business as well. So all of that should help drive those margins up that we're looking for.

Our last question this morning comes from Adam Sieden from Barclays. Adam is interested in some more color around our digital dealer structure and what that might do to the competitive position of our industry. As a last question, Eric, maybe you can talk a little more about our digital dealer strategy and how we're looking at that going forward.

Yes. I mean I think, really, the heart of it is how do customers want to engage with the company. And today, we pretty much -- our whole industry channels them down with one approach. We want to give them a couple of different approaches. This allows them to choose the mechanism, digital or live, but it also allows us to extend into areas that we had perhaps either lower or no dealer performance. So it allows AGCO to extend its footprint. We actually just bought a dealer organization. We put a company store into South America, where we own it, in Sorriso, in the heart of Mato Grosso. We bought a set of dealers in the southeast part of the U.S. And in both cases, we're looking at using those as incubators to try out our new approaches with digital solutions, adding more value to customers, staying closer to them throughout their whole experience and seeing what that means in terms of what their experience is, what the value is that is generated, what the margins are for the dealer, what the margins are for the company and so on and what happens to Net Promoter Score, are the customers happy. So far, what we've seen is we like what we're seeing in the experiments that we're running. And that's what gives us confidence to build on this strategy going forward. We recognize there's a trend in the industry, and we want to be able to make sure that we're doing it better than others.

Great. Thank you, Eric. And we want to thank everyone for their strong participation this morning and for your interest in AGCO. We hope that you took away this morning that we have a very farmer-focused strategy. We have some very interesting opportunities in terms of growing our business and expanding our margins. And with that, we'll bid you a great day. And for those of you that have follow-up questions, we're happy to get with you and answer those over the next few days. Thanks, and have a wonderful rest of the day.