AGCO Corporation (AGCO) Earnings Call Transcript & Summary

All right. Hello, everyone. Good afternoon. Welcome to Oppenheimer's 16th Industrial Growth Conference. My name is Kristen Owen. I'm an Executive Director on our sustainable growth and resource optimization platform here at Oppenheimer. I am pleased to be joined today by Andy Beck, Senior Vice President and Chief Financial Officer, at AGCO as well as Greg Peterson, Vice President of Investor Relations. Thank you both for the time today. I know we're getting started just a few minutes behind. So we'll jump off. Andy, Greg, anything that you want to start with as far as opening remarks? Or shall we jump right into questions?

Why don't you just hit the questions, thanks.

Great. So before we get into some of the longer-term opportunities, I wanted to start with a few of the more timely items. AGCO reported last week, very strong top and bottom line results. You raised your full year EPS guidance by nearly 20%. So I'd like to start off by asking you to provide a little bit of the backdrop and help folks level set on what you're seeing in the global ag market backdrop? And what's giving you confidence to raise your outlook so early in the year?

Sure, I'd be glad to do that. As we get into the really first selling part of the year, so the spring is the first selling season for a lot of our equipment, we're seeing very, very strong demand in all of our key markets. So as we looked at first quarter sales up in North America, we're up on big equipment, about 12%, and on overall, over 20%. That was up substantially. In Europe, our sales were up -- or industry sales were up over 20%. North America, over 30%. So there's obviously -- we're starting off the year with a very strong tailwind of demand. Why is that? Well, commodity prices are much higher than they were a year ago. And that really bodes well for farmer income. And so farmers are feeling much more confident than they were a year ago. They're seeing good margins coming on their crops this year. And we have a good yield and good crops. We'll see good income for the farmers. And that's what they're projecting, and they're already investing. And over the last few years, really almost 5 years, we've been really low, kind of a mid-cycle demand overall, some markets are going to be different than others. But in a lot of cases, farmers were delaying purchases. Their income levels and margins weren't at the point where they wanted to invest, and they were holding off replacing equipment and investing in new technology. Now with the income levels up, they're taking advantage of the situation and wanting to make investments. And so that's what we're seeing really across the board. And as we get into the year, it allows us to start to really gauge about how much increase we'll see throughout the year. And so we've updated all our industry assumptions and our own sales assumptions. And as you pointed out, we felt comfortable we can -- we could raise our top line and our margin aspirations.

Great. So just sort of dovetailing that as we think about your own sort of production outlook for the remainder of the year, you came into the year having drawn down dealer inventories. You noted on the call last week that you've seen a 2x increase in your order book. And then we have the impact of the supply constraints, which we've seen many of the companies at this conference discussed. So what are your purchasing managers seeing? What are the bottlenecks you're seeing in the supply chain? And how is that impacting your outlook for production for the remainder of the year?

Well, we really haven't had it. I wouldn't say it's really impacting our full year production outlook. It's certainly creating some near-term disruptions that we're working our way through, really on a daily basis. So our purchasing managers are really working hard right now to alleviate any issues they see in the supply chain, working with them very closely in terms of when we're going to get components. We've already had to miss some production days because we didn't get the components in. And really, it's across the board. There's -- it's not just 1 type of component. It ranges from wheels and tires. We had our cab supplier go down for one of our factories because of COVID. So a lot of these things are COVID, kind of the ultimate cause is COVID, where there's some labor disruption. There's maybe local municipality or whatever is having to shut down, lockdown an area, which is causing us to have delays. And so we're working very closely with those. Our suppliers are trying to make sure we get right priority on parts, and they're doing a fantastic job. You saw how we performed in the first quarter. That was still with some disruptions. But they were able to overcome a lot of those, and we ended up having a really strong quarter. So I think we'll see the same kind of issues throughout this year. Hopefully, they start to get easier and easier as we get more people vaccinated and the COVID thing gets a little more behind us. But for right now, it's a big challenge for our purchasing team. From an overall production standpoint, we projected our production will be up somewhere in the 10% to 12% range for the full year. Our biggest production quarter will be the second quarter, so that will be the most pressure on our supply chain. As we get into the back half, we do have a little room for some improvement in production if we need to. So we feel good about our production plan and ready to react to whatever the market conditions are. And hopefully, our supply chain will allow us to meet all that demand that we see out there.

So just putting a finer point on production relative to retail demand, how should we think about ending inventories at the end of 2021? And then maybe what does that portend for the longevity of the cycle as we look beyond this current year?

Yes. In terms of dealer inventories, we brought down our dealer inventories last year. We felt like there was an opportunity to do that and be -- really just be more efficient with our pipeline from company inventory to dealer inventory and we felt like we accomplished that. And we did a good job. Our inventories in all our regions were down year-over-year at the end of last year. So as we get into -- got into this year, we're in a very good position. We lowered the inventory levels. And overall, what we're planning to do is kind of keep those inventory levels relatively flat year-over-year. So we'll be -- our wholesales and retail should be consistent in 2021. And that -- with the increased demand, what that's doing is our turns or a month's supply of dealer inventory will continue to go down. So we're going to be more efficient, but overall, that's kind of built-in our plan. I think the retails are so strong right now that even like in North America in the first quarter, we typically build inventory for the first season of selling, the spring season. And we were really able to do that. Our retailers were strong enough to wear, but we put in, we sold back out. So I don't think there'll be a lot of opportunity for building inventory in 2021, and we're comfortable with that. That's how we built our model this year. So as we look into the next year, that will put us in a good position. I think we'll remain lean in terms of our inventory levels. So that's, I think, positive. And I don't think -- I think, obviously, this should be a very strong year in all of our regions. But there were, as I pointed out before, a number of years where farmers were delaying purchases and put off replacing and updating their equipment. So we think there's more than 1 year to catch up. And all the demand that we're projecting this year, we would not get them back to kind of a normal fleet age. So we think there's opportunities beyond 2021 for a healthy demand in our industry.

So shifting gears, I want to talk a little bit about some of the initiatives that you laid out at your analyst briefing this year. And Andy, you talked about those in sort of the 4 key buckets that help you track to this targeted 10% mid-cycle margin. Those big buckets being growth, optimization, productivity and investment. And I want you to touch on each of those, but maybe I'll ask it through a little bit of a different lens. So when we think about the combination of these initiatives, the work that you're doing in South America really exemplifies what this can look like on a portfolio basis. So I'm wondering if you can talk about what you're doing in this region, the investments that you're making, both on the product side as well as the manufacturing front, and how that rolls up into helping you achieve this 10% corporate margin target?

Sure. So South America was one of those optimization initiatives that you pointed out. So we have had really below our standard productivity margin performance there over the last few years, driven by weak markets and a transition to some new product portfolio and introductions that we've done in those markets. And so we are in a position where we were losing money in South America for a couple of years and obviously needed to correct that. So we've done a lot of good work in terms of updating and providing -- getting a full line of equipment back in place. We had replaced and modernized our product offering, but discontinued some models that we felt like we needed to put back into our portfolio so that we're really still serving the full customer base and so we've been able to do that. So our portfolio of products is really strong right now. We have new technology, and we also have kind of the old heritage lines that are for cost-conscious customer. And so we really feel good about our product line. We've also been really focused on going beyond just selling tractor combines, but really having a much broader portfolio of products to sell. The margins are typically going to be better on some of those complementary product lines. And we had really strong success in our planter business. We -- as you know, we acquired Precision Planting a few years ago, and that's a very strong business with leading innovations in planting technology. And they sell a lot of that equipment on a retrofit basis to existing equipment. But we've taken that technology and put it on a new plantar we call the Momentum planter, and that planter, we've introduced in South America with great success. So our growth in planters has gone up. We also have introduced some new sprayer models and our spray business is up. We're doing better in the grain and protein sector. And then part of those strategic growth goals was to grow our parts business, and we've been able to do that in South America through improving our fill rates, which is how often we have the parts and deliver them on time. So our on-time delivery of parts to our customers is gaining confidence. Our customers are gaining confidence in us. So they're ordering parts from us. And so we're really improving all the metrics there, and that's helping us grow our parts business. So a lot of high-margin aspects of the business are growing, and we're also working on improving the core products, the tractors, combines, and we're making progress there as well. So it's been good. We -- as I said, we were in loss position. This year, we should be in that 4% to 4.5% to 5% margin range. So over a couple of years, really getting back to respectable margins. But we also believe that there's a lot of room to grow there as we continue to work on our cost structure, grow these complementary product lines. I think we're also growing -- introduce Fendt in South America to have a more premium line there. That's going quite well. So a lot of things we're still working on. So it's a work in progress, but we are pleased with the progress we've made so far.

Yes. And if we were to put some time frame around that, I mean, what stage do you think we're in terms of maybe introducing the global platforms or getting that local manufacturing footprint? Are we sort of middle innings, later earnings? How should we think about that timing-wise?

Well, we're certainly ahead of schedule right now, and the markets helped us with that and great work from our teams down there. But I think, a little bit market dependent. But I would say we're kind of in the middle of where we want to be right now. There's still a lot of work -- lot of work still to be done.

Okay. One of the items that you mentioned in talking about the profitability of that region is on the parts and availability. The other piece of this being on the technology front. So you talked back in March about wanting to double your Precision Ag revenue from $400 million in 2020 to $800 million over the next 5 years. Can you walk us through how you intend to get there? Sort of what investments you're making? And how we should think about the cadence of that growth? And what it means from pricing and margins?

Sure. There's really 2 aspects, or there is more than 2, but let me divide it into 2 aspects of that revenue that we've discussed, the $400 million, half of it or a little more than half relates to our Precision Planting business. And so Precision Planting, again, was a company we acquired, I think, in 2017, and we have doubled the growth -- doubled the size of that company over that period of time. And what Precision Planting does is really apply innovation and their focus has been on the planting cycle. They built in innovation really in terms of how really automating the decision-making about what seed to plant, how deep and how far apart the seeds to plant. And so it's making individual decisions as you go down the field rather than kind of a peanut butter approach that farmers used to make. And that really enhances the yields for our farmers if they use this advanced technology. So the innovations that Precision Planting is bringing to the market is really helping that business grow. As I said, already double the revenue. We expect to double it again. And Precision Planting is really one of our key innovation engines that are going to start getting into some other aspects of the crop cycle beyond planting as well. So think there's good growth there. We're also expanding precision planting internationally. That was basically U.S. business with some presence in South America when we acquired it. We've grown substantially in North America and Asia, and we're just getting started in Europe, and the sales from very slow -- low base, doubled in the first quarter over a year ago. So seeing some trends in Europe as well as we expand the capabilities, expand the distribution of the Precision Planting business. So that's -- half of that opportunity is how we keep growing Precision Planting. And as a reminder, everyone, that business usually runs with kind of aftermarket margins. So it's a margin enhancer along with the growth. The other part of that Precision Ag revenue that we mentioned is capabilities that we utilize on a lot of our equipment. So guidance, telemetry, connectivity type, additional monitors and data collection, all those kinds of things that enhance the capabilities of our existing equipments either by automating certain functions or providing and gathering more data to allow farmers to make better decisions, improved yields and outputs and costs and things like that. So a lot of this technology that we've developed is just coming into acceptability into the market. And so that growth can come from new innovations, but also with expanding take rates. So as we -- as this technology becomes more understood and more customers demand, it's going to be on a higher proportion of what we sell. And so it's additional revenue that comes in. As we sell our new equipment, we'll have more of these options that will be put on the equipment and that should deliver higher margins and more revenue to us on a per-unit basis as we go forward.

So as we think about that opportunity for technology, certainly, producers today aren't short of options on things that purport to give them better yields or higher savings. So how does AGCO think about the competitive environment as more of these smaller start-ups gain access to capital, whether it's through SPACs or some of the corporate venture capital that we've seen? How do you think about your own make versus buy decisions? And are there specific areas where you think you need to invest to either maintain market share or maybe leapfrog a competitor from a technology standpoint?

Yes, it's a dynamic area, as you pointed out, and a lot of new participants developing technology maybe in 1 area, 1 issue that they're trying to sell to a certain type of customer. And so we're obviously dealing with a more broader scale. And so what we've done is really matured in terms of how we're managing this. Whereas before, we were more of just the integrator, using third-party technology and putting it into the equipment. Now we're developing more of on our own. So I think you'll always see us have a mix of make versus buy. For instance, on guidance, we were really just buying it from a supplier. Now we buy certain components like receivers and things like that, but a lot of it is integrated into our equipment that we've developed. And so I think you'll see the same thing as the technology moves up, the maturity and acceptance curves, we'll probably bring some more of that in-house. But the new technology that's coming in, we'll continue to partner with some of these companies that develop some of this technology. So I think there will always be a mix. We don't intend to develop everything, but we'll certainly be an important partner for a lot of these new companies in order to provide an OEM that can utilize some of their technology integrated into our own equipment. So it's really an interesting new area for us. We've -- as you -- in our strategy, you've noticed that we've separated that out, and we have a senior leadership over Precision Ag, [indiscernible] Crawford. And so it's becoming an extremely important part of our business and a big opportunity for growth, and we've been really developing our capabilities over the last few years in that area, and you'll continue to see us do that.

Great. So obviously, with this focus on growing the business profitably, AGCO has had a long history of strong free cash flow conversion. You recently announced a 25% dividend increase, return to buybacks after suspending that during the pandemic. But you also announced an inaugural annual special dividend, which will result in the company effectively returning all free cash flow to shareholders based on your guidance this year. So can you walk us through that process with the special dividend, how that fits into your overall capital allocation framework in terms of returning cash to shareholders as well as funding some of those internal growth investments?

Well, sure. So what we've done is really expanded the mechanisms we're going to use in terms of returning cash to shareholders. Our criteria and process are going to be the same as we've done in the past. Our first priority is investments and the capabilities of our own company investing in new technology, new capabilities through capital expenditures, our engineering expenses, things like that. So always the priority is investing in what we need to grow and expand AGCO. We also will remain opportunistic on acquisitions. You've seen us do that in the past and no change there. Acquisitions are obviously hard to predict. And so you just -- you're not sure when you'll have those. But when they do, we want to have a balance sheet and cash flow and liquidity so that we can take advantage of any opportunities there that we see. So that's not changed as well. Beyond that, it's obviously, we want to return cash to shareholders. We want to maintain appropriate amount of leverage on our balance sheet for our type of company. And so that's what this is mainly about is rather than in the past, we just used share repurchases solely for that with a kind of a modest dividend. We've increased our quarterly dividends, more cash will go out on a quarterly basis. And then we still in 2021, plan to do some share repurchases. But beyond that, where -- we've introduced this new variable special dividend. And so that will give us another mechanism to return cash to shareholders. And so we've announced the first one that will be paid here in the second quarter of this year. And then we would expect future ones to be announced and paid probably in the first quarter of each year. So we'll see how our year goes, see what our cash flow is, see what acquisitions we've done, what do we see coming ahead in terms of cash requirements, and then we'll make a decision on what size and extent of what kind of special dividend pay.

So just switching gears here in the last couple of minutes. Our platform, as you know, sustainable growth and resource optimization. We have an interest in understanding sort of some of the similar trends that we're seeing in population growth and consumption patterns playing out in the agricultural space in terms of limiting the impact on our planet's resources. And certainly, as we look at some of the net zero commitments that companies like General Mills or Danone have made, these are targets that require a certain level of commitment on the part of the grower. And some of the pushback that we've seen in response to the Biden administration's climate smart agricultural proposals is the notion that you can't really achieve sustainability on the backs of the farmers alone. So against that backdrop, AGCO has outlined sustainability as a key pillar of your corporate purpose. So I wanted to ask sort of an open-ended question here. From a portfolio perspective, can we talk about some of the ways that AGCO is investing in products to promote sustainability and resiliency?

Sure. We have a really -- as you point out, agriculture is so important in terms of this whole topic in terms of carbon sequestration and carbon footprint and things like that. So we think we have a really important role that we can play. And so we're doing a lot in terms of how to educate our farmers in terms of things that they can do that allow them to be more environmentally responsible. And in terms of our crop tours and training events and things like that, we're making this one of the topics that we're covering now in terms of what they can do to capture carbon in the soil and what kind of techniques should they use, what can they do with their equipment to enable that. And overall, all of our equipment is aimed at improving the productivity for farmers and the yields, but also it goes to being limiting resources. So in terms of fertilizers and pesticides, being more precise with our sprayers with nozzle -- better nozzle controls, limits the amount of chemicals in the soil, which is environmentally helpful as well. So there's yield improvements that we can offer to farmers that really help them and that's a real positive for our environment as well. So a lot of areas that we have fuel-efficient -- efficiency on all our engines. So I can name -- keep naming up that we have in our business that help that. So in terms of AGCO, what we want to do is put a better spotlight on a lot of the things that we are doing. And then, as you point out, make it really an important part of our strategy. And so we have a number of pillars that we're focused on in terms of environmental health and safety, in terms of safety of our employees, soil health and carbon capture. We're going to reduce our and commit to reducing our carbon footprint through -- and using more recycled energy and things like that. So there are a number of things that we're going to do. And then we're also in the equipment that provide -- we provide the protein producers. And so we're very focused on animal welfare and how our equipment and our training can help customers deal with those requirements that are very important as well. So number of things that we're doing, and it all kind of fits in with our strategy and support of our farmers because these are going to be important issues that they're going to have to deal with. And we want to really help them be proactive in making sure that they're ready for those. Greg, did I miss anything that we should cover?

No, I think you hit the highlights, Andy.

Great. Well, I think that, that's a great place to leave it here. Gentlemen, thank you so much for joining us today, and thank you, everybody, for your time. Hope you have a great afternoon and enjoy the conference.

Thank you, Kristen.

Yes. Thanks, Kristen.