AGCO Corporation (AGCO) Earnings Call Transcript & Summary

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Great. Good -- thanks, and good afternoon, everybody. I'm Seth Weber. I'm Wells Fargo's machinery analyst. Very pleased to be hosting this chat today with AGCO, which many of you might know is the biggest pure-play farm equipment company out there, which frankly should have it pretty nicely positioned for a farm equipment cycle that appears to be percolating. So with us today, very pleased to have Greg Peterson, who I think is actually still trying to get connected, Head of Investor Relations; and Seth Crawford, who is Senior VP and GM of the company's Precision Ag and digital business, which is obviously very, very topical and top of mind for many investors. That includes things like the Precision Planting business, the Fuse smart farming, digital parts, among other areas. And for those who don't know, Seth joined AGCO in 2019 after a couple of decades at one of AGCO's larger competitors. So the outline for today's call, for today's chat, is meant to be about 30 minutes. It's meant to be interactive. If anybody has any questions, please e-mail them over to me at [email protected], and we'll try our best to weave them into the conversation. So Seth, I think -- I'm not sure if Greg is with you, but welcome and thank you. Thank you for participating with us here today with the Wells Fargo conference.

Yes. Happy to be here, and good to meet you and good to be part of this session. So thanks for having us.

I see Mr. Peterson. I see Greg has made his way on as well. So Greg, welcome to you as well.

Yes. Seth, good to see you, and congratulations on your new role at Wells Fargo.

Thank you very much. Happy to be here and pleased that AGCO could participate this year.

I thought maybe just as -- Greg, since you're on, I thought maybe just to help kind of frame the backdrop of this call, AGCO just reported about a week ago, I thought it might be useful just to sort of talk for a minute or 2 just about current market conditions, what you're seeing in the market globally. The company reported and you raised guidance for the full year just off the back of the strong first quarter. So maybe if you could just sort of use that as a jumping-off point to talk about what you're seeing in global farm markets.

Sure. Thanks, Seth. So yes, we came into 2021, we thought, actually in a good position in virtually all of our major markets. We did see a nice move up in commodity prices as we move through 2020. Grain inventories moved down as the global economies did start to recover from the pandemic. And so that was favorable for farm economics. As we started this year, we were actually in a position in both North and South America in terms of markets for the big professional farms, well below mid-cycle. So we were at a good place in terms of potential demand. We were in a situation that equipment had aged beyond what was normal. And in both North and South America, we started to feel some of that replacement demand kick in at the end of last year. So being well below mid-cycle, we have opportunities for the big farm space anyway to see some growth this year. If you look at Europe, Europe's been more mid-cycle, more normal demand over the last 2 or 3 years, and that is very typical. Europe tends to be more stable. The subsidy scheme in Europe tends to be a bigger part of farm income over there. Farmers tend to be a little better diversified in terms of crops and the revenue stream, so a little more stability in Europe. So this year, we are looking for growth. There's some modest growth in Europe as those favorable farm economics are expected to influence demand, and then stronger growth in both North and South America as we see that equipment replacement for aged fleets. And the other kind of overarching kind of tailwind for our industry is the introduction of more technology, so a lot of talk about precision ag and digital capabilities. And that's -- we're very fortunate to have Seth Crawford with us. I know you introduced him, and he's been our Head of Precision Ag and Digital since January. But really, he's been a big part of our Precision Ag team for the last 2 years. So I think maybe I'll turn it over to Seth now and let him give a couple of minutes of his take on what our priorities are, Seth, if that's okay for you.

Yes. Greg, thanks for that. And as I mentioned, we're excited to be part of this conference and really excited to share the story of AGCO because I think if you look at where we are, we just named a new CEO in -- named the CEO awhile back. But he took the office in January 1. And you don't have to listen to many calls with Eric on board to know the importance he places on Precision Ag. We are going to be a leader in this space, and the reality is we've made great strides over the years. I've been in this industry, both the ag equipment and precision ag industry, for 24 years, it will be, next month. And what's very clear is that this trend is going to continue as long as we keep innovating. And it continues to grow and grow. And farmers around the world are insisting that we make the advancements. And as we make the advancements and prove they're reliable and prove they're easy to use, they're taking them up. And I'd say AGCO really started to make the strategic shift about 5, 6 years ago when we moved to develop our own capabilities. Prior to that, for many years, we had just simply outsourced a lot of the technology to third parties. But now that we're in-sourcing, we're building our own electronics architecture on our machine, building our own machine control capabilities. In integrating that, we're seeing the demand for that rise to the point where on our large ag equipment, we're seeing nearly a 100% take rate on our premium products. And even on some of our mid-spec products and some of our lower horsepower products, we're seeing very high take rates. So the acceptance is high. The demand is high. And then along with that, not just fulfilling the farmers' needs and delivering value, it brings in very nice margins for us with growth. And then to double up on that investment, in 2017, we bought Precision Planting. So we're the leader in the retrofit business. So with our OEM Precision Ag products, we're able to outfit our own equipment with our tractor brands. And then on the retrofit business, the full installed base is our market, so lots of upside there. And so that's the baseline of where we are today. And we're going to continue to invest and continue to grow.

Right. That's a helpful background, Seth. And I mean, can you talk -- I mean, I'm sure you've heard, there's obviously some perception among investors that AGCO is lagging behind in North America, like a Deere, for example, just because Deere has so much bigger installed base. And this is -- a lot of this is a data capture story and things like that. And so how do you respond to that concept that Deere has this impenetrable moat around it just from this installed base? And do you think that's accurate? And just maybe talk a little bit about that.

Well, I think it's probably best to just talk about the results and what we're seeing. With Precision Planting, would we pick that up? You see the industry started to really push high-speed planting in around 2017, but Precision Planting had that technology 3 years prior to that. And that's the innovation we have and that we're growing it. And then when you look at that, with Precision, we're covering more rows than we ever have. We're seeing, again, about a 25% growth rate in '21 in that technology. So once again, we're outpacing the industry, which is something that if you look at the last 3 years, both on the retrofit side and our Precision Ag that goes on our OEM equipment, it's outpacing that. And then you look at our market share gains in large tractors in North America, you specifically asked about that, and the growth with our planters and the growth with our combines, we're growing in each of those categories. So to say it's impenetrable, I guess I'd like to say we find a few cracks. And the good thing is it's not finding cracks and winning with low-cost products. I mean, these are the products that are the highest featured, most tech-ed out products we sell with the full suite of products. So we believe we have what the farmers need, and they're buying into our value proposition.

Right. Okay. I mean, you've talked about a goal of using Precision Ag to help farmers boost net income by about 20%. I guess, can you give some color on how the whole platform kind of comes together to optimize the farmer's business? And what type of scale is really required to get to that type of number?

Well, the good thing is you can get there incrementally. It's not like you have to invest and turn over an entire fleet to hit that 20%. If -- when we look at it, you start through the crop cycle. And on the planting, when we talk about proper seed singulation, so getting -- instead of having 2 seeds in the spot, getting them spaced in the soil right, getting them to the right depth, getting the right downforce on that soil so you have the perfect seabed to then help it emerge, there, the farmer can increase their yield and see an incremental gain there. Then with the proper nutrient placements, that's also giving us room to grow. And then the appropriate timing throughout the season of nitrogen, the appropriate application times, each of these will help you improve. And so that's what's nice about it. We sell the machines where if they want to invest in a full new planter or a full new combine, they can do that. But on the planting side, say, the farmer has $50,000 to invest between this year and next year, he can upgrade the planter and put some of the technology on and get a couple of points of gain and see a payback that's a very short period of time. So the business side of this for the farmers is very, very strong because they can go the retrofit route or they can go the new machine route. Either way, we have that available.

Right. Okay. Now you've talked about -- AGCO has talked about growing its precision and digital business, basically doubling it from $400 million or so by 2025. Can you talk about what's involved with that and I guess the implications for the model? And maybe there's 2 ways to sort of approach this. One is maybe talk a little bit about R&D and engineering spend. Obviously, from a dollars perspective, you're smaller than some of the other companies that are out there. And will you have to raise your investment materially going forward? And then I guess the second part of that is talking about the road map and what are the obvious kind of next steps for the product portfolio?

Yes. Sure. I'll start, and then Greg can add on or maybe correct if I go offtrack. But we already spend at a higher rate as a percent of sales on the Precision Ag portfolio. With this audience, you probably expect that. And yes, it's very real. But we look at this in really 2 big buckets. And one is what's the Precision Ag product portfolio that we're going to put on our machines that are going out the door, so the tractors, the combines, et cetera, and how are we enhancing that portfolio? And there, what we've done is we built the common architecture across our machines so that way, whether it's a Fendt or a Massey tractor or combine, whatever it might be, we then have the Precision Ag products that can build upon that. So our guidance product or our turn automation or our rate and section control products that are all what we would consider part of the machine control, those all can be added on. And then there are additional features that we're going to bring to expand that portfolio. So we're going to continue to grow that portfolio. The -- what we call Fuse, what -- the products that serve our internal brands, that makes up a little over $200 million in that area. And so we're going to expand that portfolio. That's one piece. And so that will enhance our total sales. We're going to develop our channel further. Our dealers are very much on board with us. They see the growth. They know they need the specialization. And when they have the specialists in place, they see that we're simply closer to the customer and better able to solve those problems. And so that customer stickiness is enhanced. And then final piece in the Fuse area is our global penetration. So we have a very strong market penetration with the Fendt brand in Europe with the technology adoption. With the other brands in Europe, we have an opportunity for growth in North America. We're bringing Fendt over. We think that they'll continue to carry a very high take rate. So we'll see the growth there. And we have -- on the rest of the portfolio, we have opportunity to grow that. And then in South America, we've -- it's our last market to actually transition to our own portfolio. So we have a lot of upside in South America, albeit it's a smaller market for us than North America and Europe, but we see a lot of upside. Then when we look at our retrofit business, again, very similar to our Fuse portfolio, it's about $200 million in revenue. And both of these areas are growing at about a 15% to 20% year-over-year revenue growth rate. And here, number one, it's continuing to innovate. If you're going to win in retrofit, you got to innovate. And we see a strong pipeline coming. The other piece is we're taking this globally. Our -- I think we even talked about this in our results, during our quarterly call. The growth rate that we're seeing in Brazil and South America as well as in Europe are very, very strong for retrofit. We wanted to grow that. We're seeing that. We still have growth left in North America. So all of those are good. And then the other piece that's part of our mindset as to where we're going long term is we want to get beyond just the planters. We want to get into the seabed preparation. We want to get into spraying. We want to get into more in the fertilizer placement, harvest. We see all of those areas as opportunities for growth with retrofit. So that's why we feel pretty comfortable saying we're going to double this overall business by 2025.

Okay. That's a lot. And it's a lot -- a lot packed into that answer. Will some of that growth also come from inorganic, whether it's M&A or joint ventures? Or do you expect to do most of this organically?

I won't rule anything out. We, for sure, are continuing to invest organically. But if something good comes along on the inorganic side, we'd definitely jump on it.

Okay. And then just -- you touched on the Precision Planting business, the retrofit, it's largely retrofit model today. I guess 2 questions. What's involved with further penetrating the business in Brazil and really expanding it more into Europe? Is it just more feet on the street? Is it educating the dealers? Is it educating the farmer, the value proposition to the farmers? And then I guess the second question is, at what point do you start to see more kind of just OEM business on the Precision Planting side?

Sure. A very good question. So with Precision, the first thing is that business has been very focused on North America for -- since at the start. And so Precision has a great portfolio to -- that's going to -- on our AGCO Momentum planters, but they both focus heavily on the installed base of Deere planters, Case planters, Kinze planters, you name it. Any of the brands that you know in North America, they can retrofit. And they've got the product ready to go on the shelf, and we're growing that as well as innovating further. When you go to South America and Europe, those -- all the brands I named, very few of them have penetrated those markets. And so you just get a different set of competitors. And so what we've done is, in some cases, we've built up alliances. And we actually supply over 20 OEMs today out of Precision Planting. And that number is growing, and the amount that those OEMs are buying is growing. But with that said, that's still a small portion of our business. It's -- roughly about 20% of our business is actually direct to OEM sales. And so you hit on the point, what we're doing in Brazil, what we're doing in Europe, we're hiring individuals and growing our sales force because one -- it's not only a high R&D space as far as the innovation, it's also a high SA&G space because the sales force, it's different than your traditional dealer -- equipment dealer model because you have to get out there. You have to get in the field. You have to have a very active role meeting with the farmers, for sure, training our new sales reps, training our dealers because it's a very different -- you almost have to be part agronomist and then part equipment person to really help the farmer get the absolute most out of it. But the model works very well for us. So the -- while the costs run higher in that model, the margins run significantly better in that business. And the model is working. In Brazil and in Europe, the model is working. We're seeing the revenue growth, and we're seeing the margins come along with it.

Seth, the growth in Brazil will be faster because the crops that are grown in Brazil are soybean, soybeans are the most important crop; corn, there's a lot of corn grown. And the product set, the feature set that Precision Planting has today were tailored -- they grew up in Illinois. So not surprisingly, they were tailored to the way corn and soybeans are planted in North America. And so they'll do quite well in Brazil and Europe. There's a decent amount of corn growing, but the biggest cash crop is wheat. And that's planted differently using air shaders and different methods. So we're working on technology for the crops that are more specific to Europe, but we'll also have success with our traditional product offerings. And then as you go further east in Europe, there is more opportunities. So growth rates will be nice in both places, just a little faster in Brazil.

Right. And can you talk a little bit about, Seth, you mentioned the margin -- over time, these are high margin -- it's a high-margin opportunity for you. I mean, can you just conceptually talk to like at what point does that cross over? Because it does seem like you're making big investments here today. So is there a couple of years down the road where this becomes margin accretive? Is it margin accretive to the company today? Any -- is there some sort of critical volume number that it needs to get to? Or is it more of the installed base needs to get higher, then you get more parts business? How should investors really think about that?

Let me start, Seth, and I'll let you finish. So half of the business that Seth talked about was our Precision Planting business, and that today is very nicely profitable. So it's comfortably in the double digits. So it's ahead of our company average, and it's definitely accretive to our overall margins. And as we layer on business there, the margins tend to be more -- may look a lot more like parts margins as opposed to finished good margins. The rest of our business, yes, you're right. In terms of our Fuse business, we're building a common electronic architecture. A lot of that is done for North America and Europe. It's still work in progress for Brazil. But the good news is, and I'll let Seth talk about this, but as we layer on features and functionality on that architecture, a lot of the opportunity is just unlocking features that the equipment already have so that we can turn on revenue streams without really much incremental cost. So Seth, maybe you can provide a little more color around what those features are and maybe talk about our guidance -- internal guidance in software development.

Yes. Absolutely. So for sure, Seth, it is accretive today, as to hit that, that Greg is saying, for both the Precision side and the Fuse portfolio side. And as we design it for the future, with that common architecture and our machine control products, once the customer gets the basic components on there, we have features in there that they can unlock over time. And with that, many of those features are the full margin because the cost is already embedded. There is no incremental material costs required for us or for the customer. So -- and that's what's really impressive about this is just the upside. And then the other piece is customers are really basing their purchases more and more on Precision Ag. And so having this, the portfolio is strong and bringing -- as part of our new strategy, bringing Fuse and Precision Planting closer together, we feel we have a very solid foundation that we're growing upon that will continue to be accretive. And I think you'll see that results, and I know you hear that on our conference calls about the margins we're realizing today.

Right. Right. Okay. We have about 1 minute left. So maybe just the last question, is there anything you feel like you need to do from a distribution perspective, to improve the distribution change from how you've been going to market historically or anything that you feel like that's sort of the next step to the evolution of the business?

Yes. The -- what we're doing there is we go through 2 channels. We have a retrofit channel, and we have our OEM channel. With the OEM side, what we're trying to drive is further specialization in Precision Ag. Like I said, we made the shift about 5, 6 years ago to doing a lot of this in-house, our technology being the integrators. With that comes the development we have to do with our dealers to be the specialists rather than turning those customers to a third party. So they're investing in specialists. They're stepping up their capabilities, and they're buying into this. And they're full on with us in this. So that's good. On the Precision Planting side, there, it's developing our global channel because we're just venturing out of North America. And then in North America, it's taking the professionalism and the size of those dealers up as that business grows, ensuring we can support that larger base. In Brazil and in Europe, we're very much establishing the dealer network and making sure we get the right dealers that are truly ready to go out in the field and demonstrate products and sell that full value proposition. So I'd say we're managing that dual channel strategy, and we plan to continue that going forward.

Super interesting. Okay, guys. Unfortunately, we're -- that 30 minutes went by fast. So Seth and Greg, appreciate the time, and thanks for participating. And good luck with the rest of your meetings today. Thank you.

All right. Thanks, Seth. Take care.

Bye-bye.

Thank you.