AGCO Corporation (AGCO) Earnings Call Transcript & Summary

Well, good morning, everyone. Thank you all for joining us here today at the Virtual 2021 CSI Conference. We are very pleased to have AGCO with us again. And presenting is Andy Beck, Senior Vice President and Chief Financial Officer. We'll keep this fireside chat fairly informal. I'll have some questions. We'll also have an opportunity for anyone in the audience to ask questions through the web browser. And before we kind of get into those questions, Andy, we'll turn it over to you.

And I guess the first thing I would ask is kind of a quick overview on such a strong first quarter, very good start to the year. You increased your guidance. I'd love to hear -- kind of hear your backdrop or your discussions or thoughts around backdrop for the current ag demand market as we sit here today.

We're getting a background reverberation of what you're saying, operator. I can hear a repeat of it.

Great, everybody. Thanks and welcome back. So I guess I'll kind of start off again at the beginning. Andy, we'd love to kind of get your take on the very strong results coming out of the gate, Q1. You've increased your guidance. Love to hear kind of your thoughts around the current backdrop for the ag equipment market as we sit here globally.

Sure, Stanley, and thanks for having us participate in your conference. In terms of market conditions, really, across the board, globally, they're relatively strong right now. Our business is driven a lot by farm income. And with commodity prices where they are, our farmers around the world are seeing opportunities for strong income levels this year. And so that's giving them confidence to make investments in their longer-term assets such as farm machinery. And so as we look at the markets, there's been a number of years where we've been -- retail activity has been really below average, and so now we're seeing a lot of farmers take this opportunity where commodity prices are high, their forecast for their income and cash flow levels are high, to make those investments and catch up maybe on some refreshment of their fleets that they've been putting off for a number of years. If we go by region, I think there are some differences that we should point out. Let's start with the Western European market, which is the most important market for AGCO. About half of our business is out of Western Europe. The year-to-date market is up about 20%. Now you have to remember that a year ago, April, we were all shut down because of COVID. A lot of our -- a lot of the activities within the market were suspended, so there was a big disruption in demand and supply last year. And so that's affecting a little bit the comparables. But overall, the market is up in Europe, and we expect that to continue for the rest of the year. The Western European market is always one of the more steady and stable markets. We don't see as big cyclical changes in the market in Western Europe. They're a little more -- have some more income sources, more diversified income sources with the cap money that comes in and also, I think, not as reliant on just one set of crops but a lot of more dairy, livestock influence in the results and the demand profiles of our customers there. So for that reason, we don't see as big a swings in the market, but that market seems to be up. We had -- the market recovered quite strongly in the back half of the year last year. The German market was up because of some incentives they put in place. And this year, because of commodity prices, a fairly strong dairy situation right now, we're also seeing that market continue to be strong. Our order situation is good there as well, and so that's our -- that demand is feeling strong and should continue for the rest of the year. North America is where there was really a cyclical downturn. Really, post-2014, market really declined. We've seen some recovery but really not a cyclical upswing. And the large ag market has been really below a 10-year, 7-year average for a number of years. And now we're seeing, with the higher-income levels of farmers, the farmers now want to replace really and refresh their fleet. Their fleet age had extended, and this is an opportunity for them to start to catch up on some of those purchases that they deferred. Year-to-date, large ag market, North America is up about 17%. And the market feels like there's good demand for the rest of the year there. In South America, similar situation. Farmers are extremely good situation profitability-wise because of the high commodity prices. Along with the weaker real in Brazil, farmer margins are very good, and they're taking advantage of the situation to invest as well. So that market's up over 20% year-to-date. And so across the board, good strong retail demand, and we expect that to continue for the rest of the year.

It was -- all of this is coming at a time -- over the past several years, I think you all have done a tremendous job to really refresh and upgrade your entire portfolio of products. And I think you could argue that it's -- probably AGCO has the most complete higher-horsepower professional farmer sort of offering that you've had in quite some time. I'd love to hear about that dynamic of what that's playing in the marketplace in terms of market outgrowth, for starters. And then kind of secondly, I would love to hear some of the thoughts around small ag versus large ag as we're sitting here today.

Yes. In terms of our product lineup, I think we -- as you say, we feel really good about where we stand right now. We have always had a strong tractor lineup. The Fendt tractor is a real premium seller in the market. Premium technology brings a lot of efficiency fuel economy to the customer, so there's a return on that investment of buying a premium equipment. And we're taking the Fendt equipment, that premium sector product, which is very strong in Europe, and now we're migrating and taking that technology to North America and South America. So that's going quite well, and we feel really good about the position of our tractor offering. We also have outside the premium sector very good products in terms of what we sell within Massey Ferguson and Valtra and the selected markets that they're participating in. So we cover not only premium, but we are covering the broader market as well with those brands. So that's always, I think, been our strength, and we're continuing to invest heavily to maintain that strong position. Where I think things have changed for AGCO is in terms of the other products that we would say we need to be in terms of being a full-line provider of ag equipment. In terms of combines, that's been a relative weakness for AGCO in terms of market position, but we've developed a new combine that we have really been selling now for just a couple of years and kind of limited basis. It's called the IDEAL Combine. We're selling that now in all of our major markets. It -- in side-to-side tests with competitive machines, it has very good performance in terms of grain quality, yield enhancement, capacity, all those kinds of things. So we really think we have a product now that can stand next to and compete quite well with the stronger players in the market, and we are really excited about introducing and continuing to expand our combine offering to our -- through our distribution. And then on planters, that had not been a strength of AGCO's as well. We bought Precision Planting in 2017. That brought a new level of technology and innovation on the planting cycle to AGCO. And not only are we being successful growing the Precision Planting business, which sells mainly in the aftermarket or retrofit market, but also providing that technology into our OEM planters. And so we're successfully driving planter sales in South America. That's one of the reasons you've seen a recovery and improvement in our results in South America is selling a broader product line, including these new planters. We call it the Momentum planter. And now we've introduced that planter in the U.S., and so we're just in our first season of selling that. So -- and we've always had a good sprayer lineup that has been an important part. And so from a crop cycle, full-line equipment, we now think we have -- we definitely have the best lineup that we've ever had. And that lineup, we think, stands toe-to-toe with our competition very well and is going to be a source of growth for the company in the future.

And margins as well.

Exactly. Yes. Those -- a lot of those complementary products can carry higher margins. The large ag sector is where the margins are stronger. Now you did mention small ag or smallest machine equipment. That's an important sector in some markets, North America particularly and South America in some cases. That market in North America remains strong. It's not really an all-agriculture base. It's more driven by consumer spending and things like that, and I think it's caught the demand curves that we're seeing with a lot of recreational equipment and things like that. It's kind of similar to that, in that the demand for these smaller tractors is very high, well above the 10-year average and really continues to feel strong for the rest of the year. We keep predicting that market will somewhat pull back and go back to maybe where we've seen the demand levels before but still has legs, at least what we see right now.

Great. And then in terms of the lower unit levels we've seen on the high horsepower part of the market, is it still kind of your thought that we would get to "a mid-cycle level" by the end of this year? And then in that context, how should dealer inventories wind up? I know they've been very lean. You've all made a very conscious and wise decision to -- and the industry as well, to bring that down. Where do inventories line up at that point?

Yes. I mean I think we're approaching or going beyond mid-cycle at this point. North America, I think, will -- and South America, you could point that there's a potential for that to be above a mid-cycle point this year, which is great news for us. And then Europe, I think, is about at kind of mid-cycle levels. So we've seen a big turnaround, obviously, this year in terms of -- particularly the North America market. The South America market really started surging earlier last year, and now we're seeing the same situation in North America. So that's kind of where I think where we stand there. Your follow-up question was on...

On inventory levels.

Yes, inventory levels. Sorry. The dealer inventory levels, we put down at the end of last year, we targeted a lower level. We felt that that was an opportunity for us to bring our inventories down to be more efficient, turn the inventory faster, reduce the cost of carrying that inventory for ourselves and our dealers. And that was a successful approach that we had last year. This year, inventory levels are remaining quite low, and it's probably driven more by supply and demand at this point. So the demand is remaining high, as we just talked about. And I think we, along with our competitors, are having a number of issues with supply right now in terms of keeping up with our production rates and having a number of issues in terms of component availability and things like that. So for that reason, I would say that you will see inventory levels remain low in all of our regions this year. In terms of the supply situation, we're running a bit behind right now in terms of our sales in the second quarter. We're having a number of issues with component availability in a broad array of parts and components that we're waiting on. We're pushing very hard to see how much we can catch up here in the -- by the end of the second quarter. All of these disruptions or delays in getting parts, we think, are really timing issues, so don't really affect -- don't think it will affect overall demand or anything like that. And we think our full year results are going to be achieved. But month to month, there's a lot of uncertainty right now about how many units we can get out the door because we're waiting on this part or that part and can't ship until we get all that in. And it's been quite a challenge here for us, particularly in the second quarter, and something that we're working hard to try to overcome as much as we can.

And you mentioned not having an impact or feel like you think you can manage through for the full year. Are you seeing any of these pressures ease? Is it -- availability is kind of loosening up as more markets are reopening? What kind of -- where is that confidence? Or where is the thought process there?

I would say the uncertainty level is as high as it's been, so I wouldn't say that we're seeing any relief yet. There's some hope we can get some more relief in the second half. But right now, it's day-to-day work to get to work with suppliers, see when we're going to get parts in and replan and try to figure out what we're going to do with our assembly and production schedules. So it's really, really a heightened sense of urgency for us that we're working on, on a daily basis. All our teams are pushing hard. But no relief yet. Obviously, We're hoping our suppliers can get the availability of labor, freight lines opened up, all these kinds of things to enable them to produce more or to get caught up. And those are obviously the key things that we need to happen to get to a more smoother production approach than we're seeing today.

Yes. I imagine that's a common theme that we're going to hear on the Q2 calls as well as to the rest of the comp season, for sure. But I guess, looking at '22, with the backlog, supply chain issues, it should set you guys up for another good year would be my guess.

Yes. I think the demand is there, so we expect to be able to work through these. Again, the timing is kind of uncertain. But for the most part, customers will -- these are big, long-term decisions for the customers. They're going to wait it out and get their equipment, and we're working with customers that need it for a certain application or certain work they need done. We're trying everything we can to help them through these delays. But for the most part, you can still see that demand is really strong, and that's going to carry the day.

And I would love to get -- you talked a little bit more about the technology stack and the Precision Ag. Lots of improvement, lots of adds over the years here recently. How do you all feel this lines up against some of your peers, and then kind of dovetails into the retrofit opportunity down the road, too?

Yes. I think we talked a lot about how important Precision Ag is going to be in the future, and farmers are really looking for how to be more productive, how to increase their yields, how to reduce their costs. And the focus is really on these additional technologies in order to help farmers achieve those goals. I think that what we're seeing is that AGCO has some relative strength compared to competition in some aspects. And then obviously, in other aspects, we're working to meet the new requirements. So this is an evolving and ongoing process to develop technology, integrate it into the equipment and have your customers and the adoption rates continue to progress. So this is something that we put in our new strategy as a focal point and really going to be an important part of our investment in the future and how our equipment works and operates in the future. Our biggest success story, so far, is obviously Precision Planting, which I spoke about before. It's a retrofit business. It is highly innovative in terms of precision ag technology. When you're planting a field, no longer are you planting the same seed at the same conditions in all parts of your field. Your equipment is -- now has the ability to really make single decisions about what type of seed and what depth and distance that you're planting that seed in order to really maximize the yield for the customer. And so we have been developing that technology, and we sell it in a retrofit kit, as I pointed out, that can go on all types of planters. And then we also sell it as part of our Momentum planter, which is part of our own product line. So that's our -- where I think we're really in a strong position. We've now got good connectivity technology to -- for fleet management, those kinds of things. That's an evolving technology that we're building. And our new combine also has a lot of smart capabilities in terms of sensors that help adjust the combine to the conditions in the field in order to maximize yield as well. So when we talk about Precision Ag, it's about data capture, connectivity, fleet management and also what we call smart machines, where the equipment is sensing, making real-time decisions about how to adjust and make the operation more productive or more cost efficient. And there's a lot more coming, and we know that that's an important area where investments will remain very high in the future.

To make a lot of this happen, I think the dealership and the dealership network and fostering that and building that out, with bringing Fendt to North America -- and I guess the globalization of Fendt, how has the -- I'm assuming the reception has been quite strong. How's been the uptake with dealers in terms of being able to get onboard with all of these technologies? Because it is very much an integrated package now that you're facing the market today.

Yes. I think you're exactly right. Distribution and our ability to service and support the equipment and the new technology is going to be an important part of the success for us and for our industry, so we have to bring our distribution network along in this journey with the new technology. And so that's part of the process that we're going through so that our ability to provide this technology, get it set up right, get customers able to use it and get the benefits that we're intending them to give is an important part of the process. So our dealers are getting more training. They're bringing in more expertise, and we're also providing more support to them in these areas as well. But the capabilities of the dealer is important. And that's why when we work -- you've mentioned the Fendt expansion in North America. We're putting the Fendt brand in our best and brightest, most capable dealers. Because as you point out, this is -- in order to be successful in the release of the new product, which is going quite well, customers are really going to be asking about is that dealer capable of providing the service and support after sale? And so we're working with our dealers. We've picked our best ones to sell the Fendt product. And so far, it's going quite well.

You mentioned on the technologies the kind of the -- the chance that you've had and the opportunities like buying Precision Planting, very low leverage. How do you all think about kind of the build-versus-buy sort of decisions that you'll have within the Precision piece? And someone recently announced partnership that develop spray technology kind of an AI capabilities, which I thought was very exciting. But I would love to hear kind of your thoughts on the M&A in the market there.

Yes. I think you're going to see us approach this in a number of different ways. We're certainly upping the amount of internal investment that we're going to do in development. Some of that's going to be integration work, but also we'll be developing the technologies in-house. But we're going to continue to work with outside companies that have certain technologies that we can adapt and using our equipment, whether that's sensors, vision equipment, those kinds of things that bring us to market quicker than if we were going to do it on our own. So there could be some M&A activity, could be a number of partnerships or alliances. As you mentioned, we've got one going where we're working on some targeted spraying capabilities, working with some -- with a number of companies in a collaboration effort on that. And so I think there's not one way to tackle this, and I think we'll use a wide variety of approaches to bring the right technologies at the right time to the market.

Great. We are running up against the 30 minutes. So with that, Andy, thank you very much for participating again. And to everyone in the listening audience, thank you all for joining and hope to see you in person next year at the CSI Conference. Thank you.

Thank you.