AGCO Corporation (AGCO) Earnings Call Transcript & Summary

All right. Great. Hello, everybody. I'm Steve Volkmann with Jefferies, and covering the machinery sector, very pleased to be welcoming AGCO for a fireside chat. So we have Andy Beck, the Chief Financial Officer; Greg Peterson, who looks after Investor Relations. As with many of these sessions, if you guys want to participate, we'd love to have that. I have a screen in front of me. You can type questions into your web page, and it will show up here. I will work it into the conversation. You can also e-mail me at svolkmann@jefferies.com, if you prefer. So gentlemen, welcome, and we'll kick it off with maybe some commentary, Andy. We obviously just reported a very strong quarter. Maybe you can just give us a quick rundown of what you thought the highlights of the quarter were.

Sure, Steve, and thanks for having us today. Yes, second quarter was a good strong quarter for us. I mean, really taking advantage of really globally strong markets. As commodity prices have increased across the globe and how our farmers' confidence level has gone up, and they expect to have a pretty good crop this year. we've seen demand really pick up for a number of years, particularly in North and South America. We've been really on kind of lean times in terms of the amount of equipment that our farmers are buying because their margins weren't strong enough to support new purchases. So now that profitability is up for our farmers. They're going to take advantage of these improved conditions and start to replace to some extent, an aged fleet of equipment. And so we've seen really particularly North and South America, very strong improvements in demand. And then in Europe, the demand is typically much steadier, but we're also seeing good strong increases. And this is against a really kind of an unusual year last year where our production facilities were shut down in the second quarter. And so year-over-year, really strong results that we were able to achieve. We saw margin improvement and growth, and we're able to increase our projections for the balance of the year as well.

And so we're 2 minutes in, let's get right to the supplier issues because that seems to be the topic of the day with everybody. I guess you guys saw your fair share of sort of supplier bottlenecks and so forth, sort of laying the cost side of it aside for now. Would -- was your production constrained? Do you feel like you lost some sales or some shipments, maybe they're just pushed to the right. But did you lose some revenue in the quarter based on that?

For sure, we did in terms of -- if you look at our order boards, our orders are really strong. So we -- our orders are double where they were a year ago. So our ability to determine what our revenue is, is not based on what orders that we need. We've got all the orders. It's just a matter of what production where we're capable of achieving to be able to invoice the equipment and get them to our customers. And we are seeing substantial issues that we're having to work through on a daily basis kind of managed all across our factories in terms of dealing with supplier delays, freight issues, all sorts of different issues across all sorts of components. And so it's really hard to predict and determine what your shipments are going to be in this week or next week. But as I said, we've got the orders. So if we're short this week, then we get some components in, we get the products completed, then they'll -- the revenue be picked up in the next week. So we're just working through these issues, trying to get them solved as quickly as possible because we got farmers and customers that want their equipment and need it. And that's our biggest driver to try to serve our customers and make sure that they're ready to go when they need their equipment.

So I'm guessing if you're having this kind of choppy delivery of various types of parts, and it sounds like it's many things, not just chips. That probably drives some inefficiency through your manufacturing base. Any way to sort of guesstimate the margin headwind in the quarter?

It probably wouldn't be that material, but it's certainly an issue. We're not -- we're having to -- we're having equipment run down assembly lines, maybe missing 2 or 3 parts. So then they get parked. And when those parts come in, we've got to go to a finishing station and complete those and then do the final testing to get them out the door. So there is some inefficiency there. There's extra time involved in every unit because of that. Is it -- I don't think it's that material where we could point to a big dollar amount, but certainly, we're not running the way we'd like. And the inefficiency shows up in cost, as you're pointing out, but also inventory levels. Our inventories are much higher than we'd like to see, and that's just because we've got a lot of unfinished equipment, we've got safety stock of parts to it that we think will need. And so a lot of areas of improvement if we could get the supply chain to be more predictable.

Okay. And then since you mentioned the inventory question, I'm curious, longer term, I feel like I've been doing this, gosh, almost 30 years now. I think you've been doing it as long maybe. There's been this huge focus on just in time, what's inventory is evil, one piece flow and yet. Now we find out that we'd probably all kill for an extra warehouse full of chips. And I just wonder especially with interest rates where they are, does it make sense to have some just in case on an ongoing basis instead of the sort of focus on just in time?

Well, that's a great question. And certainly, that's what we're doing right now. So we've -- for at-risk suppliers, at-risk parts. We've tried to carry more of that inventory. And so we've done it in the short term. I think as you're pointing out, as we hopefully exit this situation soon, we'll probably want to revisit in some cases, how much inventory we want to carry. It's all about trying to understand your -- understand what's going on at the supplier, what are their capacities, what are their issues, what are their Tier 2, Tier 3 suppliers doing and really being able to make the right assessment of how much inventory you need to carry for all those. If you do it across the board, it's going to be way too much. And you're right, there's a cost and interest rates are low, but the more parts you carry, you're going to have more obsolete inventory, things like that. So there is a cost to it. And so it's a balance there trying to manage risks versus your costs.

Okay. All right. Maybe circling back then. So you talked about pent-up demand in the U.S. and in Brazil. But comment on Europe, I mean that's your biggest market. Is that a pent-up demand market? And how confident are you that, that has some legs to it?

Yes. So I think that's the 1 key difference between probably North and South America and Europe is there's not going to be as much of a pent-up demand or an aged fleet. The European market is typically much steadier. The cycles are not as clearly defined and as severe. And so the amount of -- the age of the fleet is going to be much, much better in Europe. And so for that reason, we're not seeing as big of an increase. We're looking at Europe being up about 10% this year, where we're seeing 15% to 20% increases in the other markets. And secondly, you wouldn't say that there's this as long a period where the higher demand is needed to catch up or to fulfill the fleet requirements. But -- what we would expect in Europe is really steady demand, just like typical years. And the farm economy is going well in Europe. They're having a reasonably good crop. Dairy sector is going well. And so the confidence levels are very strong in Europe. And so when that's going well, we're seeing good buying behavior and volumes, and that's what we're seeing right now.

Okay. Great. And then it also feels to us anyway, please disagree if you'd like, but the technology upgrades are sort of another tailwind here for this cycle. Probably globally, but just any sort of data points relative to kind of new higher technology equipment?

Well, yes, we've talked about our Precision Ag business, which is both the Precision Planting business, which is a retrofit business that supplies mainly planting products, and we serve all markets, but it's mainly North America. And then the rest of our Precision Ag business is more focused on what we sell through our OEM. Originally manufactured products may be guidance systems or new terminals. We have new [ Set 1 ] platform that we're introducing to our Fendt products, which provides a lot of ability to plan and monitor the equipment either in the equipment or off-board in your office as well. And so all that's generating new opportunities for revenue. But as you point out, it's also going to be in heavy demand as farmers are replacing equipment. So if they're going to -- during those leaner times are really focused on margins and how to get cost reduction because they needed it to be profitable. And certainly, they remember that. And so even though their profitability and margins are much better now, they're really still going to be focused on managing costs, how to get it more productive, how to improve their yields. And all buying the new equipment with all this new technology is certainly the way to go, and we're seeing that in our growth in Precision Ag and our Precision Planting business in the first half of the year was up 37%. So it's growing faster than the core business.

And the margins on those types of pieces are higher?

Yes. I would categorize that business -- all those margins as aftermarket type margin profile. So yes, they're good margin business. And as you say, they're driving demand. So a really important aspect that we'll continue to work on and invest in the future as well.

Okay. And you mentioned Precision Planting, I guess that's sort of the biggest single kind of area of technology that you have right now. Just that business, I think you mentioned, was originally an aftermarket business, but I think you're also starting to incorporate in some of your OE sales as well. But just what's the breakdown there? And what does it look like in 5 years?