AGCO Corporation (AGCO) Earnings Call Transcript & Summary

Okay. Great. I think we're going to get started. Thanks. Good morning, everybody. Seth Weber, Machinery Analyst with Wells Fargo. Very pleased this morning to have the team from AGCO joining us. We have Andy Beck, Chief Financial Officer, on the far right; and Greg Peterson, Vice President of Investor Relations, in the middle. For those unfamiliar or less familiar with AGCO, the largest public pure-play farm equipment company. Historically, the company has kind of cobbled together with some acquisitions. But over the last few years, we feel like the story has really started to come together as a more kind of cohesive full-line operator, new products, higher margins, capturing market share. So we think there's a lot to the story here. There's -- and obviously, there's a lot of debate right now around the farm economy broadly, what it means for equipment demand and sustainability of the cycle. So again, we think this is a pretty timely discussion. So gentlemen, welcome, and thank you for coming and joining the conference today.

I don't know, maybe we'll just start with the headlines, Andy. Crop prices, obviously very strong, but farmer costs for things like fertilizer and fuel are also much higher. So can you just try and piece together this sort of disconnect with the very strong demand that AGCO is seeing and the industry is seeing versus some of the sentiment surveys and things like that, that are out there that suggest maybe sentiment is not as strong and just try to help people understand, give us your view on this dynamic.

Sure, Seth. As you point out, really the highest correlation to historically the equipment demand that we see is crop prices and the income levels of farmers. So as they get confident in their cash flows and their income levels, that's typically when they're making those capital investments into buying upgraded equipment, and we've seen that over many cycles. So currently, the crop prices, as you know, are really extremely high. And those prices are so high that they're offsetting any increases in costs that they're seeing, whether that be fertilizer, diesel costs, those kinds of things, labor costs. And so their margins are projected to be very strong this year, and that's really across the board in all the major regions. Probably the best margins are still being enjoyed in South America, but with weak prices. So strong now in Europe, those farmers are going to have very good years in terms of even dairy prices, which are important in Europe, those prices are up and offsetting a lot of the cost increases that the farmers are seeing. Now that being said, there is still concern with farmers that they see fertilizer costs going up, diesel prices going up. So that does impact their sentiment. In Europe, obviously, they got concerns about impact of the war, also impact of some regulations coming at them in terms of environmental rules and regulations that they're going to have to deal with. So probably not surprising to see the sentiment confidence levels come down, particularly in Europe at this time. But from a behavior standpoint, we're still seeing good order intake into our systems and across all regions in terms of equipment orders, still a lot of interest in taking this opportunity where their incomes are going to be high to upgrade their equipment, buy new technology, upgrade their fleets. And so that's still on the behavior side, what we're seeing. And the fact that we have -- really continuing to have supply chain issues, we're not really, we believe, meeting the real demand out there. We're constrained at this point. That's going to, I think, going to extend the time lines in terms of fulfilling all this demand. And so that's why we have pretty good confidence that this market is going -- a strong market will continue for some time.

Right. So that was actually -- my follow-up question was going to be on whether it's kind of -- in addition to the supply chain and production issues, but also just on the crop production side, right, you have geopolitical issues affecting crop production. So do you think that that could also help us extend or sustain the cycle?

Yes. So that's a good follow-up, Seth. Some of the stuff is shorter term, some of the geopolitical that influences the flow of goods, in this case commodities, across countries, I think, is lasting. So if you look at the Ukraine and Russia, they produce close to 20% of the world's wheat that's produced. And historically, Russia exports to most of the major countries in the world, and obviously, now with sanctions, that's coming to an end, and in the case of Ukraine actually being able to get their crops out of their country just because of the access to ports and all of that. So there's a significant amount of wheat production that is going to be impacted depending on how trade flows happen. Likely that piece of it comes out of the supply, and that's a support for commodity prices over the interim period, anyway. And then the other piece of it is fertilizer. The Russia, Belarus, even Ukraine are relatively significant fertilizer producers and exporters. Russia is the top fertilizer exporter. And unlike some of the other natural resources they have that a lot of it which go to China -- China is also a major producer of fertilizer. So that probably takes a significant amount of the fertilizer out of the supply chain and/or supports prices. And so what that means is less fertilizers used, crop yields will likely be lower. And again, that's a support for prices over probably the medium term, anyway. So yes, there are some reasons to think that these elevated crop prices will be sustained for a longer period than otherwise would likely.

Right. And Andy, you mentioned technology. I mean do you think that precision farming can help kind of change the narrative around the cycle, right? I mean do you feel like that the returns to farmers are so compelling that they can continue to invest in precision technology, precision equipment even if farm income were to level out or decline?

Yes, I do. There's always going to be -- as I said, the main, highly, most correlated to demand is going to still be their income levels. So you're going to see some changes in demand patterns if their income levels go down. But that being said, and we actually saw this when the markets were weaker, was farmers were finding -- trying to find ways to be more productive to reduce cost. And especially in inflationary periods where you're seeing high diesel prices, they want to buy equipment that's got better fuel efficiency. So for instance, our Fendt equipment has measurably very strong fuel efficiency. So that leads you to want to invest in that type of equipment or maybe they're looking for how to enhance their yields. And so you can buy equipment and our planting equipment that allows them to improve their yields that we can demonstrate on test farms and things like that. So in those times when maybe their income levels -- prices have come down, income levels, they're going to be looking more and more, how do I enhance my P&L, and these types of investments in technology are the ones that will do that. So instead of maybe just buying another big high horsepower piece of equipment, they're going to be looking more at the technology areas. And so I think that will enable us to maybe ride through the cycles in a little better way. The other thing I'd point out is, from an AGCO point of view, we have a unique opportunity because we are the leader in retrofit, and our business that we acquired in 2017 called Precision Planting is providing new technology to equipment without having to replace the full equipment. So there are kits and components that you adapt to your current equipment. So the level of investment is much less. So if you were in a situation where you didn't feel like you wanted to fully invest in a new piece of equipment, this is going to be a great option for you. For a lower cost, I can get some of that new technology and enhance my yields, lower my cost, whatever I'm trying to accomplish. So our -- we're really focused on developing this retrofit channel. We've taken Precision Planting, which is a leader in planting technology. And now we've announced just recently that we're -- Precision Planting has started to work on products in the spring area, so application of chemicals. And so that's going to be a whole new market for us to take advantage of, and again in this unique retrofit channel that we have.

Right. Now I wanted to get into the Precision angle a little bit down the road. But maybe just before that.

You shouldn't have given me the question...

Yes. So one of the concerns that I think is in the market around AGCO specifically is the Europe footprint, right? It's a big part of your business. It's half -- more than half of your -- broadly about half of your revenue, and it's a good margin market for you. Sales in the region were up 15% in the first quarter, which surprised me, and I think probably surprised some other people. And you said your order boards are up a lot. So I guess can you just talk about what you're seeing on the continent, particularly post war? And it sounds like you guys have done some recalibration on the manufacturing, just sort of adjusting with your -- how you're getting fuel or kind of your -- adjusting your kind of going to market, your cost of operating strategy seems to have kind of changed a little bit just to -- in anticipation of some of these events. And just how you're kind of navigating the Europe business right now?

Yes. It's obviously in a very challenging environment right now. It's a very important part of our business, as you point out. We're seeing a lot of supply chain challenges in Europe, which is really dictating the level of production that we can achieve, dictating how quickly we can deliver equipment to our customers right now. Our manufacturing operations would love to know exactly what they're going to produce every day and have it all slotted in. But really, they've had to adapt to where we slot our production based on component availability of that day. And so much more flexibility that we've put into our processes in order to try to maximize the content of what we can produce each day and get the equipment to our customers as soon as possible. The other issues are obviously around fuel and whether there's going to be any shortages, supply issues. I think the good news for AGCO is we're not heavily reliant on natural gas, which I think is at the highest risk. Most of our major operations and equipments being run off of electrical power. And so -- and we're looking for ways to back up those areas where there is natural gas requirements. So we're doing as much contingency planning as we can, trying to manage and be as flexible as we can with component availability, redesigning components, so they can work on different semiconductor chips than they were originally designed doing all sorts of things to try to maximize our outputs. And from a customer standpoint, we're obviously managing the inflation coming at us. We're trying to get pricing in place in advance. We're being flexible with pricing in terms of when we firm up the price with our orders in order to try to keep that price level to match what cost increases we're seeing. And so I think so far, we've been relatively successful doing that in Europe.

Right. And do you think that margin -- Europe margins can expand this year in this framework that you're talking about?

Yes. I think we've got those being relatively consistent year-over-year. Again, this -- to get enough pricing -- we're looking at getting enough pricing to cover these inflationary costs but to manage those margins is a challenge. So in the first half of the year, we're seeing that our margins are being pressured a bit by all the inflation and our pricing not keeping up. And then the second half of the year, it should get a little bit better. That's our current visibility that we have.

From a -- just to clarify from a demand perspective in Europe, you haven't seen any real material change post war just...

No material change in behaviors at this point. Obviously, going to watch it closely, but that's what we're seeing right there.

So just sticking on the margin question for a minute. It seems like your full year guide for this year implies North America should get better going forward as well. You did talk about some semiconductor issues that hurt your Precision Planting business in the first quarter. It sounds like GSI was a little bit affected from steel cost. So is that the right way to think about North America as well? You're kind of 7%, 8% in the first quarter going into sort of the low double digits by the end of the year. Is that...

Yes. No, you captured it. So we do have -- seasonality is going to be a bit different in our Precision Planting business because of the chip availability. So we'll sell more of that in the back half of the year kind of after the normal planting season but still have a lot of demand for what they're selling. So you'll see our margins driven a lot by the mix of products and more skewed towards our Precision Ag products in the back half of the year. And then we also have -- we've been bringing our Fendt Tractor line to North America for the last few years, and delivery and -- production schedules and delivery schedules have more of that happening in the back half of the year as well. So yes, we'll get back into the double -- low double digits in North America in the back half. And for the full year, we think actually in the double digits.

And you feel pretty confident that customers will take the Precision Planting equipment in the back half of the year even though it's sort of off season?

Well, we have orders. So it's really more of a function of do we get chips necessary.

Is there anything you can do from a -- like Andy, you mentioned sort of reconfiguring or -- anything you can do from a design perspective to help your chip availability? Or are you just waiting on chips at this point?

That's what we're doing is if a control unit or something was designed to take a certain chip, we've been -- our teams have been reengineering that allow it to take to some other chips that might have more availability. So we've been doing that in order to try to maximize our capabilities of getting our products out the door. So that's a big focus of ours right now is trying to make as much of our equipment have -- be dual-sourced in terms of -- or even beyond that in terms of what types of chips enabled would be used to make the equipment ready to go, but still a big challenge. And I think we're not out of those woods yet.

Got it. Maybe just to round out the margin discussion, South America has been surprisingly good, 12%, 13% for the last 3 quarters. I think the business lost money a couple of years ago. So -- and I think this 12%, 13% is probably as good as it's been as long as I can remember, anyway. I guess maybe can you just talk about what changes have been made there? Maybe some of it is mix. You mentioned farmers are obviously doing pretty well. And is this sort of a sustainable level in a good environment?

Yes, I think it is. We have made a lot of changes in South America. And that time when we were losing money, we're really in a major product transition and didn't really have a full line of equipment that we were able to offer and had a lot of issues associated with that. We got those -- past those. And now our product offering is very strong. And really, where we're seeing the momentum and the improvement is we're selling more high horsepower equipment. We were typically stronger in the small equipment, less strong in high horsepower equipment that was serving the big farms. We've made a lot of changes to our distribution network in those large farm areas. We've brought in the Fendt products, the Momentum planter, which is for the big farms as well as the IDEAL Combine. So we have a really strong product offering to serve those large mega farms in Brazil now. And so we're seeing -- and all of those are higher-margin -- high horsepower equipment is typically higher margin than the small equipment. So that's helping our mix. The grain and protein business in Brazil is -- the demand is very strong right now. And so we're seeing best margins we've seen there come out of that with higher mix. And then again, we used to be more concentrated just selling tractors. Now complementary equipment like planters, the Precision Planting business in Brazil is a big complement as well. And so the overall mix of what we sell and the size of the equipment we're selling is helping us a lot. And then I think we've done a pretty good job in keeping up with pricing to offset inflation. Inflationary pressures are the largest in Brazil. I mean our pricing, I think, in the first quarter were between 15% and 20% in Brazil. So it gives you a feel for how much cost increases we're seeing, but we're staying ahead of that. That's going to be a real key to continuing these margins, along with, overall, the market is strong and well above mid-cycle right now, and that obviously helps production levels, leverage on cost, all those kind of things. So as you said, at this level of demand, we -- I think we look for those margins to be pretty much maintained for the rest of the year.

Okay. You mentioned new products, extending Fendt into North America and South America. I mean can you just talk about -- do you feel like you have the right distribution at this point? I know this has been sort of a journey for you guys to get the distribution in place where you want it to be. Do you feel like you're there?

I don't think you ever feel like you're there. There's always room for improvement, but I think we've made a lot of progress. But we certainly still have some gaps in North America, but we've got most of the major large ag territories covered quite well, but there's still some gaps that we'd like to fill. And we're going to look at that either expanding with our current distribution, finding new dealers or maybe some unique ways of selling the equipment through digital means and things like that. And then in South America, we started with our own dealer, we -- kind of our own company store. Now we've got a handful of dealers, and so there's still a build-out of distribution that we're looking to do over the next couple of years. So we're well along the path, but there's more improvement to come.

So I just wanted to close the loop on the margin discussion. You talked about pricing. You talked about distribution product. Five, 6, 8 years ago, you had this sort of 10% margin number that I think a lot of people thought was aspirational. You guys are going to be there this year or pretty close this year, which most people think is kind of a mid-cycle level in the industry. So have you talked to or are you willing to talk to where you think kind of a peak margin target for AGCO could be in this new paradigm for the company?

Well, rightfully or wrongfully, I've always said, let's hit the first target before you set a new one. And what we also said was that was a mid-cycle target, and so we are above mid-cycle. So even if we achieve that this year, there's a little bit of room to go. But I think it's clear. We put a focus on margins. It's a key area that we talk about all the time at AGCO. We know it's one of the areas that will drive value for our shareholders. And so the journey doesn't stop. There's no celebration when we get to a certain level, we want to get better beyond that. So key areas to continue to expand that -- those margins are: continue to grow in high horsepower market segments, premium product market segments like Fendt; expanding Fendt into Europe and out of Europe into South America and North America is a real important aspect of this; growing our parts business; growing this retrofit Precision Planting business; growing our overall Precision Ag business is very important. Those are all high-margin areas. We've talked a lot about grain and protein, which I think has been the most affected by COVID and supply chain and all this inflationary pressure, we can get those -- get that business margins back up, that's going to help us as well. So we're looking well beyond 10%. I'm not throwing any numbers out at this point, but it's not a place to stop, but it's a place to say we're making progress.

Got it. Okay. So let's -- I'd like to spend the last 5 to 7 minutes on the Precision Ag or most of the rest of the time on Precision Ag. I think you guys have talked about $800 million target by 2025. You're a little bit over $500 million last year. So it's about a 10% CAGR or something like that, which doesn't seem unreasonable. So a couple of questions. You've done a lot of M&A over the last year. I mean how much is that supporting the growth? Is it -- do you feel like you have kind of a critical mass now in that business? So I'd like to sort of understand your M&A strategy. And also just maybe talk a little bit about how you feel like AGCO's offerings are different from the other OEMs that are out -- from the competitors that are out there. You touched on the retrofit strategy. And then just maybe if you could talk a little bit about the eventual opportunity to expand into more of a recurring-type subscription-type model.

Okay. Well, Greg and I'll try to tackle some of those questions. I'll start with M&A and let him talk a little bit about our offering. From an M&A standpoint, we have a road map of what we want to achieve in terms of Precision Ag, what kind of products, features, capabilities we want our equipment to have. It's all kind of a journey to automate more of the equipment, where today farmers are making adjustments and having to be in the cab or be adjusting things and making judgments, whether we -- well, we like to automate those, use more data, technology to optimize what the farmer is doing. And so we've got a road map of products, features, those kinds of things that we want to achieve over a pretty long time frame, but a lot of this within the next 5 years. And we looked at what capabilities we had internally and where we thought we needed to accelerate our capabilities instead of building up just organically where there are some M&A opportunities where we could acquire capabilities, acquire technology that would accelerate what we're doing. And that's what you've seen really over the last 12 months is AGCO not really buying a lot of finished product, but buying capabilities, engineering teams, software developers that have expertise in different aspects of what we need in terms of -- whether it's vision systems or autonomy-related capabilities, sensor technology, all those kinds of different aspects that you need to pull it all together, and that's what we've been trying to do. I think we've accomplished a lot at this point, but I wouldn't say that we -- we won't -- you won't see us do more, but we do think we've accomplished a lot with these acquisitions. And they're all relatively small and the big challenge now is to integrate them in and have them really be working well within the whole development team that we have in AGCO. And that's what we're working on right now. I'll let Greg talk a little about our product offering and where we stand.

Right. And so I guess if you kind of divide the Precision Ag into 2 categories. One is kind of the smart machine aspect, and the other is the machine management and data connectivity aspect. On the smart product side of it, I would say, in most cases, we either at or, in some cases, ahead of where the competition is, particularly our strengths, our Fendt tractor technology both from a drivetrain, which drives fuel efficiency, but also in terms of controlling the tractor both in the cab, but also remotely. I would say we're industry-leading in same market share gains, particularly in North and South America because of that. On planting, Andy mentioned our Precision Planting acquisition several years ago. So now we have taken significant part of that market, both on a retrofit basis, but also on an OEM basis with our Momentum planter. And that -- our planting technology is -- we were, I would say, leading because we're the only ones that have sensors that actually go into the soil and do a lot of the real-time changes to how you're planting the seed and how much fertilizer you use and even what kind of seed you use as you go through the field and you differentiate it by rows. So it's pretty specific. Sprayers, I would tell you that we're in a lot of categories right where the competition is. We're a little behind on the See & Spray. Not that our technology isn't as good, but we're -- in terms of commercializing it, we're probably a year or 2 behind on that. Combines, I would argue that our IDEAL Combine is in terms of sensing and automation and soon to be in the not-too-distant future autonomy aspects of it, really, we're right there, if not ahead of the competition. On the machine management and connectivity, it's a -- that's really a function of telemetry, essentially telemetry capabilities of equipment. And really, the last 2 years, virtually every big tractor, combine, sprayer that we've rolled out of the factory has been equipped or has the capability to be equipped with that feature. Now that's probably 2 or 3 years behind where one of our big competitors has been. So I would say from a going-forward basis, we're very similar, but because they have a 2- or 3-year head start, they have a bigger percentage of their -- whether it's acres or customers or fleet, whatever connected. So -- but I would say, in a good position to be competitive going forward.

Okay. And do you think that there is this recurring revenue model out there that makes sense? Or is it still kind of under...

Over time -- over time, yes, I think that's a good possibility. Reality has been -- in our industry has talked about growing that. And what farmers have demonstrated is that they're willing to pay for the technology and the products, right, the smart aspect. If it helps them improve their yields or cut down on their input costs, they're willing to pay for that. They've been a little more reluctant to pay for these monthly subscription services. So that's kind of a net we're still working on. But I think over time, that could be a real thing.

Great. Looking forward to it. Thank you, guys, for just -- it's the bottom of the hour, so appreciate it. It's good to reconnect with you.

Thanks, Seth.

Greg and Andy, good seeing you, guys.