AGCO Corporation (AGCO) Earnings Call Transcript & Summary

Good morning or good afternoon, everybody, depending on where you are. For those of us who are just joining, my name is Mark Carlucci. I lead our U.S. sustainability Research, and I'm very excited today to be joined by Louisa Parker-Smith, Global Head of Sustainability for AGCO and then Greg Peterson, who heads IR. On the Morgan Stanley side, I'm also joined by Dillon Cumming, who is an analyst on our machinery team. Before we get started, I just have to read a quick disclaimer here. The views expressed or represented by non-Morgan Stanley speakers during the Sustainable Futures did not represent the views of Morgan Stanley or Morgan Stanley research for important disclosures. Please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So with that out of the way, thank you, everybody, for joining this discussion, and thank you to all the investors on the line. For format here, Dillon and I are going to sort of go back and forth and moderate discussion with Louisa and Greg. But I also want to remind the audience that we do have an online web portal where you can ask questions through. So please feel free to do that, and we'll try to work those questions into the discussion.

But just to sort of kick off the call, maybe Louisa, I'll ask you a question about your sustainability report, which you just released about 2 months ago. So maybe that's a good place to sort of talk -- begin the discussion around some of the new targets that you've laid out around from a climate perspective and maybe help provide some context against some of the recent progress that you made in those areas.

Sure. Thanks, Mark. Good to be here. Well, 2021 was our first full year with the new corporate sustainability team. So we kicked off the strategy towards the end of 2020. So it's really the first full year of results for us. The areas you mentioned there, the climate and the decarbonization piece, they all focus on 1 of our 4 strategic pillars, so decarbonizing operations and products. And we made some good progress in the first year. Certainly, not an easy time to be kicking off the sustainability program kind of coming out of COVID. We set a couple of key goals in that area. The first one was to increase our use of renewable energy to 60% by 2026. And the goals are short term in nature, partly because we wanted to really start with a bit of a bang and kick out the program. So nice and easy to remember, we're about 1/3 renewable energy delivery across our manufacturing footprint, and we're around about 0.5% to 53% renewable electricity, and that's up from 27% to 32% and to [ 42% ] . So some good progress there. 12 of our sites are now 100% running on green electricity, and that includes our brand homes in Europe. So our Massey Ferguson, our Fendt and our Valtra kind of main production sites. So really pleased with regards to the year 1 progress on renewable energy and electricity. And then we're also making good progress on reducing our emissions intensity. So we achieved a 13% reduction in emissions intensity across our manufacturing footprint in 2021, and an 8% energy intensity reduction. So that's really looking at how efficiently we use energy per million dollar revenue effectively. So some good progress really there. And partly, that's been driven by a number of initiatives. We established what we're calling a green growth initiative. So this is a central fund to support sites with investment into the renewable energy technology and energy consumption programs. We also in called QUEST, which is quick energy saving tools to all of our sites. This is really to arm them with the tools, the calculators and the guidance that they need to make sort of important decisions about where to invest. And then lastly, it was just -- I think last time I talked to you about the investments we're making in our AGCO STAR program, which sounds to sustainable tracking and reporting. That's our data management, our sustainability management software. And that really allows us to move it into space where we can take decisions based on actual data from the sites. And we've got 2 good years' worth of data now. There's some good progress across the board.

And Louisa, I think another sort of key topic, maybe we should hit on upfront to is just the focus of the market right now on global food security. And clearly, your company has a role in that. So maybe if you can just provide a high-level overview for investors of sort of how AGCO can help advance that for the world.

Yes. I mean, it's a major global challenge. So we've had that sort of the perfect storm, if you like. If you look at the factors that impact food -- global food security, of course, we've been talking about climate change for a while, then came in on COVID-19. And then the other big one is, of course, conflict. So it was last week at the UN Security Council, António Guterres said 60% of the world's undernourished people live in areas affected by conflict. So there's no question whatsoever that what's happening in Ukraine will have a significant impact on food security globally. So AGCO's role in is, of course, we support farmers, particularly with profitability and production improvement. So how can we create more food and basically produce more from the same amount of land and do it in a way that is more profitable for them -- so we -- the focus for our strategy, for our core AGCO strategy, which looks really closely to sustainability is that focus on precision agriculture, and that remains the same. If you look at the growth in Precision Ag sales for the company in 2021, it reached $540 million. So that's up 34% on the previous year. So we are obviously seeing greater uptake of these technologies. And we committed, I think, at the Analyst Meeting last year to double Precision ag sales within 3 to 5 years. So we said this from the start, Precision Ag is a really important lever to increase productivity but also do that in a way that's still profitable. So I'd say that's the key area. Greg, I don't know if you wanted to add anything to that on the Precision Ag side. And I would say that's a key sort of focus with regards to the role that con play when it comes to food security.

Right? And we're taking a little bit of a different approach, Louisa, when we talk about Precision ag and that we're attacking it in 2 different ways. One is through a retrofit, which is really important because it gets our last farmers to kind of incrementalize investments and allows them to get technology into their operations more affordably. We started doing it with planting. Now we're starting to spread that out into chemical applications. So I feel like we're hoping a wider set of farmers get technology into the -- into their operations, which is then going to enable them to be a lot more sustainable and hopefully a lot more productive going forward.

Got you. That's helpful color, but flus and Greg, I appreciate that. Maybe we can kind of keep on the topic of thematics. And you talked more about the interplay between population growth, the impact of urbanization and kind of shift in consumer preferences and demand. How you see those factors kind of impacting both AGCO and the broader ag equipment industry as well?

So if you look at the main drivers of food demand population growth, it's not something new, it's something we're aware of and growing income are sort of 2 key main drivers. And I would say they're still 2 of the key ones. Urban, Urbanization is a trend that sort of continues to grow. So I think by 2050, it's 2/3 of the global population will live in urban areas. And in general, I guess, in developing markets, Wealthier consumers tend to eat more diverse diets as far as different types of foods and also more animal protein. And so ultimately, that rolls back to more pressure on agriculture. We don't have more land. So it's the same amount of land. And ultimately, we're looking to farmers to grow the same amount of land and more efficiently and produce more food from that ultimately. So this is a sort of a trend that we see going forward. I don't think that will change. And then lifestyle trends, so non-GMO is a key area of focus, organic food with being that come through a lot more in Europe from the Green New Deal and the Farm to Fork strategy, and it puts pressure on the system in a different way because, of course, you generally produce less food per acre per hectare when you're farming organically. But that's, of course, growing in popularity as consumers want to see more of where the food comes from. And then, of course, in developing markets, you're seeing more consumption of animal protein, whereas in the developed markets, you're seeing transition away to alternative proteins, which moves really from the traditional starch diet to sort of the [ beans ] and soy. So it's shift different types of commodity shifting, different demands based on different markets. But again, all roads back to the same amount of land, how do you produce more product from that same land and also how do you do it in a way that keeps the farmer in business so they can be profitable. So again, the focus on high-tech solutions on Precision Agriculture, as Greg said, on taking back those technologies to the market in -- through the retrofit channel, so that farmers can deploy new technologies quickly on their operations without having to invest in a new tractor or a new combined harvest will be an important trend going forward. And then lastly, I would say, particularly with this emphasis around food security, looking at the impact on developing markets. AGCO has been active in Africa and in South America for many, many years. Here, we're just actually looking at an increase in levels of mechanization. So we know in many of the developed markets, you're currently seeing, say, 1 to 2 tons of corn per hectare with mechanization, the larger farmers operating in those same regions can get something like 8 to 10 tons. So there's a huge at all levels, introduction of basic mechanization through to -- for those more -- those larger farms and more developed farms, increased uptake of Precision Agriculture being really key.

Yes, that definitely makes sense. And maybe shifting the discussion a bit longer term. Can you kind of give some color around the impacts of kind of climate risk to farmers and the broader ag supply chain, both from an emissions perspective and actually from a firm perspective, having to kind of grow and plant in more challenging conditions, what AGCO and the industry in general is kind of doing to help address those issues?

So we -- in our first sustainability report, we did make a commitment that we would do our climate -- global climate risk assessment in 2021, which we did do. And we put the -- our first TCFD aligned report out, which is available on our website. But effectively, we looked at 26 different risks from physical risk to transition risks and then prioritize those. So we now have 8 that we focused on sort of detailed scenario analysis. So looking at the sort of transition risks where we transition rapidly to a low-carbon economy. And then on the other side, global temperatures to continue to increase, and we see more of the physical side. There were 3 main areas in relation to farmer specifically. So one increased extreme weather. So this is more acute weather event. So floods or droughts reducing crop yields. And we always talk about if you have a good year, if the weather is great or the rain is there on time, farmers have a good year. So it's sort of accelerating that and looking at that in a lot more detail. And then the -- I guess, the longer-term impact of increasing temperatures, specifically focused on crop yields and also on the availability of water, increase of pests and diseases. And then the third one is much more on the transition scenario, looking at the impact of increasing regulation, particularly on water, on fertilizers on some of those other inputs. So again, they are all areas that came that sort of surfaced as priority focus areas for AGCO. And so the whole industry, if you like, Firstly, there's an education piece to sort of raising awareness, sharing data, sharing insights, and I think that's been happening for many years. And then secondly, I think it's a focus on building resilience because some of this is already locked in to how do you actually support farmers on the resilient side? And then lastly, I guess, how do you support farmers to adopt their operations. Again, I feel like it's almost like repeating myself, but we come back to the role of Precision Agriculture, the focus of retrofit and deploying these new technologies to the market. And as Greg always says, the level of penetration is relatively low at the moment. So there's a huge opportunity here to very quickly build the profitability for the farmer, but also address some of these challenges from a sort of climate perspective. And then really the other area on our team is we're sort of growing our capabilities and putting more resource to tracking the regulatory developments because that's happening very quickly now and really enhancing our participation and coordination in some of these wider industry association and sort of trade association initiatives.

Louisa, I'm wondering if you could just sort of building on that decarbonization topic, if you could dive into maybe some of the technologies that could help farmers improve soil health and therefore, reduce emissions?

As we -- that's, again, one of the 4 strategic pillars in our sustainability program. So we've committed to the development of new sensors, technologies and machine features to support soil health and soil carbon sequestration. So this is an area that we're focusing on, but it's not necessarily a new topic in that we've -- we're already focusing on solar health from different angles. So our products already include technologies that support with crop residue that help with cover crop seeding, which is a really important area for fixing nitrogen in the soil, reducing machine load, balancing the weight, no till planters. So these things are sort of all out there already at different stages. The specific piece, I guess, when we look at an opportunity for farmers, how do you help the farmers to [ suppress ] carbon into the soil. So in the short term, our focus is on ensuring that our machines, firstly, we understand what is required to verify carbon credit and that data can then be obtained from our machine and we support the pharma transitioning that data. The sort of more interesting areas than to say, well, how do we understand some of the pain points and how do we make that data even more accurate -- and that's where then sort of cameras and sensors and technology comes into play. So it's really a combination of different factors of giving them the data, allowing them to take those decisions, but getting them more specific about how you can address that and fill the gap. And then lastly, what are the technologies and products that you need and many of them actually are already in the market.

Yes. And shifting gears a little bit, animal welfare in food production is another area that seems to be getting, I think, more topical among sustainability focused investors and you recently had an acquisition in this area. Can you talk about some of your efforts around animal welfare and sort of how that acquisition helped further enhance your capabilities?

Yes. So we -- again, it's sort of the 4 pillars. Animal welfare is the one that focuses on our Grain & Protein side of the business. So slightly different focus, but a really key area for us. The first thing that we recognize is we've built up a significant competence and capability around the row-crop side of things, and we have the global agronomy team, but we don't necessarily have that level of expertise in the business with the bids to animal welfare. So we established our animal welfare panel. That's something we talked about last year. So that's now in play. And the idea is that they can really help us understand welfare issues, which may be outside of our reach, outside of the everyday kind of conversation that we have with farmers, and then feed those insights into our R&D team. And then you mentioned Faromatics, which is the acquisition that really bought it, if you like, a new product we call it Scout. And if this runs through the poultry shed or the chicken house and takes a number of different metrics or attributes in real time. So it's very similar to the sort of sensor running through the field behind the tractor that this is done inside the -- in the poultry barn. So the types of things that it will measure are the climate ambient temperature, air quality, which, of course, leads to the welfare, even down to looking at the fecal matter, so it can actually analyze that in real time and give farmers an indication of what's basically -- how they can address potential health issues in advance of them actually happening. So it allows us to take action earlier. It's not particularly different to the approach that we're using in the field, but just in a different part of the business. So I guess that's the sort of main focus there.

And Louisa, I wanted to go back to one of the comments you've made earlier in terms of fertilizer and seed use being one of the biggest kind of opportunities from both the farm P&L perspective and then also a resource conservation perspective. You guys have done a lot of investments, both organic and inorganic, just growing out the capabilities on precision spraying and Precision Planting, both kind of targeting that area of resource usage. Just curious if you can talk about how impactful some of those technologies are today to farms' P&L to a farm's resource usage and how you've been kind of enabling those technologies in recent years as well?

Yes. Our focus on the Precision side is to improve net farmer profitability by 20%. So that happens across a range of different technologies. So that's, I guess, a key focus across the Precision piece. But I would say it goes a little bit broader than that. So we look at, I guess, 3 main areas of 3 main buckets. So, one is more efficient equipment. So this is more efficient engines and then the piece around low and zero emissions equipment is becoming increasingly important to farmers as they are being asked to provide more information on their own footprint. So that rolls for the entire farm, but also the use of the farm machinery as well. And with that, it goes from everything from operator training on efficient use of the product, use of telemetry to optimize the fleet and then also looking at these alternative fuels and so on. And then, of course, moving through into the Precision piece, this is was focused on technologies to reduce waste and support productivity. And then lastly, I guess, the area that's newer that we just talked about is the soil carbon sequestration, but actually adding something back and really trying to tackle something that goes a little bit beyond just the challenges of the specific farm itself.

Got it. And then maybe shifting the conversation over to the governance side of the kind of ESG equation. From a governance perspective, I guess, can you just talk through some of the recent changes you've made kind of around your Board and executive comp structure, the efforts to improve disclosure more broadly as well on that front?

So maybe I'll tackle the sustainability focus area and let Greg comment on broader governance changes. So on sustainability, we established our sustainability governance a year or so ago. And we've made some small changes to that since I think we last spoke. So we had originally a Board governance committee responsible for sustainability. And then we had my role and then, of course, the global workstream teams that focus on each of the 4 pillars. As of last month, we actually established a dedicated sustainability at the Board level. So we will have much more of a stronger focus on that -- and that really focuses on 3 key areas. So it's really looking at policies, strategies, practice and their measurement of targets around environmental, with a specific focus on decarbonization, our climate change, natural resource management, waste and environmental opportunities. The same also for the social side. So again, focus on the strategy qualities and the practices related to social matters. I guess the key ones right now, one is the focus of our report, which is workplace safety and the other one which is becoming increasingly important is human rights. And then lastly, there's a focus on keeping an eye on the trends, what's happening with regards to public policy regulation, legislation, and kind of guiding us and supporting us through that process. And then the last area is to really review our shareholder and our broader stakeholder engagement program in relation to our environmental and social footprint. So a lot happened, I think over the last 12 months, we've put in place an initial structure, and we've refined and improved that more recently since the start of the year. And then, Greg, I don't know if you want to talk about what's happening kind of more broadly on governance.

Sure, sure. We've made a pretty concerted effort over the last couple of years to make sure our Board was aligned with our new strategic direction, our Farmer-First Precision Ag focused strategy. And with that, -- we've added 4 new board members. We added the Chief Technology Officer, just retired Chief Technology Officer from General Motors, definitely has helped us as we continue to look at not only automating but looking at autonomous opportunities for our equipment. We added a group president from CAT that heads up their digital and dealer development efforts, which pays dividends, again, for our business. We added a European CEO, Head of the largest sugar distributors in the world. And most recently, we added just a partially retired CFO that adds to our financial strength on our Board. So essentially, with these new additions, our average tenure on the Board now has dropped to somewhere between 4 and 5 years. We, over that period of time, named a new lead independent director. We've refreshed all the committee chairs on our board and put in some term limits for those committee chairs. So have been very active from a Board refreshment standpoint. We also made a major change to our executive compensation plan. We -- a couple of the highlights we -- the new plan incorporates a relative metric, a total shareholder return metric or modifier and tied our goals for the compensation plan to industry performance. So we're in a very cyclical industry. And so we aligned the goals with where we are in that cycle, so that when the industry strengthens the targets set for our compensation plan get tougher, so that we believe that really creates the kind of relationship and incentives really for the management team to continue to work really hard during periods of really strong market activity and then also on the way when the industry is turning down, it really [ incents ] folks to stay engaged and to look for creative ways to maximize results during that. So a lot of changes around compensation and board structure. So I think those are probably the highlights.

Louisa, I just want to ask about something you mentioned the engagement efforts that you've had with stakeholders. Could you maybe elaborate on those, what you sort of took away from that and perhaps how that might have impacted your strategy?

Yes. So we've -- a couple of key things, specifically on farmers, I guess, as a key stakeholder. I guess, our most important stakeholder if we think about who we serve. So firstly, we established a new corporate purpose, which is pharma-focused solutions to sustainably feed our world. So I think that guides a lot of the strategy and the direction of the company. A couple of specific things we've have put in place. So we've established a dedicated customer engagement organization, which sits under one of our SVPs alongside our product management group and also our global agronomy team. So that's really interesting because we're able to engage directly with the customer, engage with them from the agronomy angle as well and actually understand some of the challenges they're facing and then feed that straight through into how we think about evolving and developing our product. So that's one aspect. And then the other focus is to try and bring the organization much more closer to the customer. So traditionally, we used to see the dealer as the customer and then the farmers, the customer of our dealer. And I think we're now seeing ourselves as a partner to the dealer and we both go to serve the customers. So serving that customer in the way that they want to be served is obviously leading to a lot more focus on digital. So we have different dual channels to reach the customer. Our leadership are also getting a lot closer to the customer, and we have a regular farmer panel directly with our executive leadership team. As that's every quarter we hear from farmers all around the world, which I think is really important to kind of keep that connection alive. And then, of course, we -- as Greg talked about earlier, we're looking at how we can integrate nonfinancial areas into the incentive plans. And one of these is to focus on customer satisfaction as a metric. So all of this, again, feeds not just into the product road map and development but also directly into how we're incentivized as a company. Our own team has worked really closely with the customer experience group to look specifically at some areas around sustainability, and we recently, at the end of last year around a panel with farmers in Europe to understand their perspectives on sustainability more broadly and also on soil health. I guess a couple of things we learned from that. The first one is that they are, of course, absolutely transitioning to more sustainable approaches, but do they define sustainability really in sort of 3 areas. So one is the environmental, One is more the sort of farmer economics, and then one is the productivity. And so it really needs to tick all 3 of the boxes right now for the farmers to really be focused on it, particularly because they're operating in such a challenging environment. So for us, what we're focused on is how do we create a win-win for the customer. And then specifically on sales, the area that repeatedly came up, it's an absolutely critical area of focus. When it comes to soil carbon sequestration, there's a little bit of nervousness about this area. But I think it was really positive for ourselves and our industry is there's a lot of trust based around OEMs, and we've definitely seen as a credible and reliable partner to come in and help solve some of these challenges. And that's because we've seen us having a long-term relationship with them rather than a short-term relationship where we only engage with the customer once in a while. So some really interesting things that we've learned, but we'll continue to focus on that over the long term.

Yes, very interesting. I want to switch gears a little bit, but I want to ask you about this. The SEC recently came out with some proposed rule-making around climate disclosure. So curious if you have any sort of from your seat, any initial views on that or perhaps more broadly, how the industry might be prepared to address this?

Well, I mean for AGCO's perspective, we recognize the importance of understanding climate-related impacts. It was a commitment that we made in the first year of our sustainability strategy, and we've taken time to look at this and the impact on the business. So it's clear, this is not something that's going away. And I think it's important that this is taken seriously. So policy frameworks is a great starting point and the TCFD, I think, is will be a critical component of whatever comes out of the SEC consultation. So we also recognize that material risks should be disclosed to investors. That's an important area as well. And it should be done in a way that provides consistent information. In some respects, it may be best to allow companies to determine how to signal to investors, what's material and then show the reliability of that data through third-party assurance, that's obviously key. But we do share some concerns with other private sector that maybe having an overly prescriptive set of disclosures doesn't allow for the differences between industries and sectors to come to the fall. So again, coming back to that goal of providing material information that investors can act upon, we need to be aware that there are some sort of differences and unique qualities and attributes of each sector. And then the last area, I'm sure I'm not the only one saying this, but it is becoming increasing complex area. It's very costly for private sector to report out. So anything that helps to give some consistency and to standardize the number of different frameworks and ratings that we have to report how on is absolutely well fund.

Yes. We've -- I'd say the feedback that we've heard is very similar in terms of the sort of the industry-specific piece of that. Don?

Yes. Maybe just to wrap it up, since we have only a few minutes left, I will encourage in one other question to put these in the last 5 minutes here. But maybe just switch over to precision ag piece of the business quickly to wrap it up. I think we always get a lot of questions around what actually drives adoption in the near term. I think, believe you mentioned some of the factors, including farmers, a, learning to operate more sustainably but, b, realizing the impact that can have from a kind of a farm P&L perspective. But obviously, we're in a situation now in 2022, where planet conditions are very challenged. It's not just similar from what we saw in 2019. But just be curious to get your thoughts on how you see a catalyst like that kind of advancing the next wave of adoption and whether or not you're kind of expecting that wave adoption to take place next year as a result of the kind of current planning situation in the U.S.

Well, maybe I'll share a few thoughts and then see if Greg has any other thoughts as well. But we talked a little bit about retrofit. I think making the technologies available to farmers in a way that they can adopt them and make that easy for farmers is a key piece because I think there is definitely an increasing acknowledgment and recognition that these technologies will support, and particularly now with increasing pressure of the cost of fuel, the cost of nitrogen fertilizer and so on, this all kind of adds to that. What we are seeing is increased interest in Precision technologies from some of the smaller farmers, where perhaps the ROI wasn't originally there. So I think that's incredibly positive. I think large commercial corporate farms have already looked at this as an important piece of how they increase profitability and production. So that's sort of an opportunity, I think, right now that we can capitalize on. But again, you've got to make it available to them in a way that they can access and then you've got to ensure that the training and the skills and capabilities are also there as well. I think the last piece is actually enabling and empowering our dealer network to still confident with these new technologies. Again, for the larger dealers that work with the large corporate farms and large players, they are already in the space, really excited about the opportunity that this presents. But some of the smaller dealers that are now getting more and more inquiries. We're focusing a lot on building their confidence and capability. And we've also piloted the Precision Ag line, which basically allows them to outsource the support around Precision technology to a sort of centralized team within AGCO just to sort of get them on the road because ultimately, if the farmer is wanting the technologies, then we need them to be able to meet those and meet that need. So just a few thoughts there. Greg, I don't know if you have anything to share on that piece as well.

Yes. So right now, Dillon, there's several things that's driving strong demand for Precision Ag technology. One of them is the fact that farmers P&Ls look really good. And so they're making a lot of money today, and so they have the capital to invest. And so that's number one. Number two, especially in North and South America, we've gone through 6 or 7 years of very weak demand, primarily because farmer income situation was very good during those years. And so there is some refreshment that needs to be done just to kind of get some newer equipment into the market to take down operating expenses and improve reliability. And by the way, the technology that Precision Ag brings is a nice sweetener. And then the last thing is, and Louisa touched on some of this earlier, is the new environmental rules that are coming on us very fast in Europe and over the longer term in the U.S. and other places. But those rules are going to drive how much the subsidies that are paid out to farmers starting next year. And so there, you can imagine very interested in maximizing those pads. So farmers are great members of the community, and they have a strong regard for the environment. But just like every other business person, they're interested in improving their bottom line. So to the extent we can drive profitability improvement while we're also helping them drive more sustainable farming practices that I think is really going to carry the day.

Yes. That makes a lot of sense. I also appreciate that. With that, I think we're actually right at the end of the session. So I want to thank Louisa and Greg again for your time. There's a lot of exciting elements, the sustainability story at AGCO. So we'll certainly be following it. So appreciate the update. And yes, we'll be in touch. We'll go ahead and conclude the session there.

Awesome. Thanks, Mark. Thanks, Dillon.

Thanks very much.