AGCO Corporation (AGCO) Earnings Call Transcript & Summary

All right, everyone. We'll go ahead and get started today. Everyone, thank you all for joining us. My name is Stanley Elliott. I cover a mix of machinery names and industrial names here at Stifel. Very pleased to be back here in person in Boston with you all. And then also thanks to everyone tuning in to the webcast. With us today, we have AGCO Corporation to tell their story, what they are doing in terms of the precision farming as well as also the machinery side of things, which I think is very interesting. From the company, we have Andy Beck, Chief Financial Officer; and then Greg Peterson, who heads up the Investor Relations group. So gentlemen, thank you very much for joining.

Thank you.

Guys, if we could start off, maybe talk about the recent cyber attacks and update investors on anything that's happened along those front.

Sure. I appreciate that, Stanley. We had a cyber attack event in the month of May, which did impact our operations. We lost somewhere between 1 or 2 weeks of our production in parts distribution operations for that period of time as we were able to restore our systems from the cyber attack that we incurred. Because of that lost production time, it's going to shape the quarter and the full year a little bit differently now. We expect to have available capacity to make up for the lost production in the back half of the year. As a result, our full year results and expectations are unchanged from the outlook we gave at the end of the first quarter. For the second quarter, however, we don't expect to be able to build up the lost sales and production from that disruption in the month of May. As a result, our second quarter results will be negatively impacted compared to previous outlook that we gave. When we last talked, we said that -- we said our EPS in the second quarter would be modestly below our results for the prior year in 2021. And now our current view is that we estimate that we'll be somewhere between $0.75 to $1 further below 2021 in the second quarter. And again, it's just -- it's a timing thing. We expect to be able to make up that shortfall during the second half of the year with our full year outlook consistent with our previous guidance. I also want to remind everyone that we're still challenging -- have challenging conditions with our supply chain, and our forecasts are always going to be very dependent on what component deliveries we get and the timing of those deliveries throughout the year.

Perfect. Thank you for that update. Let's kind of focus in on the demand piece right now. I mean industry demand really started to snap back in '20. How is demand tracking across the regions? It sounds like everything is still pretty much on par. But how are these orders and backlogs trending as we're sitting here today?

Yes. The demand side of things is still really strong, Stanley. As you obviously know, farmers invest when their income levels are strong. There's a high correlation of investment in farm equipment to farm income. And obviously, commodity prices are very strong. Even though we see higher input cost to farmers and fertilizer, fuel, diesel fuel, things like that, overall, their economics are still really strong, particularly in Brazil, but really across the globe. And so we're still seeing good order rates, a lot of interest in buying equipment. And as we look at each region, that's really consistent. I think what we've seen so far this year in terms of industry sales, they've been down a little bit versus last year in some parts -- some sectors in North America and in Europe, but I think that's really driven by the supply chain constraints that there's -- the underlying demand is still very strong. And we think that if we can get -- our industry gets some of the supply chain constraints through the system throughout this year, we'll see a majority of our markets across the globe be up versus last year, more modestly up in Europe, but stronger and high horsepower in North America. And still, we see a very strong market in South America. So I think the demand is being constrained right now by supply chain. And -- but the underlying demand is still very good.

And within that order book, I'm assuming you have some level of visibility out to '23. Confirm, I guess, if that's the case. And then to the extent that inflation continues, what are you all doing to protect pricing and margins on those longer-dated sort of deliveries?

Yes. So we do have very strong order books, much higher than normal levels, and they are now getting extended into 2023. So we're starting to build some orders in the first part of '23. From a pricing standpoint, what we've done is to protect ourselves by making the pricing more flexible than what we had normally do. So when we take those orders, we still have the ability to adjust the price in the future. The only prices where they get a little more firmed up is if it's a retail price. So if the retail customer, and we're locking that in for that customer, then there's more of a commitment. But we're trying to look out and know what our costs are going to be at the beginning of next year and project that and make sure that pricing is reflective of that. So we either -- we're trying to keep as much of our pricing still flexible that closer to the time of delivery. We can adjust it if we need to. And if we are firming up a price, then we project it out, and it's not just the current cost or the current price, there's a forward price that we're using.

Help us with inventories. One thing we're picking up from a lot of the survey work is that dealer inventories remain exceptionally lean, right? And you're talking about supply chain issues continue to push out orders. I mean it sounds to me like we're looking at a setup where dealer inventories will continue to remain lean for the foreseeable future. But any thoughts on how they're tracking across the various regions? And maybe how long do you think it would take for dealer inventories to actually look somewhat normal?

Yes, our dealer inventories are lower than -- well lower than normal. In Brazil, we virtually are out of inventory in a lot of cases. We've got just a couple of weeks of supply at this point. We have below average inventory levels in both North America, where we typically carry more dealer inventory, and in Europe. And so across the board, dealers would, I think, like to carry a little more inventory than they're able to do. We're just -- because of the supply chain constraints, where as we ship product to our dealers, they're just moving straight to retail. And so they're not able to hold any inventory. And that -- in a lot of cases, that's okay. But there's probably -- as I said before, there's probably some demand that we're leaving on the table right now because we just -- we can't supply at the rate that we need to. As we think about our dealer inventory levels and trying to replenish those at some point, I think it's going to be when can the supply chain and our production capacities allow us to do that. It doesn't feel like that's -- there's going to be much of that during 2022. Maybe on some small equipment in North America where the demand is starting to moderate a little more, but in most cases, I don't see us replenishing dealer inventory to a material extent here this year. So I think that's going to be something we'll have to look at in '23, maybe even '24, depending on where demand levels out and where -- how the supply chain is operating at that point in time. I think the one positive thing about our dealer inventory levels being low is if we do see some demand moderating at some point, it gives us more of an ability to have a soft landing and have some ability to -- as we see that demand changing, we'll see our dealer inventories being replenished, and that will give us some time to adjust production levels and things like that.

And kind of on the supply chain, I mean, did it get notably worse in the quarter with China shutting down? Or did that have an impact at all? Or maybe some of the big pressure points or pain points that you're seeing within the supply chain today?

Yes. I would say the primary cause is still semiconductor. And so that's affecting a number of different components in the -- and component suppliers. But that's kind of the core reason. But there are -- other components can pop up from time to time where there's some other reasons for capacity constraints that we're seeing. So the situation, from our point of view, is pretty consistent with what we've seen all year. And things like the conflict in Ukraine is -- causes issues. China being locked down has caused some issues, further logistics issues have caused. So it's a variety of issues that end up causing problems with one supplier or another. Typically, these are down the supply chain of our suppliers. And so it's a challenge to have visibility and to manage around these things. So it's a lot of work and a lot of focus for our purchasing teams to continue to manage this, and that's been a focus area all year.

Okay. Historically, you guys have done a very nice job on the operations side, take that 100 basis points or so, improving your cost position. Help us with what's going on in that front? Can you accelerate in any way, shape or form given the inflation? Is that still just pretty much your normal cost out kind of through the year?

Yes. We have a margin improvement goal this year of about 80 basis points. That's what we thought we could achieve this year. This year, I agree with you, Stanley, the margin profile of the company is going to be very dependent on how we manage pricing versus the material cost inflation that we're seeing. We're seeing significant increases in a number of our components, a lot of them steel-related, rubber, plastics, things like that and semiconductors as well. So a lot of challenges. And so we're really focused on keeping up -- making the price and keep up with the cost increases, and we're monitoring that very closely. It's already talked about trying to keep our pricing as flexible as possible so that we can respond to different changing dynamics in our cost structure. So far, I think we've done a pretty good job. We're talking about potentially double-digit pricing this year, which is quite significant. And so it's another big focus area along with the supply chain that we've got to manage in order to achieve that -- to get -- to achieve those margin goals. As we look beyond this kind of unusual inflationary period, our margin improvement goals are really focused around, as you say, cost reduction, efficiencies, things like that, that are kind of in your normal processes that you do, but also how can we grow AGCO in our high-margin areas. So one of the areas we talk about is growing our premium sector products like the Fendt-branded products, we've taken that global. So Fendt is being offered in North America now. We're selling it in South America, and those are good growth opportunities for both sectors and both regions with that premium product that carries a nice margin. Also the Precision Ag products typically carry higher margins. So we're putting on investment in them. And we're growing our Precision Ag product lines. We had a goal to double those over about a 3- to 5-year period starting last year, and we're ahead of schedule there. And those are high-margin products. The Precision Planting business within our Precision Ag offering really is a unique line of products, they are retrofit products, so that we -- you don't have to buy a new OEM-produced piece of equipment to acquire new technology. You can retrofit kit by kit, which enables you to have some of those capabilities on your existing equipment. And so Precision Planting has done a great job in the planting cycle, and we just announced that we're moving -- Precision Planting is now developing products that will help the chemical application spraying cycle of the business. And so we're really excited about expanding that business to handle other operations other than the planting cycle. And that's down the road for us. So growing in North America, growing our Fendt brand, growing Precision Ag, growing our aftermarket business are really key elements beyond just normal productivity to grow our margins in the future.

Yes. The opportunity, I think, here for you all to continue to mix up the enterprise at much higher and higher margin levels is a nice -- should be a nice sustainable tailwind. The globalization of Fendt -- you mentioned high horsepower in North America and South America doing well. How has the progress been on the Fendt introduction in those 2 markets, right? I mean this is a key to that whole strategy. And what has the feedback been from the customers?

Yes. We took a very careful approach to taking Fendt global. Fendt's very unique, strong business in Europe. Customers really are attracted to Fendt, not only because of the high technology and the productivity that it's provided, but also the way they're treated as customers, the experience that they get throughout the cycle of owning the equipment. And we wanted to take all the learnings and all the approaches that we do in Europe and bring those to North and South America. So we want to make sure that our distribution network was carefully selected, that was capable of bringing that Fendt quality and Fendt experience to the customers and farmers in North and South America. So we've taken, I think, a little bit of a slower approach. We also have been adapting the products that Fendt produces that were really focused on European farming practices. And now we've adapted those so that they fit North and South America farming practices, which is particularly around the row with -- that the tractor is able to work within. And so we're also expanding Fendt globally with -- in terms of product offering. It used to be just a tractor line. Now it's a full line of products for combines, hay equipment, planters. And so the Fendt offering is enabled to really serve all the customers' needs in the future. And so we're taking a slower approach, but now I think we're gaining momentum. So we've made a nice foothold in North America. We're growing with substantial growth each year so far in the last couple of years. We have our dealer network in a good shape. We still have some places where we'd like to expand our network. We feel good about the dealers that we signed up. And the customer reaction is very strong. The benefits of the equipment, fuel efficiency, the way it helps you manage your fleet is well received by the U.S. farmers. There's a lot of interest in them. And so we really feel good about the progress we're making.

That's great. And Andy, it's good to hear you talk about the dealership network, right? Because I think that's the critical cog to be able to get your technology to the farmer and what you've been able to do to strengthen the distribution in North America and then in South America because -- for the higher horsepower part of the market, the parts and services piece is so important.

Absolutely. So again, the distribution is key. We're carefully selecting the dealers in North America. I think we've got really good lineup of dealers now, and they're working well with us in terms of conquesting customers and really selling the benefits of the Fendt product line. In South America, we actually started with our own dealer network -- our own dealer. And we started with that, and now we've expanded, and we have a few independent dealers now representing us well with Fendt as well. And we'll continue to expand that over the next few years. So the South America business is still a little more modest, but that's really contributed to some of the growth that we've seen in higher horsepower and our ability to participate more strongly in the Mato Grosso central west region of Brazil where the big farms are, and we think that's going to be an important product offering for us in South America in the future.

And the uptake on the higher horsepower tractors and other machines generally carries a much higher parts business, too, right? I mean your parts business had grown 5-ish percent for the past kind of 5-ish years or so. How long before you start to see that inflect and actually accelerate given you've got a much higher population of heavier-use items out in the market?

Yes. Well, I think we're already seeing that to some extent. As you point out, our parts growth has been more than just normal pricing and things like that. So we're getting a bigger share of our parts business than we have had before. So part of it is mix, as you say, with the higher-horsepower sales that does typically carry more of a higher use of replacement parts, our growth in our combined business, which is a high parts usage as well. Also think some of the digital tools that we've developed and are using, which enables farmers and dealers to scout and determine what parts they need easier, enable them to get those delivered quicker. We also are now working on digital tools for more predictive maintenance of products so that we can remotely monitor equipment so that we can predict more accurately when we need to replace certain components. So there's no downtime for the farmer. So there's a lot of things that we still have opportunities to work on because the aftermarket business is really one of the most important selling features for the customer. The customer will not buy your product if they're not confident they're going to get parts and the right service. And so we've done quite well in terms of our fill rates, which is how well stocked we are with our parts and how consistent we have parts availability to get to part to the customer on time. And now again, we're working on digital tools to make it even easier for the farmer, make it -- to reduce downtime even in the future even less. So a lot of things going on in the aftermarket, as you point out, the highest margin business that we have.

Okay. And let's talk about the Precision Ag business, right, because that certainly is a key focus for a lot of investors. You mentioned you're ahead of schedule, trying to target kind of $800 million. I mean it seems like that kind of given the current state of products that you have with all this recent launch, you have the bandwidth to get to that. You don't need additional M&A to kind of fill out any sort of void within the product portfolio?

Yes. No, that's true. So -- and our approach, Stanley, is a little bit different. Andy talked a little bit about our retrofit-first approach. That -- we acquired Precision Planting in 2017, and that was almost exclusively the way they went to market. And the way that's important and the way that's going to lend itself to more growth is that it really incrementalizes the investment for farmers. So instead of having to buy a $500,000 or $600,000 sprayer, for instance, as we work on that capability with our vision technology and other features that Precision Planting is working on, they can do the same thing for about $150,000. And so it makes the payback much faster for farmers, and it allows us to get the technology into the market much faster. And the addressable audience is much bigger. So as we take that retrofit model from planters to sprayers to combines and to tractors, that will provide a nice growth vehicle. To your point on the acquisitions, we've done 5 of them over the last 18 months. Most of them didn't really carry with it -- they weren't commercialized businesses. What we were essentially buying was things like vision technology capability or autonomy capability, things -- technologies that will accelerate our product launches into the market. So yes, we do feel very comfortable with our portfolio and with the level of technology that we have. I've talked a lot about retrofit, but we're also very active on the OEM side. Yes. And one of the things we've been -- or several of the things we've been working on is advancing our common electronic architecture. And having that now where our equipment is kind of on the level playing field, we're able to start layering on applications that, in most cases, are very high margin. Historically, we've been more of a technology integrator over the last few years and going forward, we'll be doing more in-house. And again, that's -- much of that will be margin accretive. A good example of that is our farm management guidance system that we refer to as Fendt 1. Essentially, what we've done is create an application that allows the farmer to send remote instructions to the tractor. It's got a full GPS out of guidance capability. What we've done essentially is in-source what we used to buy from third party. So we were partners with Trimble and Topcon, and much of that -- those features and functionality that we used to buy from a third party, we're now developing ourselves. And that will allow us to layer on more technology across all the OEM products that we have. So instead of just selling horsepower and bigger machines, we're going to be providing more productivity, more expense savings opportunities for farmers as we go forward.

Well, the expense saving piece is critical, right? I mean if you think about labor, being able to send down plans to someone in the field, have many hectares or acres over, whatever, is pretty -- but the other thing here, I think, is the dual focus between the OEM and the retrofit approach, right? I mean I think it allows you all to cover more ground in a shorter period of time with more touch points with the technologies.

Right. And it accelerates how quickly we can get the technology into the market. On the Precision Planting side, a really good example is every year, they play in for a new feature set to go into the market. And so what happens is a farmer will buy a more basic feature set, get really comfortable with it, most likely get a payback in that first year. And then he feels very comfortable with the technology. He then advances and goes up the technology curve and brings more of it into his farm. And that allows him to benefit at a rate that he can afford and incrementalizes the investment. And for us, it's allowed us to grow our planting business exponentially. We went from being a very small player to one of the leaders in the planter business. We expect to do similar things on the sprayer side in the coming years.

And the work you've done on the spray side so far, when do you think that to be -- when would that be commercially available when farmers could start? I'm assuming you guys are in the process of testing it here soon.

Right. We're testing it in Europe and North America next year then in the, I guess, early '24 and into '25, we would start commercializing. We're going in stages. There's different vision technology capabilities. Some of them are just the retrofit or just around smart nozzles. Ultimately, we'll get to the target spraying capability that we've been talking about on the OEM side. We'll be doing that also on the retrofit side.

Yes, that's another way to move it into market. What about the M&A? I mean we're kind of coming close to time here. Is there anything within the portfolio wish list that -- how active is the market? Kind of where is your head there? Because you say all this in the context that you are going to generate a ton of cash, especially as all this higher working capital level finally unwinds.

Yes. So we've always been open to acquisition. It's been obviously part of our DNA since the beginning. And so we're real comfortable with that if the right opportunity comes. We're always going to be opportunistic to M&A opportunities. What you've seen in the last couple of years with AGCO is that we've been buying more technology companies. So non-equipment companies, things like that. We don't have any real obvious gaps in our product lineup or anything like that, but we'll still be opportunistic. I think what's more likely is still similar to what we've done in the last few years, buying technology, buying capabilities that we can then pull together and help accelerate our road map for Precision Ag and technology that we want to provide to our end customers.

Perfect. Well, it looks like we're out of time. So thanks, everyone, for joining us. Andy, Greg, thank you very much for your time.

Thanks, Stanley.

Thank you, Stanley.