AGCO Corporation (AGCO) Earnings Call Transcript & Summary

Yes. Well, there all 3, I would say, are above mid-cycle right now. In terms of if you want to look at a 7- or 10-year average of demand in any of those regions, each region industry demand is going to be higher than that. For sure, we feel that if we were able to have less supply chain issues, we'd be -- these markets would be even higher. So the limiting factor right now is the supply chain still and demand remains strong, again, as commodity prices are high and farmer income is very strong. If you want to look at it by region, I would say the market that's the most above mid-cycle is South America. It's very strong. Farmers there enjoying extremely good margins. There's growth in that industry because of the growth in the large farms in the Mato Grosso and Cerrado region of Brazil. And so we're still seeing very, very strong and active demand there. In North America, we're actually seeing the small equipment demand start to come down. It was at really exceptionally high levels. That's starting to moderate. That's more tied to the general economy, whereas the large ag market, we're seeing orders up and the markets still stay strong, well above midpoint. I would say that we'll likely see that the small end of the market, small equipment market will continue to move back down and normalize, while, again, we believe the large ag equipment market will stay strong. And then in Europe, Europe typically does not have as distinct cycles. They're -- actually the market is much more consistent than what we see in North and South America. But it's still above its 10-year average. And although there are a number of issues in Europe around the conflict in the Ukraine and some issues, obviously, with fertilizer prices and fuel and things like that, still see reasonable confidence in the market. And with crop prices where they are, our demand for equipment still seeing very good there.

So I get this question a lot. I'm sure you do, too. There's various farmer sentiment surveys out there. The one in North America has been quite weak. The one in Europe, maybe flipped a little bit better most recently. But how do you square kind of what looks like a very strong market demand with these issues in farmer sentiment?

Yes. So there are issues that farmers are very concerned about. Those being fertilizer availability, fertilizer prices, fuel prices. In Europe, obviously, you've got the Ukraine-Russia conflict. You have pending environmental regulations in Europe. So there's a -- and there's been some dry weather as well. So there's plenty to be concerned about if you're a farmer. And so when you look at sentiment, I think it's pretty normal and pretty reasonable that you'd think that sentiment would be down as they're concerned about these issues. What they don't really reflect is that crop prices are still very conducive to good margins for themselves, that these -- where crop prices are, they're offsetting the fuel prices and the fertilizer prices. And so margins are good. They expect to make a sizable amount of money this year with a good crop. And so from that standpoint, their affordability of new equipment, the desire to replace equipment, to invest in new technology is there, and they have the means to do it. So we're still seeing a lot of interest in buying equipment, and we still see our markets staying strong, despite the fact that they do have a lot of things to worry about.

Great. Let's pivot a little bit to technology because one way that farmers can sort of boost production or lower costs is to adopt more technology. So talk about sort of what are the key buckets of technology that you're seeing farmers in terms of uptake. And then how much of that -- how much of your sales is kind of this high tech and where is that going over time?

Sure. There's -- obviously, it's a very important part of our industry now is the, what we call, precision ag technology, which really is a broad topic with lots of various pieces to it. We've been investing more of our engineering budgets each year to precision ag technology. We've also invested with some new acquisitions that we've acquired some certain technology, all with the development plan of a road map to really improve the capabilities of our equipment that allow farmers to either improve their yields or reduce their costs. And all this -- everything that we're focused on is how to improve farmer income one way or another to create a return on investment for this new equipment. It can span from fleet management, telemetry-connected machines to technology within the planting cycle, the chemical application cycle or in the harvesting cycle as well. And we're working on equipment in all and tools and all those areas. What's unique for AGCO is how we're going to go to market with this technology. We have really 2 approaches. One is through our Precision Planting business, which we acquired in 2017. That business was about $100 million business when we acquired it. Now its revenues are going to be approaching probably in the mid-$300 million in 2022. So significant growth through innovation and really perfecting the planting cycle. They have a retrofit approach to selling equipment. And what I mean by retrofit is you're not buying a new planter, but they're just changing some of the componentry of an existing planter. And so what that does is allow us not only to sell that equipment to existing AGCO customers, but to all competitive customers that can retrofit their existing equipment. So these retrofit kits fit all brands of equipment, all generations of equipment in order to improve the capabilities of their existing machines. And that comes with a lower price tag. So the return on investment is better than buying a new equipment. So that retrofit approach has been very successful in the planting cycle Precision Planting started and has done quite well. Now we've asked Precision Planting to expand their focus outside of just the planting cycle into the other parts of the ag business, looking at where they can help solve farmer problems. And so we've already announced earlier this year that in the coming years that Precision Planting will be releasing retrofit solutions for the chemical and fertilizer application business. So something that goes on a sprayer. And some of these will be around targeted spring capabilities in the future on a retrofit kit. Also Precision Planting just announced that they're starting to do work and releasing products in the future that is around soil sampling, soil monitoring and insights that help farmers make proper decisions in terms of how they manage their farm. So there's a number of things that they're doing. We acquired a business also called Headsight early last year, which helps in the harvesting cycle. So Precision Planting and our retrofit business is going to go across all the [ crop ] cycles in the future. And what we've talked about is continuing to grow that business through new innovations and new technology and new offerings. The other part of our Precision Ag offering is through our OEM equipment sales. So we have a division we call the Fuse business, which provides Precision Ag technology that goes on our original equipment that we're selling under either the Fendt, Massey Ferguson or Valtra brand names. And as that technology is developed, we equip it into our existing equipment and sell it through our normal AGCO Fendt, Valtra, Massey Ferguson channel. So we actually will have 2 distinct channels, our OEM channel and our retrofit channel, selling Precision Ag products. So we feel very good about our road map for developing technology. We also feel very good about our ability to sell it successfully through these 2 channels. In 2000, we had revenues of about $400 million in our -- both businesses combined, Precision Ag in total. This year, we'll be probably in the $600 million to $650 million range. And our target over the next 5 years is to get over $900 million in sales. So we see this as an important growth opportunity for the company. The other aspect to focus on is that it is higher margin. So these are typically sold in kind of aftermarket type margins, the retrofit business is. And so it enables us to improve our margin profile with the growth that we see in that market.

That's great. I was actually going to pivot to margins almost like we've done this before. But at the end of the day, you guys have had a 10% EBIT margin target for the company. You've made a lot of progress in getting there. You're probably pretty close as it is. I think you've also said that, that's more of a way point than a destination. But talk about the key drivers. I mean we talked about the precision, but what are some of the other key drivers of margin expansion?

Yes. So you said we're -- our target this year is nearing that 10%, but we want to be at 10% at a mid-cycle. And so the markets are helping us a little bit. So we got a little room to go to get to that target. But as we say, I think we made meaningful progress over the next -- the last 3 or 4 years in terms of our margins. How have we done that? I think it's through -- obviously, through our industrial operations, improving productivity, how we purchase parts and components in an efficient manner, but also where we're growing the business. We're growing it in our premium sector Fendt business. We're growing it, as we already talked about, in our Precision Ag business. We've seen substantial improvement in growth in our parts business as well. And our key strategy for margin improvement is -- maps out with our overall strategy, again, of growing, making our Fendt business go global. What we've talked about is Fendt is a well-established brand in Europe, but has not been taken globally, except for we started that about 2 or 3 years ago, moving Fendt into North and South America. We've been quite successful so far. We've -- since 2000, our Fendt-branded sales in those 2 regions have doubled -- should double by 2022, and we expect to double those again over the next 5 to 7 years. And so that's substantial growth opportunity for the company. But since it's a premium product line, it also carries very, very strong margins. And then I've already addressed the growth in the Precision Ag sector, those come with high margins And then in the parts business, with some of the digital tools we've been investing in and predictive analytics that we've been investing in and how we monitor the equipment through connected machines, it enables us to have more opportunities to get a larger share of the dealers' wallet in terms of aftermarket revenue, aftermarket share of that wallet as we sell parts and help service and maintain the equipment in a proper way. So we see good growth there, which is obviously parts or aftermarket is our highest margin part of our business. And then we're still working, in some cases, on continue working on platform strategies in terms of the development of our products using platform components to meet our design needs in various brands. So we're adding scale to -- for our purchasing guys to help us reduce our cost. And then overall, a reduction in terms of our parts cost and our components cost through negotiation, through resourcing, through different purchasing strategies. And then within our plants, continue to invest in new technology and new approaches to reduce our manufacturing costs. So a lot of those are very challenging in the current environment, but as hopefully our supply chain normalizes, we can get a lot more efficiencies out of our factories and that will also improve our margins. So we -- with the growth that we plan and the mix improvement that we hope to generate, we see a lot of opportunities to continue to improve our margins.

Great. So we have about 1.5 minutes left. Anybody in the room here want to ask a question? We're happy to take one. No? Good. Okay. I can do it. Let's talk a little bit about GSI. We haven't talked about sort of the Grain & Protein business. I think that's the one that's probably had the most impact from price/cost near term and maybe the most upside for going forward as things normalize.

Yes. It's been a challenging few years for the Grain & Protein business. First of all, COVID, I think, impacted that business more than others, particularly on the protein segment. We all know what's happened in a lot of protein processing businesses, which really reduced demand for our products, which support sustainable protein businesses in terms of feeding systems, ventilation systems and things like that. So the demand's been down there. On the grain side, this should be a fairly strong market because of high grain prices is typically when we see high grain equipment demand. But it's been muted a little bit by the price increases in the equipment because this is the highest steel content products that we sell. And with the rising steel prices, there's been a little bit of a sticker shock in terms of pricing. And so from that standpoint, demand has been difficult. And then with the rising steel prices, we've gotten, has been challenging to keep our pricing in line with costs. We think we're starting to see that level out and see us get those in line. And our second half of this year, we expect to be much stronger in terms of margins in our Grain & Protein business. So hopefully, a lot of hard work's behind us, and we'll start to see some of the benefits in the second half.

Super. All right. Well, that does it for time. I really appreciate your coming and participating, and thank you all for listening.

Thanks, Steve.