AGCO Corporation (AGCO) Earnings Call Transcript & Summary

It is my pleasure to welcome you to AGCO's 2023 Analyst Meeting. A really big thank you for those of you who braved the weather and are here with us in Manhattan this morning. We also want to welcome our virtual guests. We're pleased that you're both here. We're going to go through a lot of slides this morning. So if you're watching virtually, you can obviously follow along, and then we'll upload some slides at the end of the meeting today and everybody then can have access to those. Let's look at what's in store today. So as you can see, Eric is going to start us off. He'll have a quick overview of our strategic priorities, focused on our former customers and then, of course, a big focus on creating value for our shareholders. Following Eric, Seth Crawford, who's the General Manager of our Precision Ag and Digital business will give us an update on some of our technology innovations and our path forward for our Precision Ag business. After Seth, Louisa Parker-Smith, will give us an update on the progress we've made on our sustainability program and our priorities going forward. After Louisa, we've scheduled a short break and following the break Damon will wrap up the show with some information and on the financial implications of our strategy. He'll talk about uses of our cash flow and he will finish up with a quick look at our 2023 financial goals. Not on the agenda here, we have some pretty neat technology on display in the library. A lot of you, I think, have seen it on your way in, but Brad Arnold, who runs our Precision Planting business is here to explain what we're doing with retrofit for sprayers, for planters and then he can take whatever questions you might have in terms of our precision ag strategy. And then also today, we have actually outside on 46th Street, we brought our fully electric Fene100. And after the show, I encourage you at the main doors to the right and down the stairs is the tractor. Andrew Sunderman, who's one of our key corporate development folks will be there to take your questions on the tractor as well as whatever precision ad questions you might have. And then lastly, I wanted to thank another member of our team that isn't on the program today, but has had a major contribution, not just today's program, but to Agos evolution over the last 26 years. Andy back is here, so I encourage you to say hi to him after the meeting. And with that, let's look at our legal obligations here. Our presentation this morning will include some non-GAAP metrics. These non-GAAP metrics are reconciled to the GAAP metrics in the appendix of our presentation. We'll also make some forward-looking statements this morning, including information about our strategic plans and initiatives as well as our financial impacts. We will discuss demand, product development and capital expenditure plans and timing of those plans and expectations with respect to the costs and benefits of those plans. We'll discuss production levels, share repurchases, dividend rates and our future revenue, price levels, margins, earnings, cash flow, tax rates and other financial metrics. We wish to caution you that these statements are predictions and that actual events may differ materially. We refer you to the periodic reports that we file from time to time with the Securities and Exchange Commission, including the company's Form 10-K for the year ended December 31, 2021. These documents discuss it's important factors that could cause the actual results to differ materially from those as contained in our forward-looking statements. These factors include, but are not limited to, adverse developments in the agricultural industry, including those resulting from COVID-19, including plant closings, workforce availability. They also include supply chain disruption, weather, exchange and rate volatility, commodity prices and changes in product demand. We disclaim any obligation to update any forward-looking statements, except as required by law. Now a last bit of housekeeping will ask that you hold your questions until the very end, All the speakers will then be available for a Q&A session. And we're going to do that electronically this morning. So that means the folks in the room can access that Q&A platform. There's a QR code on your tables, so please use those. The folks that are joining remotely, virtually on the bottom of your viewer there's an access to the Q&A platform. So I'd encourage you to go ahead and get your questions submitted during the presentation to give yourselves a place in the queue. So with that, let's get started. [ Presentation ]

Ladies and gentlemen, please welcome AGCO Corporation President, Chairman and Chief Executive Officer, Eric Hansotia.

So good morning, everybody. It's so great to be back with you among our investment friends and be able to share our story, give you an update. It was a little over -- almost 2 years ago that I was able to spend some time with you with my team and share with you our refreshed strategy. Where is AGCO going? What's our North Star. Well, today, the strategy hasn't changed. We're just going to give you some updates on some milestones that have been achieved, some deliverables that we've achieved already, and we're going to raise the bar. We're going to raise the bar on our technology commitments, raise the bar in our margin performance in some other areas. We've got an exciting story to tell you I'm looking forward to sharing it with you. So let's just do a little refresh on who is AGCO. We've been in business since 1990, got about $12.6 billion in sales this year, $10 billion in market cap, about 23,000 employees go to market through multiple brands, and those brands are differentiated because we're going after different customer segments with different value propositions. This multi-brand offering allows us to cover the entire marketplace with differentiated solutions. But then that piece in the middle is what I want to just spend a minute on here, and that's AGCO is investing an enormous amount of money, effort and leadership on being very, very good at technology development, all the way around the crop cycle from before we plant the crop all the way through the season, harvest even post processing in terms of green handling and protein production. So we're going to spend a lot of time on that today sharing with you the areas of focus we have, how we're investing, the results for our farmers and the results for our investors. In the industry and market we operate in has a lot of tailwinds. So just as a quick reminder again, we've got a tailwind with just more miles to feed, more population. We're growing. We just passed $8 billion, we're going to $10 billion. That's going to happen. So that's one demand driver. Second one is the fact that as economies mature and get more prosperous, they add more meat into their diet. Meat is a multiplier on the demand for grain and you were from 2:12, depending on what chicken to beef. And so that's a second demand driver for our industry. Third one is biofuels, whether it's corn, soybean, canola, other things. And over the next few years, that's expected to increase by about 20%. So you've got all of these 3 ushering in demand requirements for more yield, more productivity for our farmers. But at the same time, there is pressure on those farmers to create that output with less inputs. That pressure comes in the form of higher costs, some of the costs of these inputs have risen. And also society is saying we just want a more sustainable system. We want you to generate higher yields but use less inputs and there's no more acreage. So that's the squeeze that the farmers are under. And the only way to solve that equation is through new technology where the machine can perform more optimally to get higher yields with lower inputs. That's the macro setting. In the micro setting over the next year or 2, we are very bullish about the industry strength. You look at all of our end markets, Prices are high, and getting the company to perform better. And now we're entering our third chapter. We're really focusing in on the farmer first mentality, being the most farmer-focused company in the industry, understanding their pain points and then using technology on our machines to make them more productive, more capable in the hands of these farmers so that they can get more done with less inputs. That's the big focus of the company and changing how we think about distribution. So we're going to talk a lot about that today. This one pager is very, very similar to the one pager I shared with you almost 2 years ago, and it's essentially our one-page runner strategy. So this is what all 23,000 employees we want that in their hip pocket or the shirt pocket or their notebook. This is what our North Star. This is a good guide our company. At the top is unchanged. A couple of years ago, we redefined the purpose of why we exist. That is to deliver farmer-focused solutions to sustainably feed our world. Farmer focused to be most farmer-focused company in the industry. Solutions is more than machinery. It's about all of the data and other connectivity and digital solutions around the machines, sustainably is -- sustainability is a key. It's going to weave through our entire strategy and feeding the world that gives us energy in terms of what our purpose is. We also set a milestone along that journey, what our vision is and that's become the industry leader in smart farming solutions. Smart farming solutions are just machines that have sensors on them that can understand their environment and make onboard calculations and changes. We want to become the industry leader and we think we're well on the way to doing that. We're going to share some more information on that. We had to build some muscles in the company, built some new capabilities, and those are highlighted in the middle there. The first one is about, if we're going to be the most farmer-focused company, we got to start measuring that and get our company glued to our farmers. So we want to create exceptional customer experiences for each of our brands as they operate around the world. We're measuring that through Net Promoter Score, and our intention is to be the partner of choice for our farmers. The second one is to invest more, excel and become really great at developing these smart machines. And we'll talk a lot more about that. And then the third is think differently about distribution. Our industry has been one of largely brick-and-mortar. The farmer goes into the dealership to research the machine, buy the machine, all those types of -- a lot more about this. she led our group 2, 3 years ago as we launched this effort to essentially look across the landscape are all the areas is that are changing and are important to the industry relative to sustainability, measure where we're starting. And then we picked 4 focus areas that we're going to pick to be a leader in. They're on this slide here. The first one is about soil health and carbon sequestration. Now we're an industry that has an opportunity to not only reduce how much we emit but also contribute to helping get some of that carbon that's already out in the atmosphere, trap it through photosynthesis of the plant, get it down in the soil. That's good for society and that we're helping with pollution. It's good for the farmer in that when you trap that carbon in soil, soil health improves, the fertility of the soil actually improves, allowing that farmer to get more yield. We're all about now is to try and help the farmer change their farming practices, adopt some new technology and other things to change their way that they do farming so that they can monetize this opportunity. So many industries around the world are investing in carbon credits. We want those carbon credits to flow to the farmer. #2 is decarbonizing operations. This is all about our machines and our factories. And we've got some ambitious goals there. We set the goal a couple of years ago to -- for a 2025 target for our factory emission efficiency. We're all really going to complete that by the end of the year. Louisa is going to talk more about that. #3 is health and safety. Even though there's been all these supply chain challenges in our operation, and that creates some out-of-process activity. We've been driving down our safety results. Last year 12%, this year on track for 15%, we're driving down the safety incident rate. We think that's an important message to our employees about how we care about that issue. And then finally, is animal welfare. Finding that intersection of helping the protein producers of poultry or pork have higher productivity and higher animal welfare. We invested in a robotics company where this system travels across the roof of the bar with Imagery Systems, they look down at the animals, the amount of movement, the drop in consistency and identifies through artificial intelligence when there's an issue before it really emerges. This allows the farmer to be able to take action early, move from reactive to proactive. So sustainability is woven through the fabric of our company. We also -- I talked to you about thinking differently about distribution, we've got a global network of dealer, dealer partners around the world, and we're very proud to have some great dealers out there. What we did this last year is we created a common way of measuring how a dealer performs in the AGCO network, no matter where they are in the world, comments that of measurements and we applied those to the dealer channel, significantly raising the bar on our performance expectations about how we work together to deliver solutions to our farmers, our customers. That's been a great thing. We've accelerated significantly the number of performance improvement activities and the dealers that are moving forward. So that's kind of the focus on our existing dealer channel. But then at the same time, in parallel, we've been investing for probably 4 or 5 years now on digital tools for everything a customer would want to do, research a machine, buy a machine, order a service part, set up a service schedule opportunity, finance the machine, all those things. And we've deployed those now through much of the global geography. That allows us to change the game and allows us to digitize that whole customer experience and allowing them to shift to either a direct experience or through the brick-and-mortgage channel or a combination of the both. We intend to lead in this area, we think it's a big deal. We think this is an industry right for change. We've also talked a lot about within the company about the fact that we have one of our advantages is our culture. So many of us in the room today came to work for AGCO in the beginning. It's entrepreneurial spirit, willing to try new things, fast on making decisions and care a lot about the customer. What we wanted -- the double down on that culture and raise a couple areas up really getting great and becoming a global leader in this farmer first element. We've identified -- we've created a lot of farmer panels, got customers out with -- or got our employees out with customers a lot more and identified many ways is to bring those 2 groups together, and then teaming up, I'm going to talk to you a little bit about taking our Fendt brand global. We had a regional organization before, and Fendt was largely successful in Europe. Well, now to take that full fan product line global, we've really tapped into encouraging people to work cross function, across geography to make the most out of that business, just as an example. I want to make sure the whole business is wired to deliver that, but now I would like to talk about our growth engines. You've seen us talk about this slide a few other times we introduced it early in the year. We essentially have 3 engines firing in parallel. We're going to cover them all here now. First one is about taking our Fendt business global. Second one is service and parts growth. And the third one is our Precision Agriculture business. If you talk about taking Fendt Global. Fendt is a premium best of the best brand. Historically, it's been predominantly a tractor business in Europe. And so our first step was to expand that product portfolio through innovation and have the full line served through the Fendt brand. Planters, sprayers, tractors, combines, hay equipment, are now all in the market on the Fendt brand, all market-leading products in their segment. We are very excited and proud about our product portfolio into the Fendt brand. It's excellent. It's second to none. The second step is to take that product line and offer it globally to the customers that want the best of the best in their farming operation. So a lot of those farmers in North America, South America, South Africa, Australia and other places. So we've been selecting dealers carefully, judiciously to make sure that they can deliver the best of the best Fendt experience. Even a given dealer organization, maybe they have 20 stores, we may only allow them to sell Fendt through a handful of those stores that have met this high bar of delivering the Fendt experience. So this is on track. We've doubled our business in North and South America over the last couple of years. We aim to double it again in the next 5 or a little after. It's a very strong growth engine. Once you get Fendt product in the customers' hands, they don't want to go back. But you don't have to believe that for me, let's hear from some of our customers, some of our big customers in South America and those from our customers in North America. Please roll the video. [ Presentation ] And we'll hear from our North America farmers. [Presentation] Our second growth engine is all about growing our parts and service business. Now over the last few years, we've invested a lot in what we call parts fill. That just means when a customer comes up to the counter and says, "I'd like to have a part from you, we can fill that order. We've raised our parts fill performance such that we are now the market leader in both North America and South America and have been for a few years in a row. That builds confidence in the customer base that says, that channel will have the part when I need it, and they're easy to do business with. In South America, we've raised our performance significantly. We're right now in the top [indiscernible] 2 in that business. So that's the foundation. That built the confidence, but now we're moving from reactive to proactive. We want to leverage the fact that we've got 45,000 connected machines out in the marketplace, transmitting data off of the machine real time. We can use that fleet to start looking at when is their upcoming service interval coming. I can contact the customer and say, "Can I order you in advance, the parts that you're going to need for that maintenance interval or for a part that's going to break before it happens. We've got a lot of opportunity here to grow this business even stronger. We're expecting something on the order of 8% growth rate that we've had to continue on into the future. And the neat thing about service parts is they're high margin, and they may grow at different rates, but they never decline. We've never had a year yet where we've had the sales in this year be less than the sales than last year. They're steadily growing. And so that evens out, it's a great thing for our farmers, high-margin business, and it evens out the cyclicality in our business. Third growth engine is all about Precision Agriculture. And you've got an opportunity here. If you haven't done it yet, please walk around the demos that we've got out here in the lobby. Some really exciting technology to get your hands on. And if you look over here on the side of the conference room that we're in, you see some 55-gallon drums. That's a reflection of input savings, savings on fertilizer and chemical and diesel fuel that a farmer would save based on the use of these new technology tools. Well, just the examples that we have out in the lobby here for a typical like 4,000-acre farmer would save there's 6 barrels there. You multiply that by 100, 600 barrels of inputs, and that's not including the savings on seed. That's not including the increased harvest that they're going to get, the increased yield that they're going to get and the benefit from these technologies. It's just the direct savings on these particular inputs. You stack those just to a sensor in New York, you stack those barrels one on top of another. It's a little bit higher than the Freedom Tower. So it just gives you kind of a feeling of the massive amount of potential of opportunity here for the farmer. We're investing all the way around the crop cycle, from planting through the crop cycle, through harvesting and in the Grain & Protein solutions. We've tripled our budget over the last few years, not only in organic development, but we also bought 6 companies, invested in 2 more. We are all in on developing Precision Ag solutions. And our business has been growing because of it. Since 2020, we've been growing steadily. When I was here almost 2 years ago, we talked about this business growing to $800 million. Earlier this year, we raised the bar, and we said we're going to grow to $900 million. And here today, we're proud to say that we're confident enough we're raising the bar again. And we're going to have this business be over $1 billion in sales, high margin, high value to our customers. This thing is clicking. Just this year, we're going to grow probably 30% to 35% within 2022. So we're really excited about our innovation engine. It's not only us excited about that, the industry is excited about it. We are getting so many awards by these neutral parties out in the marketplace about what's coming out the back of the pipe on our innovation. In autonomy, we will bring to the market by the end of this decade, solutions in every step of the crop cycle, all the way around for the farmer of a fully autonomous solution. We will also be in the market even sooner with retrofit solutions. Now retrofit is part of our Precision Ag business. Our Precision Planting channel is all about retrofit, meaning we take the solution, the technology module, and we take it directly to a farmer and put it on their existing machine, making a dumb machine smarter. In this case, we're going to take an existing machine and make it autonomous and already do that by 2025. The other thing about our view about retrofit is that we do that for all brands. We retrofit not only AGCO brands, but our competitive brands as well. We serve every customer in the marketplace, and we're doing that globally. The second category is about targeted spring. We're going to have retrofit solutions in the market for sale already in 2024 that have been out running this year and next year. We're really excited about the solutions that we've had. We launched those at the Precision Planting Winter Conference last year to our customers. And right behind that will be our OEM solutions direct from the factory. This is when through Vision Systems, the sprayer can identify the difference between a weed and a plant and spray only the weed with targeted chemical. And finally, as clean emissions. You've got to walk by the prototype or the early machine of our E100 is what we call it, first purpose built to the market, all electric tractor. We'll be having that for sale in 2024. It's already going to be in the market next year with customers, but starting to grow this population. We've already launched our new core engines. They're in the marketplace in our Fendt machines. Now these machines -- these engines already future proof for alternative fuels. They're designed to be able to have that capability going forward. They already have lower carbon emissions than the engines that we replaced. So this is a platform that is future-proof. And we've got lots of other projects in parallel to these on hydrogen fuel cells, on hybrid electric and other electric solutions for different size class machines. We believe that different parts of the world and different customers are going to need a different solution for clean energy at different times. So we're creating a whole suite of solutions to make sure that wherever the situation is in your part of the world, we've got a great solution for you to enhance not only our productivity with smart machines, but your clean energy solutions with clean engine machines. Those are really exciting technology flags that we're planting today, and they also give us then the confidence to plant some flags on margin. Let me give you some background now on where we're coming from. From 2013 to 2021, our company has performed in terms of margin, anywhere from 4% at the worst industry year when the industry was at a low point to 9.1% last year and then numbers in between. The average from '13 to '21 was 6.3%. We're already committed to you that we're going to be delivering 10% at mid-cycle going forward. And today, we're going to raise the bar and create a new commitment that we're taking that mid-cycle commitment from 10% all the way up to 12% by 2026 on our journey to even higher numbers. Now that means a few things. That means that if the industry is stronger than mid-cycle, we could very well get to these kinds of numbers sooner. It also means, and Damon is going to unpack this for you in great detail, it also means that not only are the mid-cycle numbers are going to go up, mid-cycles get higher, but our trough numbers get higher and our peak numbers get higher. We -- you won't -- this company will no longer deliver the low end of the margin range anymore. So historically, 6.3%, moving up to 10%, moving up to 12% on our journey to even higher numbers beyond. So to pull it all back together again, we are super excited about our strategy. Our North Star has served us very, very well. The entire company is aligned around this. We spent a lot of time getting ownership of our employees around their part of it. And we think this farmer-focused strategy is perfect for the market to deliver great value for our farmers. It's exciting for our customers, and it's generating higher and higher returns for our investors. To get there, we're leveraging technology, and we are super excited about how we're doing this. We've been investing a lot more, but more importantly, we're creating great outcomes coming out the back end. Our technology is working for farmers as getting recognized by them and the industry. Sustainability is a big deal. It's running through the heart of our company. And Louisa is going to spend some time with us in a little bit, talking about the -- all the dimensions of sustainability. We think of it as an opportunity to not only reduce how much we emit but be part of the value creation going forward for our farmers to clean up the environment. And finally, when you bring all this together, we are confident in our ability to grow margins and grow the top line. We've got a strong business today. It's only getting stronger. Our best years are in front of us. Thank you very much. I'd like to invite Seth Crawford up to the stage.

Please welcome Senior Vice President, Precision Ag and DCX Sep Crawford.

Thanks. It's great to be with you today. So I'm Seth Crawford. I lead our Precision Ag and Digital Business Unit for AGCO. And I'm excited to be here today because we have so many positive things going on in our business. And one of the things that's not going to change from what you've heard in the past is what we're trying to do for our farmers. We are trying to improve their outcomes. We want to enhance their agronomic capabilities. We want to enhance their economic outcomes, and we want to give them products that make them more sustainable. And we think we're in a great spot to be able to do that. But to do that, I want to start by giving you a little bit of a glossary of terms because one of the things we heard from the feedback sessions that we had from previous events is, we don't quite understand yet what you guys mean when you talk about integrated and when you talk about retrofit, when you talk about aftermarket. So first, Integrated. Integrated technology is technology that we build into the machines from the factory, all right? Retrofit, well, first, let me go to Aftermarket. Then Aftermarket is, okay, so we put a machine out in the field and you need to fix it. You need to bring it back to its original form. Maybe it's a broken bolt market. And that means all makes and all vintages to take the performance of those machines up to a whole new level. And we can -- we believe we can do that, add value to farmers and help make them more sustainable. So today, the topics that I'm going to cover with you. First, I want to talk about the foundation that we've established with our tech stack and the investments that we're making in both organically and inorganically. I want to share with you how that then turns into profitability for our farmers, how we help them improve their net farm income. And how that turns into results for our business and how we're increasing the velocity of our developments. And then I'm going to share why we're confident that the numbers Eric laid out there for us are real and very much achievable. So Eric talked about the 3 phases of AGCO. I want to talk about our Precision journey quick as part of those phases. Prior to 2015 AGCO was buying third-party Precision Ag products and adding them to our equipment, simply a supply relationship, not integrated, and that caused several challenges for us. Number one is, it wasn't integrated. So it wasn't something that, in some cases, that our dealers even sold. Sometimes they even had to go through a third-party channel to get it. And when we talk to the farmers, they were very clear that you have a good product, but this technology, it doesn't fit. And when I have a problem, you can't support it. So we made a dramatic change, we made a dramatic change to better serve our farmers by integrating the technology by establishing our foundational architecture. And building that to now where we're taking that common electronics architecture across all of our machines. The next step on our Precision Ag journey was buying Precision Planting in 2017. What that did was it opened our eyes to what truly retrofitting products could bring to us. So these are 2 huge steps, both on the whole goods side of our business and on the retrofit side, to see the value you can bring to a farmer by having an integrated technology that you can sell and support across the life cycle and also the retrofit technology to be able to enhance any product they have to take it even above what they bought originally. So these were 2, I'd say, aha moments and great business moves because they also deliver significant margins compared to our traditional businesses. So we've invested in this tech stack through the foundational architecture, through our guidance and machine control products, through our connectivity and managing that data that's ever so critical and then automating features and then being able to leverage the artificial intelligence and manage that machine from anywhere that's so critical as we build towards full autonomy. And that's why we've made the investments that we've made. Apex.AI helps with that functional safety layer, so that as we're building towards this autonomy, we have a common approach, so that's built in and we can take our products globally and reach that autonomy market. We bought Appareo Systems, our connectivity provider. We know that the products are becoming more and more critical to be connected, and Eric talked about the numbers that we have for connectivity of 45,000 units today. And that's just our OEM -- our machine brands, our tractors, combines, sprayers, that doesn't include all of our retrofit machines, which are also connected. You add them all up, we're well over 100,000 connected machines. We bought Headsight. And I'm going to talk about how we're going around the crop cycle, but this helps in the machine control area. And then we bought JCA Technologies, and JCA is special because of their work on autonomy, not just for us, but if you look at all the autonomous work that's happened in the industry, in the early days, JCA has worked with all of those companies, many of which have been purchased by others now, but JCA was at the heart of it. So let's take a look at what JCA can do. [ Presentation ] Well, there you can see why we're investing in these capabilities. And all of the investments that I showed, those are investments we've made over the last 18 months. So we see our velocity continuing to increase from where we started in 2015 to now really driving ahead. We're not going to stop. We're going to continue to increase our spending in R&D. When you look at our growing sales, you look at our growing R&D spend rate those are significant increases in absolute dollars. We're investing in small firms, start-ups. And the reason is we want to be closer to them to the technology. We want to strategically understand this space better and cast that net why. So we've made multiple venture capital investments that we plan to continue to do that. We're engaging with universities on sustainability practices and those working with those universities that are on the leading edge of various fields of technology. And that also helps with our talent pipeline that's ever so critical. This results in driving our revenues higher and making our machine park much more competitive overall and very much on the leading edge. When you look at our R&D and engineers, just the share count of engineers focused on our Precision Ag portfolio. Since 2018, we've increased the number of fivefold. And please remember that we purchased Precision Planting in 2017. So this was after the Precision Planting, we've already increased it fivefold, and we continue to recruit heavily in this area. That's why when Eric shows on the screen that we're going to deliver autonomous machines to the market across the full crop cycle by 2030, we have confidence that this is going to happen. And that means they're going to be commercially available across the crop cycle in an integrated form by 2030. And and that is absolutely critical for us. It will have some machines running in the field. We've -- I think if you go to JCA, you might see some activity there, lots of it. But we're going to have those machines ready in the retrofit market by 2025. And on the targeted sprayers -- spring, Eric shared the date, but these are all steps towards delivering on our mission. Because one of the things that I think you all want to know is, okay, we see how you're delivering the farmer value, but how does -- what does that mean to shareholders? And the important part is, we're not waiting until 2030 to get returns on these investments. The way we're going about it is year by year, our farmers believe in better and we're ready to deliver and monetize that along the way. And this is where we're truly unique. We have a multichannel approach. We have a channel focused on retrofit. That channel is called Precision Planting. We have a farmer first digital enablement effort that we call One Digital. One digital allows farmers to do business the way they want to do business. Enabling -- digitally enabling as much of that customer journey as we possibly can, enabling us to deliver a higher level of customer experience, reducing that variance of the customer experience and lowering that cost to serve farmers. So we're able to cover more farmers with the existing channels that we have in place. We have our specialized brands. Eric talked about the focus of the Massey Ferguson brand and the Fendt brand globally. This is critical because that gives us a mid-tier brand and a higher-specification brand. And we're going to provide the technology on each of those platforms, which gives us more growth over the long run. And then we'll talk about the full line. We not only have tractors. We have tractors and combines and sprayers and planters. We now have the full portfolio for farmers, and on top of that, we have the technology. And for the integrated technology that we offer in our whole goods, we call that our Fuse portfolio. So it's the Fuse Connected Services and technology. Why we think the retrofit business is so attractive is because there's a huge total addressable market. There are many estimates out there. But it's $150 billion plus to say the least. Some numbers go a lot higher than that. And far too often, we just get fixated on the farm equipment business. As Eric shared, we're more than that. We're far more than that because we're helping farmers optimize their inputs at each stage of the crop cycle. And we plan to do this with our retrofit approach. That's why we bought a company like Headsight that allows us to go into this area with harvesting solutions. It's why we bought the Appareo for connectivity. It's why we're working through the automation with JCA and bringing that in. Those are the investments that we've made. And what's really important here is to look at the right-hand side of the slide. Because when we studied the planter market, about 7% of the customers buy new planters each year. 100% of farmers want to get better year-to-year, and when we survey those farmers, we ask them how many of you believe our planter and 71% said, yes, I know I'm losing yield because of the current state of my planter. And by next year, I'm going to do something about it. So that's why with our approach and our dual channels, we're going after the one buying new equipment, and we're going after those that believe in better. So our approach to the market. I talked about the total addressable market. The other thing that the technology-rich retrofit approach brings is we're not building new castings. We're not building new tool bars. What we're building is the technology to go on existing machines. So we can go out and innovate sometimes multiple times a day with different iterations. And that gives us tremendous speed to market where we can take that, go out in small batches, test, learn. And as that matures, launch it more broadly, and then after a few years in the market, that's when the customer pulls -- pull comes for the -- those products to go through other OEMs. And and our own products out of our own factories. That's why we sell to over 30 OEMs today with the technology because their customers are demanding that, that technology is on the machine out of the factory. It also enables farmers to buy this incrementally. They can start with a small purchase. Maybe they're just changing their seed meters in the first year. Maybe they just want to monitor the activity and sense what's going on throughout the field. But then once they see what's going on, they want to take that next step. And that next step is to be able to control it and optimize it. And so we allow that scalability path where they can make incremental investments depending on their budget. And then finally, it really improves the farmers' profitability. Most of our retrofit products have a payback of 1 to 2 years. So it's very attractive for the farmer to make those investments year-to-year, and that drives to the sustainability. When you really look at our approach, one of the keys here is how we go about it. Edge processing is critical in the space. because there's so much information coming in when you're going through the field with high-speed planting. And with our sensors, it's essentially like you're taking a flashlight and shining it on the problem. And our sensors on the machine, are picking up all kinds of measurements. And we have to make those adjustments fast. And so to do that, on a 24-roll planter, a high-speed planter, we're picking up 13,000 measurements a second and making those adjustments in real time. That's why we have to use edge processing to take that information and process it and act on it as close to the source as possible. We also collect that data for use later, but edge processing and being a leader in this space is absolutely critical for us. So now with, I'd like to show on the screen, you'll see our FurrowJet product working. I hope you were able to stop by the library and see this. We have the demonstration of it. But what's so critical when you're going through the field is to get the nutrients right where the seed needs them. Because for some nutrients like phosphorus, the phosphorus isn't going to travel to the root. The route's got to go get it. And if the root of the plant is too far away, it's not going to get that nutrient. And so what we do with our FurrowJet product and products like vApplyHD is we put the right amount of fertilizer in the proximity to the plant where it can reach it. That's so critical for the initial root growth and to establish that early base to give it the feeding, Think of it as spoon feeding, through its early development stages. And that's where the difference is between broadcast fertilizer across the field. When you have FurrowJet jet and you have the liquid application, you get to the savings that Eric talked about with the barrels that we have in the back of the room. When we're talking about for a 40-acre field, you can save $1,200 with the technology when you fully deck out your planter and you use our turn automation and our machine control features, and it's 40 acres, think of the savings when you're a 4,000-acre farmer. That's why this technology is in demand. That's why our retrofit growth is going as fast as it is. When you look at the years up to 2017, we were introducing about one product a year. We were selling primarily in North America. Since that time, we've accelerated our product launches. We're also looking at about 7 to 10 product launches from 2023 forward. So it's dramatically more than what we've had before. Our sales in South America continue to increase as well as growing sales in Europe. With the full look at the crop cycle, we believe there is a very bright future in this business. Now let's look at what that means for the full crop cycle. [ Presentation ] So as you can see, the future is bright as we go around the crop cycle. Now our integrated technology. One of the things that's exciting here is the growth in our subscription business. We've nearly doubled our subscription business since 2018. And on the beginning of the video, we just watched, you saw our radical agronomic lab where we're doing soil sampling. As that product comes to market, that will have a subscription revenue with it as well. So whether you're talking about the Precision Planting business or our integrated technology with the fuse products we will grow our subscription base. And we're continuing to grow our penetration on our own products as we go around the world, and it's more than just the whole goods growth. So that part is very exciting as well. And to keep that going, we're going to bring additional innovations. We're going to increase our market penetration, especially where we're going to new geographies where we haven't had our technology ready before such as South America. And then finally, we're continuing to work with our channel on developing more Precision Farming specialists, because that's an additional way we make farmers more comfortable with our products. When you add all that together, it means that a great product gets even better. So the Fendt 700 is one of our flagship products. When you talk about machine control and Eric talked about the awards we're winning, 3 of them were for advancements in machine control for [ way ] lines, for automatic turns at the end of the field. And that's why we're continuing to invest because if you're going to have an autonomous tractor someday, it's got to drive through the field, it's got to turn at the end, it's got to execute every single operation. We're leading edge across the board on precision, guidance, rate control, section control and overall machine control. And then connectivity. We obviously need to connect our machines to be able to support them when they're running autonomously. We're making advancements there with the connected machines we have, our ability to diagnose as we work towards being able to fully manage a fleet from anywhere. So we're executing our plan. I talked about how that total addressable market is getting bigger. You may wonder on a FurrowJet product, why are you focused on the fertilizer. Well, fertilizers 27% of the money a farmer spends. Equipment's 12%, there's a huge opportunity just there. The other piece, and I'd encourage you to go back and check this, and I think it was March of 2021. We had our virtual meeting at that time, we talked about our focus areas. The same ones are listed in the center of the slide. The plan is working, and we're doubling down on it and driving forward. And that's what gives us confidence to drive to the higher margin target or higher revenue target with this margin-rich environment. So to sum it up, we believe the investments we've made to establish that solid foundation are stronger than ever, and we continue to invest. We believe we're giving farmers the added value, both agronomically and economically where we're going to draw more farmers to the AGCO family of brands, and that's going to lead to better results for AGCO. And in the end, that's what gives us confidence about where we're going in the future. So thank you. And right now, I'm going to turn it over to Louisa Parker-Smith to talk about our sustainability journey.

Please welcome to the stage AGCO Corporation Global Head of Sustainability, Louisa Parker-Smith.

Well, good morning. It's great to be with you here. My name is Louisa Parker-Smith, and I'm responsible for sustainability at AGCO. You've already heard from Seth a lot about our Precision Ag and Digital. And hopefully, we've given you a good sense of how Precision Agriculture is integral to our business strategy going forward and also how it's really critical for sustainable outcomes for farmers. So AGCO's motivation is to serve our farmers to grow profitably, but also to go beyond that and make a positive contribution to society and to the environment while facilitating a pathway to global food security. Eric told you all that sustainability is core to our purpose as a company and why we exist, and our purpose is farmer-focused solutions to sustainably feed our world. And as I mentioned, the Precision Ag and Digital being core to one of our growth levers is incredibly important in setting this foundation for sustainable outcomes for farmers going forward. Traditionally, we've looked at this more from the economic aspects, building profitable and viable livelihood for farmers and also the yield which links very closely to food security. Now we're increasingly starting to look at the environmental impacts. And so we've really added a third dimension in how we think about the products that we take to market. But fundamentally, we want to be a strong support and a strong partner for the farmer. We want to solve their current pain points here and now, but we also want to anticipate their future needs as we look ahead to the future. and this is becoming increasingly challenging when we're seeing global food systems being completely reimagined and in the context of a low-carbon future. And so really just building on that theme, we all know that agriculture is highly impacted by climate change. We know agriculture is a significant contributor with around about 1/4 of total greenhouse gas emissions coming from the food and ag sector. We also know that global crop yields are highly exposed to the physical impacts of climate change. So here, we're talking about increases in global mean temperatures, but also the severe weather effects and acute physical impact like floods and freezes, wildfires and heat waves, which are increasing in frequency and severity. But most importantly, and I think what gets the whole of the AGCO team really excited is that AGCO Agriculture can be a really key part of mitigating the climate-related impacts. And we've got an opportunity really here to start to rethink a farmer's relationship with carbon. And we've heard Eric talk about soil carbon sequestration, really here, we've got to focus on getting the economics right for the customer, getting the right data in their hands and then giving them the tools in their toolbox to actually change their farming practices, and also giving them the confidence to do that as well. And I think here, AGCO has the opportunity to touch on each of these points. So you've already heard a lot about our 4 pillars of sustainability. So I won't go into too much detail on these. But really, the key focus here is to get the whole of the organization behind our sustainability program, give some energy and some direction to our focus areas and really drive forward concrete action. And I'm going to touch on each of the 4 pillars in the next couple of slides. But just before we do that, I want to take a moment and really just take stock of where we've got to after only 2 full years of our corporate sustainability program. We've delivered early and solid results across a broad range of holistic KPIs and on both the environmental and the social aspects of sustainability. Eric already mentioned that at the end of this year, we were hopeful that we'll achieve our 6-year target, which is to reduce our emissions intensity across our manufacturing operations by 20% by 2026. And actually, we are pretty much already there to do that. We've also listened to many of your feedbacks and met with many investors and many of you also in this room. Greg and I have done the rounds and been out and talk to you all. And we've strengthened our disclosures and our transparency around our performance on sustainability. And we've also integrated 4 key global best practice framework into our reporting. As a result, we've seen year-over-year improvement in our ESG ratings, and I'm really proud to say that for sustain Analytics, we're actually in top quartile. And we're very close to that in a number of the other frameworks when we benchmark ourselves against our peer group. And lastly, and hot off the press, we are incredibly proud that we've been placed 71 out of 500 ranked companies in Newsweek's America's most responsible organizations, responsible companies. So just turning our attention to decarbonizing our operations and products. Our focus until this point has mainly been on Scope 1 and 2 emissions and on our own factories and our own operations. It's a really good starting point. It's something that we control directly. We've made some good progress through energy conservation programs and renewable energy programs. But 2023 will really see us pivot and focus on the broader value chain emissions and our Scope 3 emissions. And this is where we think we can have a really strong impact and take a leadership role. We've been evaluating our Scope 3 emissions, both upstream and downstream over the last months. And it's not surprising when you compare us to other industrial companies that the majority of our emissions will be in category 1, which is purchased goods and services, and category 11, which is use of sold products. So the tail pipe emissions from our self-propelled machines. And we are planning on setting a Scope 3 target in 2023 and we'll be announcing more on that in the new year. We're currently assessing various options for target setting. So we've also started to look at the various levers that will be available to us to decarbonize across the value chain. And the majority of this will be focused particularly when we look downstream on the next generation of zero and low emission machines. The future will likely include a broad combination of approaches. There's no one size fits all. including ongoing enhancements to fuel efficiency, alternative powertrains like mild hybrid and full hybrid and the full electric tractor. And I think you've already heard we have E100 out on the road for you to take a look at today. That will be available in the market in 2024, which is actually earlier than we originally announced in our sustainability report in 2020. We also newly announced the AGCO Power Core 75 engine family, which is our most efficient engine on the market. And its biodiesel and HVO compatible, and it's also been proved -- future-proofed for use with other alternative fuels in mind. And then on the upstream side, this is really where we're focusing on work with suppliers. Of course, we'll be looking at the materials, the go into the machines, the weight of the product. There are a variety of opportunities for innovation in this area. But I'm pleased to say that we've kicked off a partnership this year with EcoVadis to really understand the sustainability performance of our top 500 suppliers by spend to our top 500 Tier 1 suppliers. This will give us a sense of a bit of a baseline as to how our suppliers are performing on key environmental and social dimensions and will give us an opportunity then to work with them on specific areas where we see opportunities for improvement. So really just doubling down on the topic of soil health. So we've mentioned this multiple times this morning. We see this as a really important foundation for sustainable agriculture. On the slide, you can see the virtual cycle of focusing on soil health with farmers, but it's an increasingly hot topic. So the FAO, the Food and Ag Organization of the UN, announced earlier this year, that they were concerned that up to 90% of the earth soils would be significantly depleted by 2050, if we're unable to take rapid and significant action. So there's a real opportunity here for us to address the challenges that we see in the future around food security, but also to ensure that we secure profitable livelihoods for farmers. So our starting point is really to help the farmer understand the state of their soils to help them understand the accurate measurement and establish a baseline from which to measure improvements to soil health over time. And this is critical for fertility management, but it's also the most basic and fundamental requirement that's needed for soil carbon credits to generate high-quality carbon credits that can really attract the kind of pricing that we need to get the adoption from farmers. Earlier this year, we launched Radical Agronomics, and you saw a little clip of that in the video that Seth played. It was launched through Precision Planting. And I would encourage you all, if you have not already to go on to the Precision Planting website, take a look, because we feel like this is a real game changer for the industry. It's something unique. We've not seen anything like this before. We're incredibly proud of this product. We see an opportunity to really simplify the whole process of soil sampling and also to speed up the process, take out some of the inconsistencies and ultimately provide high-quality quick results to the farmer. So Radical Agronomics covers a number of different products and tools, but one of them is the Radical Lab, which is a fully automated soil lab with a small enough footprint that it can be housed at the location of the agronomist. And so it's a slightly different target market for AGCO because we're working in this case with the agronomist rather than the farmer. Now the image that you see on the slide here is the micro flow technology, and this is effectively the chemistry that sits within the radical lab and fully automates the whole process. So you're effectively moving the touch points and with that inconsistencies in the process. This is really builds on a foundational belief that we have that is accurate measurement is as, if not more important than modeling when it comes to delivering high-quality, credible carbon credits. We really see our investment into Radical Agronomics is a great starting point and leaping off point for AGCO to take a more active role in the carbon credit space. Now shifting our focus a little bit to our Grain & Protein organization. particularly the protein side of the business is really seeing now the opportunity to leverage some of these precision livestock technologies and also monitoring data to drive improvements in productivity, but also for animal welfare as well with a strong focus on the care, the nutrition and the health and well-being of the animals. So over the past year, we've worked really closely with our independent expert Animal Welfare Advisory Panel to really start to dig into some of the specific animal welfare areas that can be addressed through precision livestock technology. Examples include thermal comfort, air quality, litho moisture and sound levels. And so our intention is to start to integrate these dimensions into our product development plans going forward. One example is Scout. And again, this is in the video that Seth showed just now, this is a ceiling suspended robot that makes its way through the poultry barn sensing and measuring with a variety of different sensors, various attributes as it goes through the barn and really helping the farmer through AI to take decisions about things that they can't necessarily see with their own eyes. So it gives a huge opportunity again to address animal welfare opportunities but also to increase productivity. So Eric has already talked about our cultural beliefs and our purpose. AGCO has a really great culture. And I can say that firsthand. I've been with AGCO for 10 years. I've worked in 3 different global regions in the U.K., in the U.S. and also in Africa and Zambia. As part of our farmer-focused strategy, we're really doubling down on how we can leverage our culture as a competitive advantage, but also how we can leverage this as an employee value proposition as we compete for talent in incredibly hot markets. And we're also confident that if we can connect our employees to our purpose and get them passionate about why we exist as a company, we can deliver not just financial outcomes for the business but also sustainable performance. And then the only other point I would make here is the great work of our AGCO Agriculture Foundation launched in 2018 and in just a few years, they've launched 20 global programs supporting over 20,000 individuals, mostly farmers across the globe and impacting more broadly 200,000 farming communities, primarily in the areas that we operate in the communities that we work in. So the work doesn't stop here. We have a responsibility also as a global employee to take diversity, equity and inclusion seriously, and it's a priority for AGCO. With the support to our new CHRO, Ivory Harris, we've put new goals in place for 2030 to address the number of women in leadership positions in the business and more broadly the number of women in AGCO and then also to set some targets around minority representation in our U.S. business. We also believe that safety as a value is nonnegotiable. We expect that our employees can come to work in the morning and expect to go home at the end of the day safely. In 2021, we established a new health and safety program called Focus 2.0, which was really to sort of catalyze our activities in this area and take it to the next level. It's been going great in the last couple of years, and we really want to set the next level of target. So we've set a target for ourselves to achieve an incident rate of below 1.5 by 2025 and this would take us to a leading position within the industry. So they have it. AGCO is committed to a sustainable future. We've delivered early strong results across a broad range of sustainability KPIs. We've listened to you, and we've increased our transparency in our disclosure, and we have a clear path forward driven by the 4 sustainability priorities that you see on the slide. And so the world is changing, and so is AGCO. We've embedded sustainability into our corporate strategy and we're taking steps to be more resilient and more competitive in a dynamic marketplace. We want to deliver value through sustainability, not just for the farmers of today but also for the farmers of the future. Thank you very much. And I'll hand over to Greg.

Louisa and as we head into break, let me just give you a general push to get your questions into the queue, so far, we've collected 10 questions from Jamie and although we love Jamie. We know the rest of you have some great questions. So please go ahead and do that. QR codes on the tables online, the link underneath the video box, and so please get those to us. And let's do 5 or 6 minutes break, there's coffee, good stuff outside, see you in 5 minutes.

Damon Audia, AGCO's Chief Financial Officer. As Eric, Seth and Louisa mentioned, our farmer first strategy continues to be focused on driving improved performance, not only for us but for our farmers and ultimately for our investors as well. And I'll start my session this morning with an overview of the financial goals supporting the strategy that Eric outlined earlier. First, our 12% mid-cycle operating margin, which is a significant increase from where we are today. We're excited and we're confident in achieving this new target. Now in a moment, I'll walk you through our performance over the last several years and why we are confident in our path to hitting this 12% target, but also, as Eric said, continuing to take the bar at that next level. There's 2 key metrics that are critical to help us achieve this target. One, we're going to outgrow with our high-margin businesses, Fendt, Precision Ag and Parts, and two, we're going to consistently generate cash across the cycle that will enable us to do continued internal investment as well as external investments while also continuing to return cash to our shareholders. You'll be able to track our progress with 2 key metrics: One, we're targeting to outgrow the industry by 4% to 5% per year. And two, we plan to generate free cash flow that averages between 75% to 100% of adjusted net income on an annual basis. So before we go into details on our new targets, I want to spend a couple of minutes sort of reflecting on the history and what we've accomplished over the last several years and how we measure our performance to ensure we're delivering on the incremental value regardless of where we are in our cycle. The slide behind me, it plots the operating income margin over the last 10 years relative to where we were in the cycle. And as you can see on the slide, there are several years below the mid-cycle and 4 years above the mid-cycle with operating margins ranging from 4% in 2016, up to our current forecast of 9.9% in 2022. We use this 10 years of data, and we pulled it together to create what we call the value creation line. And the point of this value creation line is really twofold. One, the placement on the line sort of reflects our average profitability over this time frame relative to the industry cycle. And two, the slope of the line, and again, this is based on this 10 years of data, this slope effectively represents the incremental or the decremental margins as sales volumes increase or strengthen as well as the decremental margins as our industry is weakening. As we look forward, we use this value creation line to help guide us to ensure that we're delivering the right incremental margins as our markets are strengthening, but also an equally probably more important that we're cutting our costs or reducing our cost as we're seeing our industry weaken over time. So with that value creation line, we've taken 2013 through 2018 using the slope of that value creation line, and we brought that to the mid cycle. And you can see that as we bring those different points at mid-cycle on that slope, it shows that our margins were effectively flat during this period of time. AGCO's actual margins actually moved or ebbed and flowed depending on where we were in the cycle, but really showed no real structural improvement over time. Now I would mention during this period, however, we did increase our R&D and our engineering as a percentage of sales, which ultimately led to some of the future margin improvements that we'll talk about here. So as we begin to execute in the early days of our initiatives, we began to drive the structural improvement to our profitability in both weaker market conditions as well as in some of the stronger markets. And you can begin to see the improvements, as we look at the average of 2018 to -- sorry, 2013 to 2018 average. And when you compare that to 2019 at mid-cycle, you can begin to see the benefits as we began to focus on technology and the farmer-first solutions. And you can see that step up there. As we move to 2020, despite still weaker absolute market conditions, we began to deliver improved margins by driving further growth in our South America business, and this was driven by the Fendt full line being offered in South America, the first year, is also selling some higher-margin products in that part of the region like our Momentum planter. We also saw good growth in our Precision Ag and our parts business in that year. In 2020, North America also saw good performance in fend as we continue, as Eric said, to roll out the full product portfolio, both in North America and in South America. As we move to 2021, so did our apt in the market strengthen, well so did our absolute results as you see on the slide. We saw strong demand for the high horsepower tractors in 2021, coupled with solid pricing, which allowed significant growth again for our Fendt brand, both in North America and in South America while we saw good growth in our Precision Planting, Precision Ag and our overall Parts business. The high-margin growth drivers that Eric touched on really allowed us to continue to raise the bar on this value creation line going from '19 to '20 and again to '21. This year, we expect to deliver our best results ever. We're planning operating margins of 9.9%. And when you bring that using the slope of that value creation line to mid-cycle, you look at a mid-cycle margin of around 9%. It's through the disciplined execution of our strategy, and I think it's clear that we've made significant progress. We've structurally improved the profitability of our company by around 300 basis points when you compare our performance this year to where we were at the average of 2013 to 2018. And it's this type of improvement that we've demonstrated along with the opportunities that you heard from Seth, Louisa and Eric that make us very confident in delivering our new targets. So now let's talk about the future. Eric touched on our 3 high-growth margin engines. And so I'll only mention each of them briefly. Globalizing the Fendt full-line brand will continue to be a growth engine for us, growing the premium farm equipment market segment as farmers look for the highest and the best technology. Our growth focus, as you know, is both in North America and South America, with still the largest opportunity for us here in North America. The Precision Planting business has been fantastic, delivering above-market results for the last 5 years for AGCO. And there's still more opportunity for us to grow here in North America as well as growing in South America, and in Europe. Precision Planting will continue, as you heard from Seth, will continue to execute its unique retrofit approach. Seth talked about a strong ROI for our farmers, but it also presents a large addressable market for us to capture. The Fuse brand is our Precision Ag portfolio that we leverage on our Fendt, Massey Ferguson and Valtra products. We've seen tremendous growth in our technology portfolio, which is a key to further penetrating the large ag segments of the market globally. Parts and Service that as Eric talked about, as we get closer to our customers, we can become a better partner to them digitally. We expect our service and parts business to continue to increase and grow as well as we increase our penetration rates with them. And we expect these 3 primary growth drivers to help drive AGCO sales 4% to 5% above the industry growth when the markets are strengthening, but also to dampen our decline when the markets are actually weakening. Our operating margins from cycle-to-cycle is that basically, we will generate higher highs and higher lows. The bars on the left here reflect AGCO's margins through the existing cycle. As Eric said earlier, when you see our cycle, we were at 4% trough margin in 2016 and at a high point this year of 9.9% in 2022. As I mentioned, using the slope of that value creation line that puts us at about a 9% mid-cycle in this current cycle -- or in this current position. More importantly, if we look at the bars on the right, based on the operating margin progress that we've made over the last several years and the growth plans that Eric and Seth and Louisa talked about, our plan is to improve our mid-cycle operating margin to 12%, that's a 300 basis point increase from where we expect to finish 2022. Using the slope of that value creation line, that would translate to a trough margin of around 9% in 2026. As Eric said, this is not the old company you remember of AGCO. This is a new company delivering higher highs and higher lows. He also touched on, again, based on the state of the market, if we were to see the market where it is today and the strength of where it is today, we would expect to deliver margins in the mid-teens. So overall, I'd tell you, these are very strong results, and we will be delivering above our cost of capital regardless of where we are in the cycle in 2026. Historically, farmers have allocated a relatively small percentage, let's say, around 10% to 15% of their total spend on agriculture equipment. As we focused on Precision Ag, farmers see technology as really the key way to increase their yields and reduce a number of their costs like fertilizer, seed, crop protection, labor. As a result, we see the opportunities that farmers will continue to invest well beyond their historical levels to capture the benefits, which allow us to participate in a much larger addressable market than we have historically. Eric and Seth discussed some of the new technology targets that really reaffirm us as a major player in this growing segment of the market. Now let's take -- let's shift to our strong financial position that AGCO has really established over the last decade and the investments that we've been making to really support these strategic initiatives. Our investment-grade balance sheet and strong free cash flow generation with really limited calls on our cash provides a tremendous opportunity for us to continue investing in growth and returning cash to our shareholders. We've averaged between 75% to 100% of free cash flow conversion, and we expect to continue at that pace in the year -- in the coming years. The pie graph on the right details our capital allocation priority -- historical allocation priorities. Over the last 5 years, we've committed nearly $3 billion to support our strategy and also returned a significant amount of cash back to the shareholders. We've also added on this pie chart, our engineering spend in that red part, which was around $1.9 billion. Just to put in perspective that in addition to all the ways we've allocated cash, we've been adding a significant amount of cash into engineering, trying to fuel our pipeline going forward here. We've increased -- as I said, we've increased our capital expenditure engineering to focus on new product introductions and we've been growing our Precision Ag capability, which has really helped deliver on those margin improvements and the technology advancements and portfolio expansion that I've talked about in the past. We've done some bolt-on acquisitions really to focus on technology and bring further expansion to our portfolio and really to accelerate that farmer-first mindset that you heard from Seth, Louisa and Eric. And finally, we have remained committed with direct returns to our shareholders, including our normal quarterly regular dividends, our special variable dividends and then periodic share repurchases. Overall, we've been very balanced with our capital allocation. We've been investing organically. We've been adding inorganically, and we've also been providing sizable direct returns to our investors. Given our historical approach, we would expect to remain balanced going forward. We've built a strong capital structure, and I would tell you, we will strive to maintain our investment grade. We continue to invest in our business, and we expect to continue to increase our engineering spend as a percentage of sales in this year, both on a percentage of sales basis and an absolute dollar basis. We remain opportunistic, as you would expect, with our acquisition opportunities as we look to accelerate technology and really add new products. And finally, with our healthy balance sheet and our strong free cash flow generation, we would expect to continue to return capital back to our shareholders. This year, as you know, we increased our quarterly dividend by $0.20 -- 20% to $0.24 per share, and we paid our second special variable dividend of $4.50 per share. Future returns to our shareholders will be based on free cash flow generation, our internal investment needs as well as that looks at things like CapEx as well as inorganic opportunities and our overall market outlook. So speaking of our market outlook, let's go to the next section, which I know most of you are waiting for. Let's talk about our assumptions for our 2023 forecast. The slide behind me shows our retail forecast for our 3 major regions. Globally, driven by strong commodity prices, we expect healthy farm economics to support another year in 2022. For North America, we expect similar demand compared to the healthy levels that we have here in 2022. We expect continued growth in the high horsepower row crop equipment segment to be offset by softer demand for smaller equipment after the several years of strong growth that we've seen. The increasing interest rate environment is expected to continue, and this has been slowing the small equipment segment of the market this year and likely into next year. In South America, we expect sales to be flat to up 5%, really moderated more by supply chain constraints. This region remains one of the strongest end markets for us, especially in Brazil where they're forecasting record profits and strong farmer profitability in 2022. Shifting to Western Europe. Industry has forecasted to be relatively flat compared to 2022. The farmer fundamentals in the region are generally healthy with grain prices continuing to outpace input inflation. Meanwhile, the supply chain constraints that we and the industry have seen here in 2022 are really extending the equipment cycle into 2023. With this as a backdrop, let's look at our 2023 financial goals. So currently, we expect net sales to be around $14 billion next year. With those sales, we're expecting effectively slightly higher modest global sales volumes to increase. Pricing for us at this point, we think, will be in the high single digits next year. And based on the current FX rates, we would say that foreign currency will be around a 1% headwind year-over-year for us. With those sales, we're projecting earnings per share of around $13.50, up significantly from where we expect to finish here in 2022. We're targeting capital expenditures at around $375 million, and we expect free cash flow conversion in the range of 75% to 100% in line with our long-term targets. So as I close my section, I want to remind you of the 12% mid-cycle operating margin target which I said earlier, is 300 basis points higher than where we expect to finish this year at the mid-cycle as well as our annual performance metrics, which are also critical for our long-term success. And I'm hopeful that after you -- after our presentations today, you can see why we're excited and why we're confident in our new targets. So let me wrap it up. We've highlighted our optimistic long-term view of our industry. You heard Eric, Seth and Louisa talk about why we're excited about AGCO. You've heard from them that we're well positioned to win. We've reiterated our long-term strategy aimed at growing our business improving returns for our farmers, for ourselves and for our investors. As you saw on the value creation line that I walked you through, we've proven that we deliver on what we say year after year, and we've demonstrated the ability to get stronger every year regardless of where we are in the cycle. We've outlined some new long-term financial targets, and Seth and Eric set some new technology deployment goals that will help deliver higher levels of profitability, higher highs, higher lows and more consistent earnings through the cycle. All of these things will deliver long-term value to our shareholders. And with that, I think we're ready for Q&A.

Okay. Eric, I'm going to ask you to kick it off for us. We have a couple of questions that I'd like for you to cover for us. The first one involves digitalization particularly, does the digitizing the customer experience, create conflicts with dealers, number one? And does the dealer share and the profit stream associated with the digitalization.

These digital tools are creating really benefit the customer and the dealer. So I'll just use a simple one to give you an example. When we do e-commerce on parts, allows the customer to order a part, it gets shipped to them directly, but the dealer still makes a margin. What this is low. That's just one example. When we have these sales funnel management tools, it used to be even at a dealer level, the relationship with the customer was in the salesperson's hands. I was in a notebook or whatever that happened to be, so it was very distributed. The dealer didn't even know how much activity do I have out there in the marketplace? Do I have enough demos plan? Do I have enough inventory on hand, all those types of things. So these tools help the customer experience, they help the dealer manage the overall sales process, they keep the dealer in the margin stream, and most importantly, it creates a higher level experience for the customer and a more consistent experience for the customer. Sometimes our farmers will span 2 different dealer organizations. We want to make sure that through these tools, they get to interface the way they want much more consistently.

Awesome. Eric, the next one, we're going to stick with distribution and particularly, let's talk about our dealer strategy in the context of dealers selling both Fendt and Massey brands. How do we maintain brand governance and how to think about potential for channel friction.

Okay. We have different strategies of our brand positioning -- channel positioning based on the region. So in Europe and in South America, fundamentally, we have a Massy Ferguson channel that's full-line Massey Ferguson and then a second channel that is Fendt and Valtra. 2 channels to go to the market. In North America, since we don't have Valtra in this market, we're allowing dealers to sell both Fendt and Massey. And largely, the way that works is that the Fendt is going after the premium production producer and Massey is going after the straightforward dependable consumer, and oftentimes the smaller farmer. You may have a farmer that would want to buy products from both brands. They want to buy their combine and planter and their sprayer from Fendt. That's the goal cover large acreage, but then they may have some dairy operations or farmer activity where they want to buy some Massy tractors to do some mowing or around in their dairy. So for the customer, it works well. What we do then with the dealer is to say, we want you to have different sales focus. But back office in terms of service and parts and things like that, those can all be combined because we really want to create a great experience for both brands. It's the sales focus that we want to keep separate in terms of different salespeople.

Awesome. Seth, I have a couple of questions for you. The first one asked specifically, does the way you monetize equipment with Precision Ag change over time? And then the second part of that is, do we move to a pay per usage or pay per acre model?

Yes, that's a good question. So I think the first thing to understand is it already has been changing over time. With technology and with the connected fleet out there, we can monetize our products after the whole good left the factory. And we also, with our Precision Planting products, we can also scale up over time. So it's not like you need to buy it all at once or you miss out. You can actually determine year-by-year what you want to do. And it's actually quite exciting because it enables us, if we see a farmer is going through their field taking care of a certain task, and we know we have some optimization products that can help them. We can offer a demo over the year. We can offer the unlock for that over the year, and we can incrementally charge for that, whereas the old way was you order it upfront or you never got it. And then with some of our turn automation, just the guidance accuracy, correction signals, those have long -- for a long time, been products where we could get recurring revenue and additional revenue. Then when we jump to the other end with our Radical Agronomic lab, our approach there is to go to market with a service approach, with a service fee by the sample. And we think that will be a nice recurring revenue growth opportunity for us going forward.

Great. And then as a follow-up to that, what type of adoption do you anticipate in your early autonomous products in grain cart and tillage. And then a follow-up is, will the first release of your autonomous grain cart be able to unload.

Yes. Somebody here is a farmer, I think, because if there's a hard operation in the field, it's not just getting the grain cart full, but pulling up to a truck without hitting the truck. So that's very astute. But as far as the adoption, what we're looking at, and there are a lot of debates about this, we look at what was the adoption with guidance. When guidance got to the point where it was truly productive and reliable and easy to use, we believe that automation will follow that same adoption path. And you can look at that path from the early 2000s through about 2010, North America adopted fully over that period. Then Europe was really the next continent that had the adoption curve really spike up. And then South America is still in the middle of the adoption curve. So that's the way I would look at it. As far as committing specifically to the features, we're not ready to do that. But you can rest assured that with our farmer focus, we are examining those pain points and making sure that we're going to bring a product that will truly be value-added.

Great. Thanks, Seth. Damon, I have a couple of financial-related questions for you. The first asks -- the goal is to double our Fendt revenue in North and South America over the next 5 to 7 years. What is the mix of that Fendt revenue today between North and South America? And what type of a mix do you see by the end of that 5- to 7-year period?

Yes. So I think today, right now, our mix is around 75:25 directionally between North America and South America. As you've heard Eric and I talk about, we see tremendous growth opportunities in both. I think there's a larger opportunity here in the North American market in absolute dollars. But as we migrate further north in Brazil into the Mato Grosso region to more of these professional farmers, we've seen significant growth there. And so we still see great growth potential in South America. But I think from an absolute dollar perspective, we see more opportunity here in the North America as we grow our share with the Fendt brand.

Awesome. The next one references our 12% mid-cycle margin target. And they'd like to discuss what needs to happen within the Grain & Protein portfolio to support that 12% mid-cycle margin.

Yes. Well, let me step back a little bit and sort of talk about the components of going from this mid-cycle 9% that I talked about when we move 2022's adjusted current forecast to mid-cycle up to the 12%. So that 300 basis point increase that I talked about. What I would say is about half of that is expected to come from those 3 growth drivers that Eric and I talked about. So Fendt, Precision Ag and Parts really outpacing again. These are our high-margin businesses. So you think about half of that 300 basis points we would expect to come from there. The other half is going to be a combination of what I'll call the optimization. So Eric, touched a little bit about Massey Ferguson and what we're doing to further optimize the profitability. I will put Grain & Protein in that same segment. This year, we know our Grain & Protein business has been challenged by steel prices and how that's influenced some of the projects of what the customers have been able to order. We have a large business in China that's been influenced by the COVID lockdown there. So we know that the Grain & Protein group today is not performing to where we expected. The team has done several things to restructure to improve its profitability and position it for further improvement as the markets recover. As we've seen steel come down, we're hopeful that the order pattern for some of these large projects will pick back up. And we know that as China starts to loosen its COVID-19 policies, we're hopeful that we continue to see improvement there. So as part of the optimization that I would put underneath that bucket, we're expecting the Grain & Protein team to really start to improve its profitability up to some of the historical margins. So those would be the 2 parts of the optimization. And then the third part that's really underpinning that is going to be sort of the overall productivity improvements. we still see opportunities have been our factories to drive incremental productivity to reduce our cost of sourcing as we try to move to more low-cost or more in-region for-region where appropriate. And so when you put those 3 between Massey Ferguson, Grain & Protein and then I'll call the more of the manufacturing optimization, that's probably the other half of this 300 basis point improvement that we're planning over the next several years.

And Damon, while we're on the topic of that 12% mid-cycle target. I have another question that relates to the growth aspect of it, the 4% to 5% outgrowth of the industry. Can you give us a sense for which of the 3 buckets that are -- let's shift a little bit, Louisa have had a couple -- the first one, thank you for your transparency into your progress and what they want to know is, when are you going to set some goals around science-based targets and what are some of the initiatives that are underway there.

Yes. Well, we've had a team working on evaluating our Scope 3 emissions, as I said earlier, for the last couple of months now. And we absolutely recognize that the science-based target initiative is sort of best practice for setting credible long-term targets. So right now, we are being guided by that methodology, looking at both the guidelines around setting new mid-term and long-term targets, so sort of 10 years and then up to 2050. We're looking at the sort of target lines for a well below 2-degree scenario and a 1.5-degree scenario again within the scope of the guidelines from science-based targets. And then also looking at the different target setting options around absolute and intensity targets as well. So we're still sort of evaluating those options. We want to do the full due diligence on that. But as I said, we we're being guided by the SBTi methodology and process. And as I said, we look forward to announcing our Scope 3 targets in 2023.

And Louisa, so the second question I have for you, talks about growing interest in the carbon credit trading by farmers and the asks about what kind of incentives farmers will need in order for them to continue to improve the sustainability of their operations.

Yes. So the, I guess, global uptake of carbon credit -- carbon credits is still -- well, firstly, the data is pretty patchy. There's not a huge amount of data on soil carbon credit uptake, but the numbers are still relatively low, I think, in the U.S., more than a couple of percent in Europe similar sort of 4%, 5%. I guess the main barriers are really the transition costs, so changing your practices and then also the impact on yield, so there's still a cost to the farmer and whether the economics sort of balance out at this point in time is a challenge. We've had the opportunity to see some research, which talk to around about 4,000 farmers in Europe and North America. And it's clear to see that more farmers are certainly looking at this as a viable option for the future. So they ask about are you currently using carbon credits now? Are you looking to do in the next 2 years and the numbers went up significantly, particularly in Europe, sort of around about that 20% level. The rationale sort of why have you taken up the option of carbon credits to this point in time, around about half of the farmers surveyed were basically saying that they hadn't been approached about it. It didn't really have any information about it. So there's still a huge opportunity to educate and inform around the programs. I think around about 40% was saying that the ROI wasn't high enough and then about 30% saying that they were really waiting to see what would happen with the price. And particularly when you think about the fact that a lot of these contracts are 10 years in length, it kind of makes sense while everything is in a bit of a state of transition for farmers to hold back a little bit. And we also talk to farmers directly ourselves. We run a farmer panel on soil health and carbon sequestration and the key point that came through from that research was a trust element actually because it's a long-term commitment. There's not a huge amount of clarity. There are still things that need to be figured out about how the whole process works. And so I think there's various options and opportunities to improve that. And as I said before, getting the economics right, getting the data, the right data in the farmers' hands and then helping them with the right tools to bring down the cost of the transition. And then also looking at transition financing, I think, would be key.

Great. Thanks, Louisa. Seth, I have another question for you. You earlier highlighted our separate retrofit channel. This question would like you to elaborate a little bit about that channel. Just what exactly is it? How does it separate? Why is it so successful?

Sure. So one of the things that we do is we go out and look for our channel partners in this space is I don't want you to think about massive buildings and overhead cranes and all these types of things. What I want you to think about are individuals who like to get out in the field and teach. If the knees on their pants aren't a little dirty, they haven't been down in the field digging up seeds to see how things are progressing. And they need to be able to listen to the farmer's problems and really help them shine a light on it and get to the solution. So that's very different than the traditional OEM model which is heavy infrastructure, looking at the big sales. And then the other piece is the retrofit channel, they're very much, I would call sales engineers. They're very good at teaching. They're very good at listening and they're very good about during the peak season being out there with the farmer to make sure that it works. And so those are the types of individuals that we're going after. In general, they're smaller organizations. They're less well capitalized than a traditional dealer. But with the business where we offer such tremendous growth opportunities and lower overhead needs, it's very interesting to them. Of our channel, less than 10% of our dealers for the Precision Planting business are actually also equipment dealers. So it gives you an idea, 90% are not in that space. And it's not to say that equipment dealers can't be good at it. We have some that are fantastic. But we found that to really go out and be hungry and go after this business. It's a different type of individual or a different type of dealership. And we're finding that to be consistent as we go from North America to South America to Europe.

Great. Thanks, Seth. Eric, I have one for you. It asks for a little bit of discussion around the revenue model for autonomy, and how it will differ from our traditional model for selling farm equipment.

Yes. If you go back to answer that question, think about what Seth talked about the adoption curve, and we use guidance as our pattern. And so if you look at the guidance pattern of how fast it got adopted, we can also learn about how it got adopted and guidance showed up as a retrofit solution first or an aftermarket solution first. So the customer had a tractor and then they bought a guidance package, put that on their existing tractor. And that's how the market worked for a number of years. Then over the course of time, then OEMs started integrating that and offering guidance from the factory. We think that autonomy will also have multiple paths to the market. Retrofit will be a key path. It will look a lot like guidance did. And so that's why we're investing heavily with JCA and others to create a really great retrofit autonomy package for all brands delivered through our Precision Planting channel that Seth just talked about. I want to underline that channel. That channel is different than anybody else in the marketplace. Everybody's got OEM channels. We're the only ones who have also on top of our OEM channel, a retrofit channel. So we think autonomy will come to the market early as retrofit, certainly. Then it can be priced as either just a hardware sale like most of our retrofit solutions are today or some customers in certain situations also want to buy it as a subscription model. Over time, I think we'll be also seeing this technology coming to the market through an OEM. Somebody will want just a turnkey solution delivered directly from the factory that's a simpler offering that way. And so we'll be offering that, too. And again, I think that will also come in 2 forms, either as an option package or as purchasing it as a subscription model. So multiple channels, multiple financial models depending on where we are in the world.

Great. And then another Precision Ag question for you Eric. And Seth, you may want to jump into, pretty straightforward. I just ask, do you have all the pieces in place today to deliver on the full crop autonomy by 2030? And if not, what pieces do you still need to put into place? And how would you plan to solve those?

Well, I'll say we -- I think we've got an awesome team. The team that we've invested in and the team that we've invited in over the last year through the 6 acquisitions, I'd stack them anybody else in the industry. Really excited about the team we have. Having said that, we're also inviting more in. We have a trajectory to grow that team over the next several years through the various tech hubs that we're establishing. And so we'll be bringing on more talent. In terms of skill sets, largely, we have what we need. But I think the work in front of us has a lot of machine learning, artificial intelligence work in it. And so you took a look at the bias of who we're going to be hiring, we will continue to bolster in those areas, strong bench today, but that's where most of the future work is. And so that's where most of the future additions will be. Anything you want to add?

I would say we have a lot of the foundational elements that I talked about. Now it's the -- like the digital area. It's deploying that globally, getting that to be our platform around the world. We've done well in Europe. North America is the target for next year for very strong deployment and then South America. And that's the model we're going after. And then through that, developing the capabilities to also support this, leveraging the digital tools, leveraging the connectivity and enhancing that over time because that's going to be absolutely critical for the adoption because farmers are going to look for productivity, which we think we for sure can deliver, but it's also got to be the reliability and the ease of use because if they set off an autonomous machine to till a field, and yet they have to run back and forth to it 10x before it completes that field. They're probably not going to use the product much. But if they put it in the field and they can trust that it's going to reliably get the job done and it performs and it was easy for them to execute, we see that going very quickly. So that's where we're going to iterate over the next few years and continue to invest.

Thanks, Seth. And then Eric, another Precision Ag question for you. We talked about the opportunity to expand or extend our precision business outside of North America. Can you add a little more color as to what type of slope you envision for that growth, both in South America and in Europe? And if there's changes you need to make to your international distribution to make that happen.

So our Precision Ag business, I'll start and Seth can tag [ team ] this one with me. Historically, it had its strongest foundation in North America, it's next evolution was in the South America and our newest market is Europe that essentially takes a few layers to generate. As we said, it's a whole new channel. So they're establishing the people, but it's also establishing the on-the-ground capability in terms of research plots, data from those research plots and all of that to think. That's what we've invested in the first 2 or 3 years after we bought Precision Planting in 2017 is establishing the data and the people in Europe because that's largely where our most unpenetrated market was. Now we're able to really grow and we're growing 50% plus in Europe. We feel like now we've got critical mass for sure in North America. It's mostly an optimization opportunity. We have some more growth in South America, and it's filling out the rest of the markets in Europe. Europe is also a little bit more fragmented. So if you think about the situation, we're selling a technology module onto an existing planter or sprayer or combine. Well, in North America and South America, the existing planter, sprayers and combine market is highly consolidated. There's kind of 3 to 4 major players. In Europe, there's more players. So when you think of that market, there's one more degree of difficulty in that we need to adapt our technology onto more platforms, more planter platforms, more common platforms, things like that. So that's something that's also in the works to aid our growth. Seth, anything else?

I think Eric hit that one well. Today, from a mix standpoint, we're at a little south of 75% still in North America and about 15% in South America, and you could -- and then Europe is 5 plus and then the of rest the world takes up the remainder. And you could say, well, boy, you're not doing a lot in the other parts of the world. You've got to remember that we feel that we're only on planters alone, maybe half penetrated in North America. So we still see tremendous growth just in planters in North America. And that demand, we've been allocated with our demand throughout all of 2022, and we're working through those issues. But those markets are all growing very, very rapidly, and there's no doubt there's upside from all the global markets where we are, especially where we're well established and there's a high concentration of those machines that we've traditionally retrofit. That's why you see North America, Brazil, Argentina and then Central Europe being very good markets -- growth markets for us.

Great. Thanks, Seth. Damon, I have one for you. It asks specifically, it seems like the 12% target is mostly based on sales mix. Should we expect a restructuring or cost-cutting program as well?

Well, again, I think as we look at that value creation line and one of my comments was that we have to make sure that we're controlling our costs as we see our markets move from where they sit today, which is above mid-cycle to the below mid-cycle at some point in time in the future. Again, none of us can predict when we'll see that, but we know historically, we operate in a cyclical industry. We'll do our best to flex our cost, try to maintain as much variability. But again, in a cyclical industry to the extent we were to see a significant downturn, I think what you're hearing from our team, from Eric and myself is that we've improved the structural bar on an annual basis, and we'll look for those opportunities if we have to, if the market is getting weaker, but our goals are is to react as quickly as possible. As I mentioned, we use this for ourselves to see where we are and how we're managing our costs to ensure that we're at that level or above that bar on a regular basis, so we'll flex our cost structure as much as we can variability wise. But at the end of the day, we're going to try to make sure we stay on that line. And if that means we have to look at a restructuring at some point in the future, we'll do what we need to.

Great. Thank you, Damon. Eric, another, I guess, strategy-focused question. It says we didn't spend a lot of time talking about our Grain & Protein business today, and it as pretty straightforward? Is it still part of your central strategic buy-in?

Yes, as part of the portfolio, we think that there's a lot of upside in that business. So Damon talked about the fact that if markets just get back to normal, that business has a lot more margin potential. Over the last 2 or 3 years, we've been structuring that business and having it come together, perform better, much like we committed that we would do in South America. And you see the results flowing through in South America. Our margins are really strong there. We've consolidated a lot of factories, product, added more technology to the business, both in Grain & Protein. So we've been doing all the things on our transformation plan. Unfortunately, there's been some headwinds with steel, China shutting down and third one, I'm just fiber -- and the cyber attack. When we shut down from cyber, we brought Grain & Protein back on latest. So 2022 is just a bit of headwinds for that business. We think as 2023 comes in. These things all level out, deals are already coming down. China is coming back. Let that -- let the results from that business just flow through like they should. And we think that that's going to be a much better year for Grain & Protein next year. We have a lot more value to add to that business yet.

Great. And then, Eric, maybe one more for you. This asks about the replacement cycle for ag equipment appears to be getting shorter and do you agree with that, number one? And number two, what role does precision technology have influenced that.

I think it's -- to there's any shortening it's all about the technology. It's all about customers seeing these new features, 600 drums of inputs that they can save if they add a little bit of a feature on their new machine which that's why there's this addressable market expansion that we talked about today. But the customers see that big time. They see the rising cost of their inputs. They see what new technology can do. and they say, "You know what, I need to get into that new technology, either through retrofit by increasing the capability of my machine or buying a whole new machine. So it's really a technology-driven situation. Where are we in the cycle? I think Europe stays a little closer to the midpoint. And so they don't get too extended or ahead or behind on their buying behavior, but North and South America doing we're still -- we've still got an extended fleet out in the marketplace, both in North America and South America. Europe is closer to target.

Great. Then in the last few minutes we have, Damon, we've got a few questions on our 2023 targets that you talked about. The first one asked, is the expectation for supply chain embedded in your '23 guidance, does it assume a significant amount of improvement?

Yes. So we've seen the supply chain start to get modestly better here in the back half of fiscal -- of our 2022 period here. As we looked at our '23 outlook, we expect it to get better. I would not say completely better, but we do expect as we move through 2023 for the supply chain to ease, allowing us to produce more units and become more efficient in our factories. And so we've assumed some level of disruption, but not to the degree that we have in our current -- we've experienced in 2022.

And then the follow-up to that, Damon, is your pricing assumptions for 2023? Is it mostly carryover? Or is there some incremental pricing associated again in 2023?

Yes. It's going to be a combination of both. So as we've talked about this year, we are expecting to finish 2022 with pricing in excess of 10%, so there will be a good percentage of that, that will carry over into 2023. Two points, we are planning some incremental where we feel it's appropriate. And then the other one is our South American markets. As you've heard us talk over the last couple of quarters, we tend to open those windows 1 quarter in advance to make sure that we're -- as we look at the cost of the products there, the demand that we're not -- we're ensuring we get the right pricing. So again, depending on the strength of that market, that's one that will be more variable as we move through the course of 2023, but a lot of incremental carryover and then some incremental already built into that high single-digit number.

Great. And then a question about incremental margins in as '23 if we're making specific investments that have caused that to be lower than our typical 25%. Why don't you answer that.

Yes. So we are, and there's a significant amount of investment, as I made in my comment, we are increasing our engineering and R&D not only on an absolute dollar year-over-year, but as a percentage of sales. Last quarter on the call, I think I mentioned engineering was trending a little bit lower than what we would have normally expected. Part of that was just the hiring rate of our ability to hire all these engineers we're looking to do, plus some of the currency fluctuation. Next year, we are expecting engineering to go up as a percentage of sales. So again, I think this year, we'll probably finish at this, call it, 3.5%, 3.6% of sales, which is lower than where we want it to be, as we go into '23, we'll be ratcheting that up probably closer to 4%, 3.8%, 4% of sales. So there is a large amount going into engineering. We're investing, as you heard Seth talk about. We're moving into Europe on the Precision Ag space. There's some upfront investment we're doing there on the SAG side of the house, which, again, we know has the returns that we've seen in our Precision Ag business, so we're doing some investments there as well. The other comment that I guess I would make for the audience, which is a little bit below the line, not to the incremental margins, but as interest rates have continued to rise, and we saw this last quarter, and we sell the receivables through AGCO Finance we've seen a significant increase in the cost of that. And so we've tried to factor that in as we look at the interest rates and the selling of those receivables. Again, that's going to be below the operating line. But again, we know that, that will be an incremental cost that we'll expect to see year-over-year in '23 versus '22.

Great. And then the other piece next year that's impacting our margins has to do with price cost in South America. We did a really good job of getting pricing in early in Brazil this year. Now we're feeling some of those costs associated with that pricing. So while we had good success, price cost in 2022, we won't have that same benefit in '23. So that will be more year-over-year as a headwind. So those 2 factors play into it as well. And then Eric, maybe as a last question before some opening -- or closing remarks. We have a question on the war in the Ukraine, what the end of that war might mean for European ag equipment demand.

Well, this is a crystal ball question. So it's been a pretty big disruption in that area, especially originally. Now with some of the agreements that have happened, a lot of that grain is flowing out of the region, and it looks like that over the next, say, 4 to 6 months that they'll be back kind of where they normally would be in terms of getting grain exported out there won't be grain stuck in the region. So that dimension #1. Dimension #2 is the crop that's being planted and harvested. It's been damaged, and a lot of the cropping area is in the eastern side of the country, not so much the western side. So in the area where most of the conflict is where most of the crop is, so you've got crop damage, farm damage, storage damage. And then some of that area has been taken over and that crop is getting removed. So I think even if we certainly hope that conflict comes to an end as soon as possible. That's absolutely our top priority. But a lot of damage has been done. And so if the conflict were to end soon. I think there's going to be a lot of work to go back in and rebuild those farms, the equipment, the storage, bring them back to productive capacity, and I think that's going to be a heavy investment and a multiyear journey to bring them back. It's naturally fertile ground. So the world needs that ground to be productive, but it's going to be a bit of a long pull. We certainly hope it starts soon.

Wrap up.

We just sort of appreciate the tremendous turnout here today. We love the enthusiasm and interest that you have in AGCO. Hopefully, you heard today the excitement we have in our future. We started a little while back by refreshing our strategy. We spent a lot of time on that. The entire leadership team spent several months going from one into the under turning over every rock. We've locked in on that strategy now. And you see we're staying on the same direction. The second step was reorganizing the entire company and with that was a huge effort that we completed. We took 2 layers of management out and collapsed, we call it the farmer first operating model, and essentially got all of our employees and our managers closer to the farmer, flattened our organization and took cost and made the organization even more decisive and clear and consistent around the world. So working on culture. We thought that was an advantage we want to turn that into an even stronger advantage to attract employees in. We have the right plan. We want to have a fire in the belly to go get that plant fast. And then within the plan, we're seeing the results happen. Our growth engines are all driving. And you can see from the results that is happening in both technology, the awards for that technology is turning into farmer satisfaction productivity and turning into margin. And Damon's chart showed the margin steadily coming up. Well, margin doesn't happen on its own. It happens because of the more value being generated and is coming from the key ingredients in the strategy. We have the right plan. We've got the right team. We've got the right first early initial performance steps to give us really good confidence that got a very bright future in front of us. Thank you so much for your participation today. We look forward to talking again soon.

Thank you.