AGCO Corporation (AGCO) Earnings Call Transcript & Summary

All right. Good afternoon, everyone. My name is Jamil Ohaiyia. I'm the associate on the machinery construction team here at Morgan Stanley. And with me, we have AGCO Corporation's Chief Technology Officer, Seth Crawford; and Head of Investor Relations, Greg Peterson. Thank you both for being here.

It's good to be here.

Just to start off with a quick disclosure. For important disclosures, please see Morgan Stanley research disclosure website at www.morganstanley.com/research disclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So just to kick it off. Given that most people in the room likely aren't familiar with AGCO as a company, can you start by giving us a bit of an intro and background on the company and maybe a quick state of the union on your most important markets?

Absolutely. So last year at about $12.7 billion in sales. We were the largest pure-play agricultural equipment and Precision ag solutions company. Diverse revenue base, about half of it comes from Western Europe, 20% to 25% in North America, 20-ish South American and the balance, primarily in Australia and New Zealand. We're roughly a 30-year-old company put together with over 30 acquisitions over that period of time. Maybe the most significant was the last major acquisition, which was a company called Precision Planting. And some of you may or may not have heard of that, but it arguably was probably the most successful ag tech company we've seen in our industry for sure. And it was very important to AGCO for probably 3 reasons. Number one, it gave us unquestionably probably the best planting technology. Number two, it introduced the concept of retrofit first to our business, and it's one that we've embraced and taken not just planting but across the crop cycle. And number three, it gave us another distribution channel, which is enabling that retrofit strategy and really is a big differentiator between us and our competition. So we've taken then that acquisition and built a very strong precision ag business with it, and Seth will talk more about that in a few minutes. But essentially, our go-to-market strategy as we were targeting big professional farm customers that today are hungry for technology. And the good news is that the penetration rates for a lot of that technology is relatively low. Our strategic priorities as a company. We have the 2 top strategic priorities are: number one, to outgrow the industry. We put a target out there to outgrow the industry, 3% to 5%. We have 3 high-margin growth pillars that are supporting that strategy. Number 1 is to grow our Precision Ag business, both the retrofit side, the Precision Planting side, but then also the OEM technology that goes on our big equipment. Number 2 is taking our premium Fendt brand global. The Fendt brand has historically been a European ag brand. We've built a full line around the tractor business, which has been the key to that business, and we've taken it now to North and South America and have aggressive targets to double the business over the next 5 years from about $700 million last year to $1.5 billion over the next 5 years. And then the last growth pillar for us is our parts business, which doesn't sound glamorous, but it's a very high-margin part of our business. And through digitalization and expanding our web capabilities, we have some nice targets to grow that part of our business. And then lastly, in terms of strategic priorities, we've had a long operating margin target of 10%, a mid-cycle operating margin of 10%. Last December, we raised that to 12%. So over the next 5 years through both those growth initiatives I just talked about as well as some optimization things to take costs out of the business. We look to expand our mid-cycle operating margins 200 basis points over the next 5 years. And then lastly, to talk about what our markets look like today. If you look at our underlying drivers of our business, essentially commodity prices and farm income. Last year was a record in most of the markets for farm income through the pandemic, commodity prices more or less took off. And even though they've come down from relatively lofty levels, they're still quite high. And even though farm income might be stepped down a bit from last year, farmers will be very profitable in 2023 given a normal harvest. And so that will enable significant investment in our equipment, and our order boards are extended through the third quarter across most of the regions. And then lastly, in terms of support of the industry, commodity prices are very important. With the conflict in the Ukraine, about half of their production capability has been taken offline. That's very significant. Ukraine historically produces 10% to 15% of the world's calories. And like I said, about half of that is off-line. So that's been supportive and will likely be supportive of global commodity prices. Then the other real thing we're watching very closely is the opening of China. They're a major importer of soft commodities. And as they reopen and return to kind of normal life, folks will consume more protein and that is a big driver of grain consumption. So a couple of important tailwinds in terms of commodity prices as we think about what the future looks like. So a strong 23% and shaping up for another good year next year. So I'll hand it back to you.

And then just diving into the Precision Ag, I know you mentioned that, Greg. As one of the most attractive secular growth drivers for AGCO in the broader space has been the emergence of precision agriculture. Can you talk a bit about how this product suite has grown for the importance of AGCO and how your go-to-market approach is different than some of your competitors in terms of retrofit versus newbuild integration?

Yes, absolutely. Well, I think Greg hit the macro factors pretty well. And I think you've all heard the major themes about what we're facing globally, population growth, improving GDP per capita. Along with that comes the improving diets and the need for greater food production overall. And at the same time, the sustainability impact that we're feeling, the farmers are out there wondering how are we going to be able to do all of this. And the reality is we need to apply technology. The technology exists. We need to apply it in our industry. And so Greg talked about in 2017 was really a key moment for us in our history buying the Precision Planting business at the time, it was less than $100 million in revenue. And we've been able to take that and learn from it, learn how to have a separate channel that can innovate and deliver products to farmers around the world, farmers who believe in better and that want to deliver differentiated results. And then also blend that with the traditional equipment channel and deliver integrated products in a way. That's greatly helped open up our view of what's possible. So we've truly embraced the dual-channel approach, and that's something no one else in our industry has done. Others talk about retrofit, but they try to jam it through the same channel and it really is a disruptive mindset that we take because if you're going to retrofit what we mean by that is, we'll go on anybody's machines. We don't care who originally manufactured it and it can be of any age. When most of the other folks talk about it, they'll talk about putting equipment on their own machines up to maybe 5 years old. The reality is our business, we thrive on machines that are even older than that sometimes. But we don't take them -- it's not an aftermarket product where it's like a part broke and you fix it and you get it running again. This is technology that you apply to a traditional steel and iron product and you take its productivity to a whole new level. So the installed base is everybody's installed base. And that's where the addressable market gets very large for us, and we see that growth opportunity continuing, especially as we expand our portfolio across the stages of the crop cycle. As the name would apply, Precision Planting started with planting but we've now expanded to soil testing, and we've expanded to application equipment, so herbicides, pesticides, et cetera. And then we've made some strategic acquisitions over the last few years to get into the harvesting space, to get into the connectivity space. So it's really helped us build out our tech stack and be able to position ourselves for the future.

That was perfect. I was going to actually ask about precision planting next. But I guess going forward with that, which precision ag areas and technologies are you most excited about in terms of driving outsized yields and cost improvements at the farm P&L level? I'm assuming that precision plating is a big part of that, but if there's anything else that you wanted to expand on?

Yes. What I'm most excited about is just the momentum that we have. Our -- the business started -- for the Precision Planting business, it started in a farmer's shed in Central Illinois. And we have grown that business and now we've set out a target to be at $1 billion in sales by 2025. We passed over $700 million already, so it's not a big stretch to get there. But the whole idea is that we're able to take this technology and leverage it to optimize the inputs. And so the way we start is, first, we help the farmer see what's going on in the field because they're going through the field at a reasonably high rate of speed, it may not sound very fast to you, but if you're planting -- if you're riding in a tractor, planting crops with 24 rows or 36 rows at a time, that feels pretty fast at 10 miles an hour. If you're applying pesticides or herbicides and you're going close to 20 miles an hour, that feels pretty fast in that environment. The first thing we want to do is we want to provide a visual monitor to help the farmer see that everything behind me or everything that I'm doing is going right. They're riding along, but they have a lot of feedback mechanisms that we're able to show to sense what's going on. But very quickly, they're able to see and sense it. But from there, they say, okay, now I want to be able to act on it. I want to be able to control it all the way through the field, and I want to be able to optimize it. And that provides us a tremendous opportunity. So we were able to deliver that value to the farmer upfront. They quickly see the payback of those investments and they want more. And so that's the neat thing about it. You don't have to buy a $0.5 million piece of new equipment, you're able to make incremental investments that are very scalable to start with your existing fleet and then take it up step by step from there and be able to see those results. Usually in 1 to 2 seasons, the farmer is able to realize payback and they're willing to come back for more and unlock more and more features, which is good for them and obviously good for us, too.

That's great. And then just taking that a step further, if we can just hone in on the discussion of autonomy for a second. What initiatives does AGCO have in place here that differentiate the company versus your competitors? And then can you just discuss the commercialization efforts and time to market? Are we seeing this tech currently at the field level today?

Sure. So as far as autonomy overall, we've been automating features along the way. You can't get to autonomous operation in a farm field if you don't automate hundreds of actions. At first, you have to understand the actions, but then we need to be able to automate it. We've been on that path for many years and that's through building in our common architecture then being able to guide the machine through the field, being able to turn it at the end of the field, being able to go back in, sense the soil, sense your surroundings and being able to optimize throughout the entire operation. One big difference that happens in a farm field versus the highway. On the highway with a car, your #1 goal is don't hit anything, right? Well, in a farm field, your harvesting crop. So the whole point is, yes, hit that and get the crop off the field. So you have to sense not only what is the desired thing I want to hit, which is the crop or the soil, but you also need to be able to parse that between, okay, this is a desirable thing I want to hit, and here's the undesirable piece of that, that I want to hit. So it brings in -- well, there may be less regulation in the farm field than there is on the roadway, the challenges are different. And so that's helped us really hone in on what we need to develop. And in some cases, we've been building up our internal analytics capabilities, and we've been doing that in really across the whole organization. And then we've also been doing it inorganically. We bought a company called JCA Technologies out of Winnipeg, Canada last year. They've been at the heart of automating solutions for many businesses in the agricultural space and the construction space over the last few years. So they have a lot of the capabilities we were seeking, and that helped us greatly. From a time line, Jamil, the key dates for us, we're going to have what we call retrofit autonomy. So a product that can go on your tractor pulling a tillage tool through the field or pulling a grain cart through the field, maybe working in harmony with your combine in that case, harvesting the field. We're going to have that by 2025, in operation. We'll naturally have -- we've had products in test. We'll have it again this summer. And then we will be bringing See & Spray technology. We have that in the retrofit form for the summer of 2024 with the full availability there, and we'll have it in factory fit form for 2026. And so a couple of different ways to go about that. And then our long-term commitment is to have the entire crop cycle automated by 2030. So that means whether you're sampling your soil, planning your field preparation, planting your crop, applying your pesticides, herbicides, in-season fertilizers harvesting your crop, we'll have that entire cycle automated by 2030.

Yes. And to that exact point, what needs to happen in terms of tech development in order to get to that 2030 milestone? Or another way, what hasn't yet been solved and needs to be in order to commercialize that offering by 2030?

I think perfecting that the ability to go through the crop at speeds that will be acceptable to the farmer is a big piece. Some of the early sand spray technologies they worked, but they were going through the field at 1 to 2 miles per hour, whereas when you're running a conventional ground-based sprayer, you're going 15 to 20 miles an hour. And so you had to take your productivity down so much that most operators would say that's not going to work for me. I have to get the ground covered in a much more efficient manner. So it's the ability to now ramp this up and be able to deliver that level of productivity. And then we also have to solve for some of the challenges of how do we tender the machines? And what I mean by that is if you're running a sprayer and you're applying the chemicals of the field, you're hauling a lot of water. You're hauling a lot of these chemicals to the field and someone needs to be there to refill the machine. The question will be how do we automate that because if you can't, you're going to be running people back and forth constantly. And the efficiencies that you might be able to gain from the technology will be offset by some of the legacy realities of it. So it's those types of things that I think need to be solved, but I don't see any impediments. It's going to take time and additional development. And there's no doubt that the data is coming in as fast as -- we're collecting it as fast as we can and being able to run through it. The computing power is definitely there and some of the AI technologies are truly amazing. So we're pretty excited about the future.

Maybe shifting a little bit. Greg, you had mentioned Russia and Ukraine. And we know that they brought fresh challenges this year with regards to the fertilizer availability. Many of the future products that AGCO and others are developing specifically target fertilizer and applicant usage, so have you seen any changes in adoption as a result of those dynamics?

I'll take it to start. When we look at some of our products, first, we're able to evaluate what we need in the field and we're able to sense when we talk about our soil sampling capabilities and then our Furrowforce technology where you have a sensor going through the trench of the field, really sensing what's the organic matter in the soil, what's the temperature, what's the moisture level. We're able to place the seed right where we want it. We're able to put the right amount of starter fertilizer on it. And then I would say, appropriately position the nitrogen right where the plant can get to it for the growing season. And as we adopt some of these technologies in our own trials, we're able to see that we can reduce fertilizer usage anywhere from 25% to 50% and get the same yield. It's all about putting the right amount on at the right time and being able to do that throughout the season. So we're hyper focused on that because as the fertilizer constraints continue around the world, we also are facing the fact that, first of all, farmers don't want to broadcast fertilizer. I don't expect everybody here to be an agronomic expert, but I think you all know what I'm talking about when I talk about granular fertilizer, the dry fertilizer that comes in a little like pebbles looking forms. 70% of the fertilizer around the world is still broadcast in that granular form just across the field. And when you think about it, when we can change that and we can go to a liquid form that you can put right where the seat can use it initially and use it throughout the season, that's where you get a significant reduction in the amount that you're using. And if you just blast a granular fertilizer across your field, and you have a big rainstorm, your value from that is practically 0 because it washes away, which is one of the worst things that can happen because that's what ends up in the waterways and causes all kinds of issues. So it gives our farmer customers the opportunity to optimize their operations from the chemicals that they use and do it in a much more sustainable manner as we go forward.

I just want to pause and see if the audience has any questions.

Can you talk about [indiscernible]

It's a good question. I don't think we've got that perfectly modeled out and that will be a better question to ask me about 2035 or 2040 when we're able to look back. But what we do see is much more willingness from farmers to invest in technology to enhance their current machines. As machines get bigger, there are less customers for that equipment to flow down to through the used market. And really around the world, that's a critical cycle that's been in place for many generations. And so what we see us being able to do by being in both sides of this with the retrofit technology and producing the equipment is we can keep those machines running longer and not just relife them, but take their potential up. You look at a planner bar, that planner bar, once it's 5 years removed from being new, its technology is pretty dated and it, for sure, needs to be upgraded as far as the wear components. With our technology, we're able to do that. And that bar can probably last at least 20 years in most markets around the world. And so we see us extending that life and there's some debate about will this all go to little swarm robots. Will they do all the work? I think there will be a place for the small autonomous robots but the reality is, I think it will be a mixture over the long term because we're not going to abandon this installed base of equipment. Farmers are going to look for the technology to automate the big stuff and then we're going to be looking at how do we take that productivity up year after year and do it in a scalable way, which is also a very different concept than what we've had in the past. Historically, you sold the product with all its capabilities on day 1 and then you moved on to create the new product. The way we're doing it today on both sides of our business, whether it's the retrofit or the traditional product, we sell it, and we're selling a connected product with an architecture that will enable us to sell additional features over the life of that product. So we're able to enhance the value to the farmer, and we're able to enhance our business, which gives us reason to continue to reinvest in it.

Let me add just something quick on to that. You talked about the 10% to 15% that farmership historically spent on farm equipment. And there's also about 30% they typically spend on land, so that land piece, really, we can't do anything with. But there really is about 70% of the farmer spend that for the first time in our history, we're getting a chance to have a say and how they spend it. We're finding that farmers are very willing to pay a little more for a plant or a sprayer or a tractor if it saves them on seed and fertilizer and spray. So we're in a very different situation. We used to be kind of the -- almost the afterthought. Now we're very much a strategic partner that helps them decide how are they going to farm, right? So that's a very different situation. We're finding that they're willing to pay for the technology that helps them do that. So really need for us as we think about growing our sales and expanding our margins.

Yes. Just as a follow-up to that. When did that -- and best estimate, when did that sort of dynamic start? Was it 2017, '18, '20? When did you see that inflection?

Which dynamic is that?

In terms of the farmers being -- willing to pay more and looking -- doing sort of this math, this offset?

Yes. I would say when were they willing to pay more when you look at the company that we bought to really get into the space with Precision Planting, that's a 30-year-old company now. Their age is about the same of AGCO. But where it really started to amplify was a few years ago. And some of the things that happened at the same time is equipment prices, you can listen to all the industry participants and hear about the price increases that are going on there. They're very steep increases. And so to get in and be able to buy a new tractor planter combination, you're talking $0.75 million. And so I would say the farmers' appetite to really step in and buy the technology has increased greatly over the last few years. And that's what's giving us the growth rates. We're seeing greater than a 30% compound annual growth rate over the last 5 years in that business, which is far greater than the equipment business, and that's why Greg talks about being able to exceed the industry growth by 3% to 5%.

And then the other thing to think about is that right now, farmers are making a lot of money. But as the commodity complex comes back down, they're going to be even more interested in technology that helps them be profitable at lower commodity prices. So that's the reason to think that the way they invest in equipment will change over time going forward.

Probably have time for 1 or 2 more questions.

Can you give us a bit more granularity into the $700 million you were talking about in revenue from the position planting business? Does that include GPS guided -- is some of the revenue being reclassified into Precision Ag from what would have been machinery before? And I just had a second question on biologics, whether that you think is significant for your See & Spray business?

Sure. So from a -- I don't think it would be called a reclassification on our part. We've always considered guidance to be part of Precision Ag, but you're talking about guidance, all the turn automation, all your -- what we would call way-line planting, which is the path you're going to take across the field and the logistics features that we would offer there. The connectivity is included in that. And then the other piece is all the technology on the planter as far as your down force, your seed meters, your placement technologies, your fertilizer application technology, all of that would fall into the Precision Ag category for us. And then from the biologics standpoint, we actually are -- we have what we call, well, test farms around the world, demonstration farms. And we have 3 of them around the world, and we're working with various companies on the use of biologics to see the efficacy and how they're performing. So I'd say we're staying very close to that to see what the opportunities are. And right now, I'd say it's a little too early to tell.

Looks like we're right out of time. So Seth, Greg. Thank you both for joining us. Appreciate it.

Thank you.

Thanks, Jamil.

Absolutely.