AGCO Corporation (AGCO) Earnings Call Transcript & Summary

Good morning. This is Tami Zakaria. I'm the Head of Machinery, Engineering and Construction equity research at JPMorgan. We are here today with Brad Arnold, SVP and GM of Precision AGCO; and Greg Peterson, Head of Investor Relations. For those new to the name, AGCO is a leading manufacturer and distributor of agricultural equipment and related replacement parts throughout the world. AGCO provides farmer-focused solutions to sustainably feed the world. So let me pass it on to Greg to tell us more. Given most people in the room likely aren't familiar with AGCO, can you start by giving us a bit of an intro and background on the company and maybe a quick state of the union for your most important markets?

Sure. Thanks, Tami, and thanks for having us here at the conference. AGCO, in terms of last year's sales, is a $12.7 billion, as Tami said, ag equipment and agricultural solutions company. We're the largest pure-play ag equipment company with a pretty diverse business internationally, primarily in Europe, North America and South America. In terms of company background, we were founded in 1990, and we're the product of over 30 acquisitions. And probably one of the most important was a company we bought in 2017 called Precision Planting, which arguably is the most successful ag tech company in the world. And Brad is here to tell us a little more about that in a few minutes. AGCO's really shifted our focus over the last few years, for sure, focused pretty intently on large professional producers that have a very strong appetite for technology. And the good news is, a lot of that technology, the penetration rates are still very low. In terms of strategic priorities, we have 2 that we're focused on pretty intently: one is to outgrow our industry by 4% to 5% and the other is to improve our mid-cycle operating margins to 12%. Quickly on those growth strategies, we have 3 high-margin growth businesses that we're trying to grow aggressively. One is globalizing our Fendt premium technology brand, which has been an industry leader in Europe. We're bringing that here to North America and also to Brazil. We have our sights set on doubling the business over the next 4 to 5 years. In terms of our margin improvement, a lot of that, the momentum is going to come from our Fendt growth strategy as well as growing our Precision Ag business and growing our parts business. And then we also have some cost-focused initiatives aimed at improving the cost structure of our Massey Ferguson business as well as our Grain & Protein business. Quickly in terms of demand drivers for our industry, a lot of concerns around where we are in terms of our cycle. We are a cyclical business, driven primarily by farm income and commodity prices. So farmers, yes, obviously, are aggressively in the market as their income improves. We're down from record levels last year in terms of commodity prices and farm income. Commodity prices have pulled back this year, but so have things like inputs like diesel, fertilizer and seed cost. And with that, farmers are still expected to be nicely healthy this year. A lot of demand globally for grain, things like population growth, changing diets towards more protein and the reopening of China all are expected to support relatively low levels of commodity prices and support commodity -- I should say, low levels of commodities and support commodity prices in the future. So Tami, that maybe gives a brief, brief background and overview. Happy to throw it back to you.

Absolutely. Thank you so much. So Brad, to you, can you help us conceptualize what kind of savings your existing Precision Ag solutions are generating for farmers? And can you give some examples what's the ROI from a farmer's perspective? If they want to buy a solution from you, what's the payback period?

Yes, you bet. Well, first of all, Tami, thanks for, again, allowing us to talk about our exciting business of Precision Ag within AGCO. I want to first start by talking about our customer. For those that might not be familiar with agriculture, in my view, farmers are probably one of the most high-risk entrepreneurs really in any industry. Many, many things that they do are outside of their control on a daily basis and in terms of all of the tasks that they perform around the crop cycle. And just to give you a little insight into what the opportunity is that exists, if you think about a single seed, a corn seed, as an example, the genetic potential that's in the bag before the farmer does anything to it is well over 600 bushel per acre. But yet in North America this year, which has dramatically increased this year over, say, 10 years ago, the average farmer will yield 180 bushel. So our opportunity to create value through better management of the inputs that farmers use every day, every year, is significant. Obviously, we can capture back some of that lost 400-some bushel advantage. So some of the things that we've done that have created meaningful value. Just to give you an example, one product that we sell through our retrofit channel, through Precision Planting, as a brand as well as to OEM customers that we support, like some of our large OEMs here in the U.S., has a product called DeltaForce. DeltaForce is a product that goes on a planter and manages how much force is applied to a row unit so that we can keep a seed consistently spaced at depth in a way that's going to germinate well and maintain as much of that 600-bushel potential as possible. When we actively control it with that product, we can actually improve -- in trials all across the country year-over-year, about a 10-bushel improvement. That system costs a farmer around $50,000. A 10-bushel improvement on $5 corn, which we sit in about a $5 corn market today, that's a 1-year payback for that system. So again, just an example of the targeted paybacks that we have for farmers. Most of our products range from 12 months to 24 months as a retrofit solution.

That's very helpful. And I think, last year, Precision Planting revenues were impacted by chip shortages and -- but recovered in the back half of the year. So how are you thinking about growth of this business this year and in the medium term?

Yes. Very good. I think probably the best way to answer that question, we used to be highly concentrated in our sales in the first quarter and into the first 2 months of the second quarter because it was centered around the planting season, and that's when our dealers were focused on getting installs done and most of our sales occurred. Last year, with the chip shortage, we actually stopped our order board in August of 2021, didn't reopen it until June of '22. So we had a long period where our retrofit channel was not able to access product or access orders. We were still shipping a product that we had on hand. So that pushed our back half of the year to be much stronger than normal last year. This year, we'll probably follow a little bit more similar trend to that because farmer -- or dealers are still working through the inventory. But our goal is to, as we grow our business internationally as well as we grow the maturity in our channel, we want our dealers installing product all year long as well as being able to ship into the Southern Hemisphere a higher percentage of our product. So I don't think we'll ever return to the position we were in, in 2021 where a significant amount of our sales were in Q1.

Got it. That's very helpful. And we've heard you talk about your retrofit strategy a lot. I think that's one of your differentiators. So can you just shed some light on why retrofit is the right way to go for Precision Ag within AGCO?

For sure. The benefits are on both sides. If we think about, first, the farmer, farmers are able to access new technology through a retrofit approach with a channel that's dedicated to do that and very confident at doing that. So that when you solved a single problem, they can access that technology on a planter or a sprayer or a combine that they already own. They don't have to buy a new piece of equipment to access that new feature that provides a better outcome for them. So the retrofit strategy improves the farmers' operation with very little investment. For AGCO and for Precision Planting, specifically, we were able to develop a solution for a particular problem in a 2- to 3-year time frame, where it takes many NPI programs within a whole good environment, we're talking about a 5- to 7-year development cycle. So we may have an idea that we think is valuable, but it's going to be 7 years until we get it into the hands of a farmer for him to give us -- he or she to give us feedback that it was. With a retrofit approach, we get feedback in year 3 that it's simple, reliable, that it solved the problem we thought was real and that it provided an ROI. And then we can incorporate that proven solution into our whole good platforms within AGCO, so into our Momentum planter for Fendt or a rogator-sprayer as an example for Fendt as well. We also sell those through OEMs. So again, this retrofit-first approach both benefits AGCO and our innovation speed as well as the farmer and the investments that they need to access that technology.

Great color. I want to come back to the OEM piece of it. But before that, I think you gave out some growth targets for Precision Ag revenues. I think you talked about $1 billion -- reaching over $1 billion by 2025. So what kind of dealer network expansion do you need to do to achieve that in each of the 3 major regions?

Yes. So the retrofit channel is not something that's probably known by a lot of folks that might be here today or listening. It's a dealer network that really was created by Precision Planting, and it's amalgamated of a lot of different types of ag businesses. So Precision Ag specialist -- for most Precision Ag specialists that we would have as a dealer for us is about 85% of our business -- or 85% of their business is ours. They have complementary products, retail channels. Also, input providers also sell our products as well as seeds and crop consultants and those types. That's a hard channel to build. We built it over the course of 30 years. It's very different in their mindset and their relationship to farmers than an OEM dealer. OEM dealers like to sell a large piece of equipment, take in trades and move those trades to the second buyer or third buyers of new equipment. The agronomic knowledge and capability that's required for a retrofit dealer is significantly different than selling new machines. So we developed that in the U.S. and now we've moved over the last 4 years down to South America and begin to develop that region. And now we're over in Europe about 3 years in, developing the European region. Globally, we're about 650 dealers, about 500 of those dealers being in North America. We think we need to be about 1,000 dealers globally before we are able to reach that $1 billion mark. So it's about more dealers as well as improving the capability of each dealer in each region.

Got it. Very helpful. And for Precision Planting, I think you have relationships with OEMs. So update us on the breadth of OEM relationships you currently have. What's the growth outlook there?

Yes. So not just within Precision Planting, but the 3 other businesses that I'm responsible for that we've acquired over the last 18 months: Headsight, which is a harvesting automation company; Appareo, which kind of -- does automation across the crop cycle; as well as JCA, which is focused on autonomy. All 4 of those businesses have OEM relationships. This is a very unique approach in the industry. No other ag -- outside of perhaps Raven does support other OEMs. But within Precision AGCO and those 4 businesses, we focus primarily on the retrofit market and then also on these OEMs. It's probably 25% of our business. We are very opportunistic in how we'll continue to grow that business. When we were acquired by AGCO, I think we had around 12 customers -- OEM customers globally. We're over 40 now. So it's certainly something we've had success even within AGCO, bringing on competitive customers to our whole good brands.

Before I move on to the next question, I do want to highlight that we will have the last 10 minutes of this session opened to the audience for questions, both for here in the room, and you can also submit questions via the webcast. So we will get to your questions, if you have any. So the next question, again, to you, Brad, what is the parts and services opportunity associated with Precision Ag sales?

So today, we don't really have a great way of measuring the aftersales portion of a retrofit business because we sell through a dealer network. And so it's not easy for us to track what's a new piece of -- a new system, essentially, a new feature going on a used planter today. We believe the useful life of most of our products are 4 to 5 years. Farmers sometimes will trade in between that time frame. So repeat sales to the same customer, the same feature or perhaps new features is significant, but it's not necessarily measurable for us.

And is it fair to say that your dealer network will be essential in sort of creating that sticky relationship, where, if there's any new features, updates, they would be able to provide it to the farmers?

Exactly, yes. There's 2 engines to our business: one is the retrofit channel, which I've focused a lot on; the second is our commitment to innovation. That innovation engine, in the past, would produce 1 to 2 new products a year. This year, we'll launch 6 new products. Those new products are most highly adopted by existing customers of a dealer Precision Planting products. So...

Got it. I will come back to the upcoming launches. But before that, let's talk about pricing, price realization. What has price realization been in the Precision Ag business in the last few years? And what's the usual run rate for pricing for the segment? The reason I ask, I think for traditional machines, it's low single-digit inflation type of pricing -- price realization over time. But it seems like there's a lot of value to be had from Precision Ag solutions. So what about pricing for that segment?

So interestingly, when you think about price realization, especially in the environment we've been in, where the industry has been capacity-constrained as well we're in an inflationary environment, we see ourselves as well as many competitors on whole goods raising prices dramatically. Our products start out value-priced. So in the example of DeltaForce I talked about earlier, we're value-pricing that solution at 50%. So the margins are more like parts margins to start with for that product. And so we have kept pace with the rest of our whole good business in terms of price realization over the last 3 or 4 years, but it's so strongly priced to begin with. If we had to pull those back from an elasticity perspective, it wouldn't be dramatic to our margins.

Got it. And going back to product launches, I think you mentioned 6 new launches this year. So can you update us on what those products would be? And then not just this year but beyond this year, what kind of new products are in the pipeline?

Yes. Well, the name Precision Planting today is getting more and more ambiguous, even though it's very specific. And we've actually done a lot of surveys with farmers because we've moved beyond the planter to the combine and seeder and now to the sprayer, and so I'll talk about some new products on the sprayer. But farmers now are identifying the retrofit approach with our name versus we're specialists at planting. And again, part of that has been because we've brought some new technology to the sprayer industry over the last year and well over the next 3 or 4 years that give us a new platform to develop on a new path for our dealers to be engaged with. The first was ReClaim. We launched that last year. It's a boom recirculation product. We have a new nozzle coming out, that's a PWM nozzle that will give us the ability to control the application of chemical through a sprayer. And then we're bringing out in 2024 a complementary vision system, we call vision-targeted spring, that will allow us to do targeted spring so we can see a weed, spray a weed and bring dramatic reduction in herbicide use for farmers, saving upwards of 75% of their herbicide budget on certain passes.

Interesting. I think you've talked about the commercialization of fully autonomous crop care solutions by 2030 with retrofit solutions coming in by 2025. So from our perspective, the outsiders, what are some of the KPIs to monitor the progress of all these initiatives?

Well, I think the things you all will be able to see and monitor is the acceptance of the first few use cases of autonomy. So we'll be doing field demonstrations of our autonomous grain cart, as you mentioned, earlier -- or later this year. In fact, many investors are invited to join our field day. You'll be able to see that in Nashville firsthand. So proving out that the capability is there, that the farmers' willingness to pay is there on solutions that we actually commercialize is critical behind the scenes to fulfill the commitment to having a fully autonomous fleet by 2030. We're working in a more -- a less visible way of creating the epics necessary, meaning all of the automation required across every pass of the field, every tool that a farmer uses and all the functions within those tools that have to be automated in order to actually remove the operator from the cab and perform the task at or better as an experienced operator. And so we've got a pretty significant program management process behind that.

Got it. Just to dig a little deeper, the autonomous grain carts and tillage equipment, I think you mentioned it's coming in 2024, right?

2025 is when we hope to commercialize the retrofit grain cart, yes.

Okay. That's the retrofit. And first fit is probably a year after, in 2026?

Within factory fit?

Yes.

Yes. A year or perhaps 2 years after, yes.