AGCO Corporation (AGCO) Earnings Call Transcript & Summary

Yes. So I think there's a couple of comments. We're not looking to transition away from the CNH dealers. Again, as you know us quite well, our focus -- we talk about being the most farmer-focused company in the industry. And our goal is to serve the farmers in theory, no matter what color tractor they're driving. And you saw that with Precision Planting, right? The largest customers for Precision Planting here in the U.S., most of them drive John Deere equipment. And so we're very much agnostic in trying to serve the farmers to make sure that they're getting the best yield, the lowest input cost possible. And so when Trimble and CNH dissolved their partnership, Trimble began to sign up many of the CNH dealers to become more of a direct distributor of the product. And they saw some very good success in signing up those dealers. And then we subsequently announced the creation of the joint venture. We've continued to see good success with many of those dealers continue to sign up. We do expect that we won't sign up 100% of those dealers, but we are seeing very good transition as Trimble and now PTx Trimble joint venture goes out and works with these dealers and explaining very much how we're a retrofit mindset, OEM-agnostic mindset, trying to focus on the farmers. And the key for us and the key that we instill with the JV leadership is really maintain the relationship with the CNH farmers. Again, you know, Kristen, you follow our industry a long time, as implements are getting smarter, as technology and the machines, you're getting more and more of a natural mixed fleet just because of the level of technology and implements. And for these farmers who have the Trimble as their installed base of information, we want to make sure that they have that readily available regardless of whether that's coming historically from CNH or whether it's coming directly for -- or was directly from Trimble or now coming from PTx Trimble, we want them to ensure that they have that technology, the convenience, the comfort of what they're used to using. And they're going to get that service no matter where. Even it's not coming from their CNH dealer, there will be a PTx Trimble, Vantage dealer. There may be a Precision Planting dealer or maybe it's an AGCO dealer, but our goal is to make it as seamless or as frictionless as possible for them. And that way, they can continue to use that Trimble software that they got comfortable using for the last 20-plus years.

So build on that technology piece and sort of what the Trimble customer is maybe accustomed to, what the Precision Planting customer is accustomed to. And Trimble did have some products in the pipeline, they may allow you to leapfrog, at least get a foothold in the other parts of the crops. Precision Planting [indiscernible] pretty good foothold, [indiscernible] you're coming out with the sprayer solution that's here. But other than that thinking about their WeedSeeker product or autonomous solution that they bought through Bilberry. Just maybe talk a little bit about some of the functional technology synergies maybe beyond what most people [indiscernible] for Trimble in terms of that baseline guidance.

Yes. Well, I think that if you go back to when we announced the joint venture back in September, we talked about how complementary the product portfolio of what the Trimble ag team was bringing to the table coupled with what AGCO had. And it was a very complementary, you touched on the distribution channels. Again, there's strength in Europe under Muller, our strength really in North America. And so there was 2 complementary distribution channels. And then you laid together the product portfolio starting with their guidance system, their data management system, and you moved around the crop cycle. And it was a very much a complementary portfolio. So you touched on WeedSeeker, again, very good program, very good product as they identified green on ground. We'll be introducing a retrofit approach to targeted spraying later on this year, ultimately moving into an OEM version likely in 2026. You look at Bilberry, again a very strong, very much grain-orientated targeted spraying as we've been working on much more of a row crop orientated. So again, a very complementary set of products. The key for us is to get with that team, and our team has already done that and sort of look at the libraries, look at the algorithms and are there ways to commonize. So rather than having 2 or 3 sets of algorithms, is there a way to create one set, one library that's looking across to see what's the best for the farmers and best for the products. So we see a lot of complementary parts of the product. You think about their water management system. Again, we haven't talked about water for many years, but it's becoming more and more relevant for the farmers. And so as we look at that, how do we build upon that with our programs like radical agronomic. Again, soil sampling, water, all of these things come together that focus on the farmer and give them hopefully a complete suite of offerings that either drive their productivity and their yield up or keep their input costs as low as possible.

The synergies between Precision Planting and Trimble, I'm going to ask a little bit qualitative, a little bit quantitative on this. You rebranded Precision Technology multiplied, PTx. It's the multiplication that I want to ask you about because if we look at AGCO, say, 2017, so last trough cycle. Before you acquired Precision Planting, AGCO was kind of this portfolio of disparate brands. You didn't really have a full lineup. You had EBIT margins, which even in the good years, were high single digits. You had some great brands, but it wasn't really a cohesive strategy around farmer solutions. So now we have this blueprint that Precision Planting brought to the organization. It's my opinion that, that sort of fundamentally changed some of the culture at AGCO. Help us understand where you see Trimble in that blueprint? What did you learn from Precision Planting? And where do we get this multiplication effect?

I mean you can come on to my side, Kristen, you did a great job. I mean you hit the nail on the head here, right. I mean if I go back to 2017, Precision Planting was really the first business to demonstrate that farmer-first mindset. They're very much focused on solving the farmers' challenges. And again, back then, it was mainly in the planting space. What I would tell you that as we learned what they were doing with new products, addressing the pain points, we as a broader company really began to embrace that mindset. And I'd say it got turbocharged throughout AGCO as being the most farmer-focused company in the industry. And you look at not only what does Precision Planting do on planting, but now as we've been able to invest in them, they're really demonstrating that farmer-first mindset, addressing the pain points around the crop cycle. That's things like radical agronomics, which are so critical for the farmer to understand from a soil sampling standpoint what he or she is getting, getting better information in a more timely, but then we've also done targeted spraying that we touched on. We've got the symphony nozzles coming out of Precision Planting. We've added Headsight. Again, a small bolt-on acquisition that's really addressing the harvest. But again, getting them to embrace that farmer pinch point mindset of how do we help drive productivity. And now you see that flowing through our brands as well, whether that's Fendt, whether that's Massey, whether it's Valtra, all of them basically thinking about the farmer first. And so when you add that power, so that's our baseline. Now you add the power and the technologies coming from PTx Trimble through this farmer-focused lens, again, it's not about selling a product, but it's about the farmer focus and addressing his or her needs. The opportunities for us are immense. Now again, go back to the history of this -- of what Trimble was, it was really going -- they were selling to an OEM, and the OEM was selling to a dealer. And that dealer was then selling to the farmer. When you shift the work now going from the farm -- focusing on the farmers' pain points and you bring that back upstream in your product development, that's where the real potential when you combine that mindset, coupled with all of the technology we already had in our tech stack. And so when we think about that multiplication effect, and again, you look at the examples of what Precision Planting was doing and how they were addressing it, and you start to layer that in now with the PTx Trimble technology and portfolio, that's where we see the real opportunity to accelerate the growth, accelerate the penetration with the farmers and hopefully developing better relationships with them because now they're going to have even a bigger suite of portfolio of products to bring to the table to the farmers.

Well, so here we get to the quantitative piece then. If this is the qualitative and the product solution, let's talk about what it means for AGCO margins. You currently have a 12% mid-cycle target out there. In the guidance, there is assumed some margin uplift to the overall portfolio from Trimble, obviously, in this choppy end market. So help us understand, let's fast forward 3 years from now. What does the margin profile look like? And then I'll have some follow-up questions for you on that.

Yes. So a little -- you're a little bit ahead of me on this one already. We're just 1 quarter in. We don't even have a quarter with PTx Trimble. But what we did say, and you're right, last year, we did 12% slightly above mid-cycle. So you bring that back to mid-cycle, we're getting close. I would say we're probably closer to 11.5%. So we're very close to achieving our mid-cycle target last year. You now layer in Trimble, the PTx Trimble business. What we said is it's going to be about 30 basis points accretive to margin this year. We would expect that to grow, grow in a couple of A, the margins. As we think about the revenues right now, they're kind of depressed given what's going on with the CNH churn. But then as that business hopefully outpaces the broader AGCO business like Precision Planting has or our precision ag business, we hopefully expect to see that margin accretive. I don't want to give a number just yet. We're going to have our Investor Day here in December, and we'll give you new margin targets, and we'll embed this as part of that. But we expect this to be margin accretive. We expect it to be part of that contributor that's going to help us continue to outpace the industry as we said at our December '22 Investor Day.

So if I think about the organic then the underlying margin enhancement opportunity, I mean to get to that 11.5%, one of the biggest uplift has come from improvement in margins in South America. This is the question that came in from the audience. I mean you've moved your margins from mid-single digits to high double digits. Obviously, Q1 kind of retraced back to the low single digits. What are the levers for improving structural margins in South America? And how do you get more equal balance on the margin profile across the regions?

Yes. Well, a couple of questions embedded in there as well. You're good at your multi-question questions. I think if I look at South America, the structural improvement in profitability to the business is there. And I look at the gross margins, again, a little bit of a competitive pricing environment right now. If I think about what we've done to structurally grow the high horsepower part of the business, really attacking that Cerrado region or the Mato Grosso part of the country, we have these large professional growers, you're seeing good growth there. Again, go back to the Fendt penetration, we have 70% of the white space covered there. We continue to grow there. So the gross margin of the underlying product is relatively strong. I think there's probably 2 variables right now that are influence in South America. One is a little bit of the market competitive pressures that we're seeing, and that's driven more by the speed of which things decline. Again, you go back just 6 months ago, that industry there was red hot. And now we see there was some poor planting. You saw the interest rates or a few variables, and it slowed down significantly. I think we and our industry as a whole have all reacted very quickly and cutting production. So when you look at the margins that you saw in South America or we look at the margins you saw in the first quarter, a lot of that is more reflected to the speed of the negative absorption as we're trying to adjust our production. Hopefully, I think longer term, if you get more managed through the cycle, you can adjust your production, hopefully, more timely than, I'll call it, these significant cuts that you saw. When you're cutting 30% in the quarter, it's significantly challenging to your P&L. But ideally, as retail starts to balance more with production levels as we get in hopefully into the third and likely into the fourth quarter, you should see the margin uplift because you're not getting such a large amount of negative absorption there.

Is there a mid-cycle margin for South America that we can think about?

Yes. What we expect to see -- it's hard to say there's a normal in South America. But what we would like to see is sort of that low to mid-teens margin is what we've expected in South America.

Perfect. I want to move on because this is often a question that we get about AGCO. In a broader sense, it's really around your capital allocation. So let's first touch on the variable special dividend, $2.50 this year. It's the fourth time that you've done this special dividend. How should investors think about the heuristic around payout? I mean, obviously, we understand the Trimble acquisition took up some of that cash. But excess free cash flow ex acquisitions, is there some rule of thumb that we should think about for the special dividend?

Yes. I think the way that we approach capital allocation is really I'd say a hierarchy of our investments. We start with what we need to reinvest back into the business with capital expenditures, R&D and you've seen us, we've been increasing our capital expenditures as we've unlocked on some areas where we've been bottlenecked and things like our CBT transmissions. We've been increasing our capital expenditures. So over the last couple of years, we were up around 20% up until this year, which we've reduced it given the market, but very much focused on inward investments to drive long-term growth. So that's been priority one. Priority two has been the bolt-on acquisitions. Up until last year with Trimble, it's been a lot of bolt-on acquisitions where we've been able to sort of add to the tech stack and accelerate some of the development. I think we'll still be inquisitive there. Again, I think when you look at Trimble coming in, we've met a big part of our need, but there's always opportunities where maybe someone is a little bit further ahead, we can accelerate some development by acquiring. But again, I expect those to be mainly bolt-ons. And then whatever is left to get back to the direct shareholder returns, we do have our quarterly dividend of $0.29 per year -- or excuse me, per quarter. But even doing so, we'd still continue to generate significant free cash flow. And so as you alluded to the prior 3 years, we were paying the special variable dividends. This year, I think we took a little bit more of a balanced approach because of the debt we took on to Trimble, I made the comment earlier, we were underlevered relative to my views. And so we thought it was appropriate to still continue to return directly back to the shareholders in the form of a special variable dividend but at a lower level, just given the incremental debt that I took on. So we try to take a more balanced approach. I think it's important for the investors also to understand that because of our shareholder concentration issues, we and our Board have made the decision that we use a special variable dividend in lieu of a share repurchase program. So we only buy back stock to the extent it's to offset executive or annual dilution. But other than that, we use this as our sort of our means to return surplus cash back to the shareholders. And we'll look at our cash flows this year, as you alluded to, on the debt repayment, we'll see how we generate cash this year. We also have grain and protein under strategic review. So to the extent we elect to monetize that, that would bring a bunch of cash into the company. And we'll see how that goes towards debt repayment and/or incremental returns directly to the shareholders.

Thank you for touching on that grain and protein. That was something I wanted to make sure we also had the opportunity to discuss. Just remind us all on that final point on grain and protein, the margin profile of that business versus the corporate average?

Yes, so this year, we would expect the operating margins to be mid- to slightly high mid-single digits. So again, to the extent we were to divest it, if that would also be margin accretive to that -- to our 12% mid-cycle margin.

Fantastic. Well, I think we will leave it there then, Damon. Thank you very much for your time today and thank you everybody for joining us. Enjoy the rest of the conference.

Great. Thank you, Kristen.