AGCO Corporation (AGCO) Earnings Call Transcript & Summary

Good morning. My name is Tami Zakaria. I'm the Head of U.S. Machinery, Engineering and Construction Equity Research at JPMorgan. Welcome to this fireside chat with AGCO Corporation's team. I'm delighted to welcome Chairman and CEO, Eric Hansotia, and SVP and CFO, Damon Audia. I will start off with some prepared questions, but we will take questions from the audience in the last 10 or 15 minutes of the presentation, and those who are listening to the webcast, you can also submit questions virtually, and I will read them out. Before I begin, for those needing an introduction, AGCO is one of the largest manufacturers of agriculture equipment globally. It recently formed a joint venture aimed at Precision Ag products and services with Trimble. So we will talk about these more, so let's get started.

Hi, Eric and Damon, welcome.

Thank you, Tami. Good to be here, and thanks for all the participants today.

Great. So given that in this room, we have a lot of tech and media focused investors, can you start by giving us a brief intro to the company and the top strategies you're focused on coming off of a record sales and profitability here in 2023.

Yes, very good. So maybe just to start at the beginning. Let's talk about the industry and then we can talk about our company within the industry. The main problem that farmers are faced with is that they've got a lot of pressure on them to increase the amount of grain they produce, we call that yield, while using far less inputs. Why more yield? We're going from 8 billion people to 10 billion people over the next couple of decades. As the economies mature, they add more meat into their diet. That's a multiplier on the demand for grain. And then the third one is more use of biofuels, ethanol, sustainable aviation fuel, other things like that. All 3 of these are engines for needing more grain out of the world, and yet there's no more land. And so the farmers have to be more productive. And at the same time, society is saying, "I don't want you to use so much fertilizer, pesticide, herbicide and things like that and diesel fuel." So the only way to solve that equation is through technology and being more precise on every piece of land that they operate to be able to be more efficient. And so that's the heart of really, our investments, our strategy is around what we call precision agriculture. So we've raised our engineering budget by 60% over the last few years. We bought 6 tech companies. We just closed on the deal that Tami talked about, the largest ag tech deal in the history of our industry, where we formed this joint venture with Trimble to form what we call PTx Trimble, precision technologies multiplied. We're bringing all that together to be able to rapidly automate features on the machine, so that the machine can sense its environment and take over the complicated task for the farmer, essentially going to autopilot for that complicated thing, manage the depth of the plant or manage the spacing of the planter, seeing weeds and differentiating those from the plant and spraying only the weeds. Those are all tools that were coming to the market. We do so in a differentiated way, in that not only do we put those on our own machines, our brands of Valtra and Massey Ferguson Fendt, we've got this whole technology business that's focused on retrofit. And essentially, that's where we put a technology module onto a farmer's existing machine. It may be a 5-year-old planter or 8-year-old sprayer. And ours is very different than anybody else's. And we serve every brand out there. So our technologies are for the mixed fleet. And that's a core focus. One of the other strategies is something that we call farmer core. So a big chunk of what we're doing is on Precision Ag and serving all farmers. Another differentiator is on what we call farmer core, it's a distribution strategy. And essentially, our industry has had 100 years of brick-and-mortar model, where the farmer has to come into the store to research their machine, buy the machine, get their parts to their service, all of it. Well, like many brick-and-mortar industries, the customer finally says, "I want something more convenient." And so we're aiming to -- we've designed a way to flip that 180 degrees where instead of having a farmer come to the business, the business goes to the farmer. And so we use connected machines, remote monitoring. And then we buy these really nice service trucks with our dealer, the dealer buys them, and we do all of the work on the farm. So it's digital tools, service trucks and an on-farm first mindset that results in essentially the business coming to the farmer and the experiences instead of going to the mall, the experience is much more like Amazon. So those are just a few things to kind of set up the discussion for today.

Perfect. That's very helpful, Eric. So we will go into Precision Ag in more depth because I think it's probably the next frontier for the industry. But I do want to spend some time on some of the things you've done great over the last few years. One is Fendt. Fendt has seen spectacular growth in North and South America over the last 5 years. As the ag end markets are slowing now after the peak we've seen, how is your strategy shifting to help the Fendt brand grow even in a down cycle?

Yes, just again to maybe set the stage, Fendt is our very premium brand. So the marketplace would say that's the best of the best of anything in the marketplace. It's for the most demanding farmer with the newest technology, the highest quality, the best support from the dealer network. Historically, say, 5 or 10 years ago, it was fundamentally a tractor business in Europe. Well, we wanted -- and the reason for that is that those tractors were designed in such a way that they didn't fit the farming practices in North and South America. The tread spacing of the wheels didn't fit down 30-inch rows that farmers do in North America. So we had to -- fundamentally about 5 years ago or more, a little bit more, we said, you know what, we're going to change our strategy. We're going to make this a global business, and we'll make it full line. And what that means is instead of just tractors, we're going to serve the farmer all the way around the cropping cycle from planting to spring to harvesting and tractors. So we redesigned all our tractors to be not only suited for Europe but also suited for everywhere around the world. We've launched a brand-new ground-up planter program. We did the same thing with the combine, clean sheet of paper combine, and redesigned our sprayers to fit with the Fendt platform. So now we've got the best in the world tractors, the best in the world planters, combine and sprayer all earning the right to carry the Fendt badge full line of equipment that we're taking globally. Now when we come into a market, dealers are super excited to be able to carry this line. It's like, well, hey, I'd love to carry the best of the best. So we are very cautiously step-by-step allowing 1 store at a time. So a dealer may have 10, 15, 25 stores. We only turn on 1 store at a time once they've met those very stringent requirements of being a Fendt dealer. We've gone from about 3 or 4 years ago, we were at 40% of the industry coverage, now we're at about 75% or 80% of the industry is covered, on our way to about 90%, 95% over the next couple of years. But we've got a lot of penetration yet to happen, a lot of market share to grow. We've been growing steadily. Started -- when you combine North and South America, we were about $300 million, $350 million in sales back in 2020. Last year, we were about $1.4 billion.

Perfect. And do you have any plans to grow it to a certain number over the next 3, 5, 7 years?

Yes. The growth rate has overachieved our targets. We're 2 years ahead of our plan when we started the program. So we're very pleased with what we've done so far. We expect at least another doubling going forward. For example, like in North America, we're roughly 10% large ag market share. We aim to get to 20% in short order. And our trajectory and growth plans, we have high confidence that that will happen.

Perfect. I don't want to miss the other 2 brands, Massey Ferguson and Valtra. Tell us about those two, did those grow in line with the industry over the last few years? The reason I ask that maybe sometimes some of your competitors say that your Fendt growth -- Fendt brand growth came at the expense of your own Valtra and Massey Ferguson brands. So how would you respond to that?

Well, before, we reset our strategy back in 2020, rolled out in 2021. As a precursor to the overall strategy redesign, we did a brand refresh and said, "Let's get super clear on what position in the market each brand plays." Massey Ferguson became the global straightforward and dependable brand, and Fendt clearly was going to be our premium brand. They're playing very different positions in the market, competing for different customers with different products, different value propositions at a different price point. So they fundamentally go after a different customer. If you look at the -- that was the intent and the plan and what we've been executing to. If you look at the result, when you add all 3 of our brands together, we've grown clearly. Fendt has grown the most, but Massey and Valtra have also grown just a little bit less. If you compare that to our competitors, you can see what's been happening here. You look at the growth rate over those 3 years, and AGCO is clearly taking share.

Perfect. So let's talk about the newly formed JV, joint venture, PTx Trimble. What are the distinct brands that make up this JV? What types of products and services does this JV have for farmers right now?

Yes. I'll start with this kind of the mindset. First of all, we have a very different perspective on our technology business. So I talked about technology that feeds our machinery business, what goes in our tractors and combines and sprayers. That's somewhat common to our competitors. But in parallel to that, we've got this whole retrofit technology business, where we'll sell a technology module direct to a farmer where they upgrade their existing machine. So they could take a brand X 5-year-old planter or a brand Y 8-year-old sprayer and put this technology module onto it that now has sensors and onboard compute, and it now has the ability to do a new feature automatically, put something in autopilot that was complicated for the farmer. We do this for all brands of equipment through deep, deep into the life of the machine. Some of our competitors have seen our success, seeing how much traction it's getting and they're saying, "Yes, we're doing retrofit too." But the little bit that they're doing is on their own brand of equipment for a couple of years back through their machinery channel, the same channel that's trying to sell a brand-new combine or sprayer. We have a completely independent channel, parallel and separate from our machinery business. Our machinery channel has very large dealers. We want them to grow to scale, have multiple dealers, whereas our tech business is much more agronomy-focused and tech-focused. Those folks go out to the farm and assess a problem that the farmer doesn't realize that they have and then put the technology on it. So that's kind of what we're trying to achieve and how we structured it. Separate channel. Trimble is the only company that had the same DNA. They also serve the mixed fleet. They had a few different brands, Trimble, Müller, Bilberry, all kind of now melting together under this PTx business. AGCO had several businesses that we had Precision Planting. We bought 6 tech companies over the last while, Appareo, Headsight. And then we also contributed JCA. All of those businesses are coming together. We thought this is the time now. Critical scale, we want to bring that together, simplify it. And it's all called PTx, precision technologies multiplied. The multiplication factor we can have on the productivity and the profitability of the farm by bringing this technology to the farm.

Perfect. Before I move on to my next question, just a reminder to those who are listening online, you can submit questions via the website -- webcast link, and I'll pose it to Eric and Damon to answer. So Eric, my next question, how does PTx Trimble position you long term? Let's think long term, long term, how does it position you versus your competitors? What are some of the synergies or dyssynergies that you expect along the way?

Well, the answer is we are and we'll continue to grow the lead in being the industry leader in selling precision technology to the mixed fleet. We wake up thinking differently than anybody else in the industry does. So that's clear. Now what are some of the pieces? If you look at what has to come together, our last few years' focus has been automating these features on the machine like I talked about. Taking a complicated task, creating sensors and onboard compute and having the machine do that task for the farmer. One by one, we've been automating task after task because ultimately, there's a lot of discussion about autonomous machines. Well, there's not a lot of value for the operator until you've automated all the things the operator had been doing. So that's where our focus in the short term had been, let's automate all these things that the operators have been doing. That provides value to the farmer today. They can do a complicated thing way better, more effectively. So that's what precision planning focus has been. JCA was a leader in autonomous machines. They've been serving multiple companies on autonomous, and Trimble is an absolute leader in guidance. They do other things as well, but that's their core. And now you've got all 3 of these things in the same camp. Great at guidance, which is the core of autonomy. Great at leveraging that into autonomous solutions and automating all the features, so that the farmer gets the most value out of it. Doing all of that, with the mixed fleet mindset, not only on the machine that we sell to our -- through our brands, but the mindset of selling to almost 200 OEMs. Some of our competitors sell to 1 or 2 OEMs. We sell to almost 200, which is essentially anybody who is anybody in the marketplace buys our technology. And then thirdly, selling directly to the farmer and the mixed fleet. So it's a different setup, setting up through a different channel with a different mindset, with a different outcome, and that's the industry leadership position in Precision Ag for mixed fleet.

Great. So I remember, I think a couple of years ago, you had put out a target that you want to launch fully autonomous crop care solution by 2030. I think one of your larger competitors also has the 2030 target for fully autonomous crop care solutions. So is that still the target? That's question one. And question two, with JCA, Trimble, Precision Planting, you have different things like who are great at different aspects of Precision Ag overall. But do you see any gaps in the portfolio? And would you have to sort of go out in the market and fill those gaps to enable a fully autonomous crop care solution by 2030?

Well, the target we set was actually prior to the JV with Trimble. So all that's done is actually build our confidence that we can get there more effectively. We'll be in the market at the end of this year -- last year already, last summer, we had a field tech days. We showed our autonomous machines running to investors and the media. We'll be doing that again this summer at the end of June. We'll be already bringing to the market an autonomous retrofit kit. Again, you can think of taking your existing tractor, putting this kit on it and taking that tractor of today and making it autonomous. We think that's the way that the market will adopt this type of feature as opposed to buying an autonomous machine from the factory. That's the way guidance happened back in the early 2000s. It was a retrofit approach. So we're still targeting 2030 for solutions all the way around the cropping cycle. Having said that, our main investment is automating features. We think every farmer can take advantage of that. Some farmers will probably go for the next step and leverage autonomous machines, but we think that's probably still going to be a niche that will grow over time, but all farmers can leverage the automating of features that we're embarked on right now.

Perfect. So let's talk about some numbers. I think you've said you want to double Precision Ag revenues to $2 billion by 2028. I'm curious what kind of investments be it in dealer network or R&D or any other areas that you need to do to make that reality?

We feel we're tooled up. We've got the whole Trimble dealer network and the Precision Planting dealer network to serve the retrofit market. Really now, our focus is we have plenty of folks there. We don't have to create it. We have to now make the best of it. Leveraging, selling our Precision Planting technology through Trimble dealers, selling Trimble technology through Precision Planting dealers and so on. So we've just got to make the most of what we already have. It's not really investing in creating new. Similarly, on technology, we've got a huge stable now of engineers between all those tech companies we bought Precision Planting and now this JV. We've got great talent, but we still got our AGCO Ventures, which is scanning the marketplace for small companies, maybe start-ups or mid-cycle and inviting them in when that makes sense. So we feel like we're positioned well. We've got enough on the plate. It's now about digesting it and making it perform really, really well. We've spent the last 6 months between announcement of the deal and closure of the deal, waiting for regulatory approval. Working with a consultant and doing really detailed integration planning, 23 work streams, lots of fingerprints on it, heavily owned, ready to execute on day 1, such that when we closed, the whole team is running hard, running on innovation, running on managing the channel, running on continuing to escalate -- or elevate our game with our OEM partners.

Perfect. So along the same line, I think you've also said you want to double EBITDA of Precision Ag by 2028. What would be the building blocks of that? And from a margin perspective, do you expect Precision Ag margins to get better from where it is today?

Precision Ag is a high-margin, high-growth business today. Over the last 5 years, our tech portfolio has grown around 20% CAGR. It's been having margins roughly double the average of our company. So it's already a high-margin, high-growth business. We don't necessarily need it to grow higher in margins. We just now want to feed it and feed the innovation pipeline, get the distribution channel performing well and really just scale what we have. So -- because the other side of it is that we want to stay very affordable for the farmer. Our whole intent when we take these retrofit solutions out is that when they buy one of these tech modules that they get a payback on the farm, our target is 1 year, maximum 2, so that the benefit they get in higher green output or lower input costs, pay for the technology module quickly. So we don't want to change our pricing strategy too much. We'd rather keep giving a really great deal for the farmer but grow faster.

Perfect. So for us to understand better, can you talk about some new products that you have launched or will be launching over the next few years that would leverage these Precision Ag technologies and would be more -- so that we can actually like get a sense of what to expect and what's to come.

Yes, I'll talk about some that maybe are interesting to the audience. One is we've automated the entire soil sampling process. So for the last 100 years, you've had to manually go out and do it, take a probe, put it in a bag, send that off to a lab. 28 manual steps that happen between when you're in the field to when you get it back. You get it back weeks later. It's very expensive and it's not very accurate. So that means that the -- why does that matter? That's what the farmers use to make their fertilizer purchases and their prescriptions that go down as well as a lot of times, their seed strategies. Those are the two biggest costs for the farmer. And only about half of the fertilizer the farmer puts down gets absorbed by the plant. So there's this huge waste sitting there. We've automated the whole soil sampling process where we've created our whole automated lab. Probe goes in, geo stamps the sample, goes into the lab, automatically processes the sample, gives a super accurate low-cost sample that allows farmers to get much more precision. Second one will be the autonomous solution of retrofitting on to a tractor making automated grain cart. We showed that last year already, when the combines in the crop, instead of coming out of the crop, they can summon the tractor, nobody's in the tractor, comes around to the combine, locks in. So the two are running in parallel. The combine unloads on the go, when their bin is empty, it says release, the tractor drives away, goes off to the side of the field and unloads, all without an operator in the cab. That's another one. Third one would be targeted spraying. We'll be launching that this fall, where artificial intelligence library identifies the difference between a weed and the crop like a corn plant or a soybean plant, identifies what kind of weed it is, then summons the right kind of chemical depending on how big the plant is, the right amount of chemical, sprays only the weed, you can save 70% of the chemical versus what farmers do today, all farmers spray the entire field, regardless of where the weeds are where they aren't. So there are just a few examples. But there's dozens and dozens of projects that the teams are working on to automate everything that the operator is doing and do so in a kind of an autopilot way.