AGCO Corporation (AGCO) Earnings Call Transcript & Summary

All right. Perfect. Thank you. So thanks, everybody, for joining us. My name is Angel Castillo, and I'm the Morgan Stanley machinery analyst. And it's my pleasure to have with me today, Damon Audia, CFO of AGCO; as well as Greg Peterson, VP of IR with AGCO. Before I dive into the Q&A, I just want to read a quick disclaimer. So for important disclosures, please see Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative. I just want to remind the audience, we want to make this as informal as possible. So just if you have any questions, just raise your hand and we'll get you a mic to ask your question. So with that, again, Damon, thank you so much for joining us. It's great to have you here.

Thank you.

So maybe just to dive in, there's clearly a lot of debate as to the cycle, right, and particularly as we head into '25, what that's going to look like for agriculture. So I want to maybe tackle that a little bit by region, maybe starting with the one that gets the most play but perhaps not the most significant one for you given that you're more European exposed. But North America, that's an area where the kind of investor focus tends to be. So from an inventory perspective, can you talk about just what the kind of setup is right now in terms of inventory, dealer inventories, how you guys are managing it?

Yes. So if we think about where we were at the end of the second quarter, North American dealer inventories were around 8 months, a little bit lower on the large ag portion of the business, a little bit higher on the small and medium ag portion of the business. Our target is to get to around 6 months, as we've said. Sort of as we think about trying to get to there by the end of the year, that's probably a little bit at risk as we look at the industry challenges. We also have a little bit more of an elongated supply chain versus maybe others as our wheel tractors come in from Europe, so there's about 1 month on the water. Our low horsepower tractors come in from Japan, from India and from Brazil. So we have a little bit longer supply chain. So we want to get to 6 months, but we're probably going to see that bleed over into 2025 here based on what we see right now.

Perfect. And maybe just to the extent that, that impacts your views on pricing or the industry dynamic there, I think that's where probably the most skepticism is in terms of investor base, thinking that there might be a little bit more pressure on the pricing side, right? Yet what I hear, when I speak to the company, it's a little bit more discipline around the pricing side on North America. So if you can kind of talk about what are you seeing both from the new and used side and maybe what the ag strategy is.

Yes. So if we think about pricing, our total company outlook for the full year is net 0 pricing, positive when we think about it relative to inflationary headwinds. If we sort of unpeel that, looking at North America, we're positive year-to-date. And we expect to have positive pricing for the full year coming here in North America. And so overall, we continue to look at using the production lever as a way to try to reduce the dealer inventory. Again, our industry as a whole sort of learned some lessons during the prior downturns. Again, I think you're seeing AGCO cutting production up to 25% this year, being much more aggressive at the speed and the severity of the cuts, really trying to get it out via the production. If we think about things like the discounts, we're using it selectively to drive some retail sellout to help balance the dealer inventory. It's not necessarily -- in our industry, it's a competitive dynamic. And so raising or cutting prices to gain share is really somewhat of a temporary phenomenon. And so for us, we're definitely much more focused on trying to reduce our production to get that dealer inventory at a healthy level as we go into 2025. Do you want to go into the used equipment?

Yes.

Again, another good sign for us as we think about why this downturn could be different than the prior ones, if we look at the amount of equipment in the used equipment channel, it's up a little bit versus the pre-COVID levels. But if we think about the pricing of the equipment, it's actually still relatively high versus the historical standards. And so again, what you're seeing is a little bit of a different dynamic this downturn versus the prior industry downturn. We, as an industry, last time, got into a little bit of a bad behavior. We tended to run production probably longer than what we should have. And as a result of that, we created these short-term leases, 1-year, 2-year leases. And so as those rolled over into the used equipment market, it put a lot of pressure on pricing; gave farmers, who would normally buy new equipment an option of buying 1-year-old, maybe 2-year-old semi-used equipment, and it really elongated the downturn we went through. The industry stopped doing those. And so when you look at what's flowing into the used equipment market, generally speaking, it's much more traditional 3- or 4-year-old, 5-year-old equipment, and you're seeing that in that pricing. Again, it's an important variable for the farmers because most large ag equipment, when a farmer comes in and buys a new high horsepower equipment, he or she is generally trading in one. And so they're looking at that delta of new versus used. And so the fact that price is holding up is a good sign for us here in North America. And then you look at the age of the equipment. Again, we go to that prior downturn, the age of the equipment went from old to average to young. If we go through this one, we, as an industry, couldn't produce to the demand levels we saw because of supply chain constraints. And so we sort of shaved off that peak in '21 and '22. So when we look at the average age of the equipment here in North America, it went from old to average. So again, statistically, there still should be some opportunity for farmers to replenish their equipment, to get it to that young, if you believe in those long-term averages.

Yes. That's very helpful. And maybe just to kind of continue on that because you mentioned market share, the dynamic there. Obviously, you have your strategy around Fendt. I think also at Farm Progress, you talked about Massey Ferguson's strategy as well. But one of the things that was notable is you made it clear that you're not going to use discounting lever as a means of growing your market share and driving that incremental growth in those businesses. But you have been having -- I think you'd mentioned in one of the meetings, you have been having some success with the Fendt market share. So can you kind of talk a little bit more about that strategy, how do you grow those businesses, grow the market share and keep from pulling perhaps on that lever?

Yes. Fendt is obviously 1 of our 3 growth vectors. We're seeing good growth in Fendt North America and South America. It's not leading by price. Fendt leads by value. And if you think about it from a price point standpoint, Fendt price is above the competition. I use my automotive analogy, but if you think of Mercedes-Benz, BMW, Porsche, Porsche tends to price slightly above those two, but it's still a volume-orientated brand. Fendt is the best of the best. And so when we go to the farms and we try to conquest the farms, you're selling the overall value. And what does that mean for a farmer? Well, it means you're going to pay a little bit more upfront, but you get better fuel efficiencies. So those tractors idle at a much lower RPM, you're spending less on your diesel fuel for the course of the year, for several years. You look at the warranty. Here in the U.S., we talk about the Gold Star Warranty. That's 3 years, bumper to bumper, parts, service maintenance where, if you're looking at the competitors, it's 2 years and you're probably paying some sort of your -- for the maintenance or for the service upgrade. So for that farmer who may be concerned, he or she is locked in for 3 years with no cash out of pocket. So I have better performance. I have better parts and service or the Gold Star Warranty. I usually have better technology. And then you layer on that CVT transmission. So if you're thinking about towing a planter, when you feel your car change gears, that CVT is seamless. So if you're towing an implement, you're not getting that start-stop, so you're getting better planting throughout the field, driving better yield, all of those things conveying the value for the farmer of this is why he wants that versus the competition, and we're seeing good momentum.

And what about the Massey side, so the strategy there to double that brand?

Yes. So Massey, again, especially here in North America, if you think about that business, historically, have been a little bit low to medium horsepower. There is a price point for these medium to large ag farmers where Fendt may be too technology rich, too high of a price point. So you see Massey moving into some of the higher horsepower segments. You saw the new 9S launch at the Farm Progress this year. Last year, we announced -- we showed the Massey sprayer. So again, a little bit more of the volume-orientated, straightforward, dependable farmer who's not looking for the technology-seeking type farmer but more looking for good quality, not an opening price point. And when we segregate the market, we'd say probably half of the market are these Fendt technology-seeking type farmers. The other half are more straightforward, dependable Massey market. So you're not really seeing a cannibalization between those 2 brands but really trying to target farmers. But with Massey, it's growing into that segment that we really didn't have products to offer several years ago.

And then how are you seeing that market share, the ability to capture market share in this downturn? Is that evolving or changing versus where we were perhaps [indiscernible]

Yes. I'd say it's going a little bit slower given the environment. The number of deals that are out there now are fewer than what it would have been a year or 2 ago. I think the environment -- again, that last marginal sale is a lot more important now than what it was 2 years ago. But we're still seeing good momentum. We're still penetrating the farms and creating more mixed fleets. Again, when we talk about growing share, I think it's important for investors to understand, this isn't necessarily walking in and taking over a farm from every aspect of his or her fleet. But generally, farmers who are using 500 tractors, they'll rotate their tractors, let's say, 20% per year. And so as we're building the Fendt reputation, the Fendt experience, that farmer who maybe buys 100 tractors that year, first year, they buy 25 of Fendt and 75 of their incumbent brand. They test the fuel efficiency. They see how does it work on their farm, with their products, their crops, are they getting the value that they thought. And then next year, if it delivers, which we're confident it does, instead of 25, they buy 50, 75 or 100 and slowly continue to create the mixed fleet as an option for them to get the performance they're looking for. And that's when we talk about layering on, why the Trimble acquisition was so important because then they start talking about the data, "I need to be able to go between brands. I want to make sure all my data is together." Trimble is bringing that mixed fleet data service to them, where now you can be agnostic as to the type of product you're using, but your data sort of works across any brand because Trimble is that mixed fleet provider with 10,000 makes, 10,000 models. So it didn't matter what color tractor, what color combine you were using. Trimble worked. And that's where our service offering now with Fendt products, coupled with Trimble, lets you create a mixed fleet that you don't lose the data by having to go from Brand A to Brand B.

Right. I definitely want to get back to some of the offerings that I think you also announced some at Farm Progress that I thought was interesting. So maybe sticking with this, just the last one on North America, early order programs or on the seasonal larger equipment, what are you kind of seeing there in terms of early reads into fiscal year '25?

Yes. So our early order programs are a little bit more focused only on our seasonal products, so our tractors, our combines, our sprayers and our planters. That window will just be opening up sort of right around now. So it's still too early to tell.

Okay. Got it. And maybe switching over to Europe, I think you historically described this as one of the less volatile markets versus the other regions. Can you just talk about what's the latest there? I think your inventories are kind of in a better place. But as we think about indication into '25, what are kind of the early signals in terms of direction that you're seeing?

Yes, Europe is usually the least volatile in the 3 major markets we play in. Again, we talk about relative to mid-cycle. We, as a total company, we're $105 million last year, down to $90 million this year. Europe usually ebbs and flows between $90 million to $110 million. So it doesn't really get too high or too low because there's such a high percentage of the farmers' income that comes through the subsidies. So there tend to be much more consistent or less volatile buying pattern there. If we think about the dealer inventories, we're at 4 months, that's optimal for us. Fendt's a little bit below that. Massey and Valtra, the 2 volume brands, are a little bit higher. So we got a little of adjustment to do. But as we think about that, it's a relatively good position going into 2025. Again, generally speaking, if you look at the number of registration units, it's at a pretty low point right now. You look at that SIMA index or the barometer, it's at a relatively low point. Usually, those things turn around fairly quickly. We're not giving an outlook for '25, but as we think about Europe, again, it seems to be in the best position inventory-wise. It seems it's usually the most stable part of our business here. So hopefully, not a lot of downside risk to Europe, but we'll see how things unfold in the next month or 2.

And then that's 50% of your revenue, correct?

Correct.

One interesting thing that I find about Europe is it's the least volatile, but it's actually the most fragmented of the regions. Can you talk about maybe what allows for it to be perhaps showing a little bit more discipline or a little bit narrower of a kind of volatility when you would kind of expect theoretically that the more fragmented a market is, it's probably going to face more competition, more lack of discipline. And yet, it seems to be a little bit narrower.

Yes. I mean we have a fairly mature distribution market or channel in Europe. And so again, there are 4 major players there. Again, all of us are competing, but the share and the distribution networks seem to be fairly mature. And again, because the underlying European farmer, he or she is getting a large percent of their income from subsidies, they tend to be much more consistent. They don't tend to be as much feast or famine, as you would see in South America, so they tend to be more consistent with their purchasing behaviors. We are seeing very good market share growth in Europe. If you look at our European business, margins have stayed strong. Overall, the business has stayed strong, and we're seeing Fendt really do well in Western Europe. And part of that is the new product mix that we're seeing, the new Fendt 700 Gen7 is doing great, Fendt 600 is doing great. So we're seeing sort of somewhat a flight to quality as, again, Fendt is that premium producer in Europe as well. So good share capture there and I think more of a mature, relatively disciplined environment in Western Europe.

That's very helpful. And I guess as you think about -- you mentioned the market share of Fendt, that's been continuing very well. Is there an ability to do consolidation in the industry in Europe? Or is it just about taking share kind of over time with the product offering, with innovation?

Yes. I mean, I think generally speaking, there's 3 major players. And then in Europe, you have CLAAS, which is a major player in Europe but maybe not at the same scale globally. There's always sort of, I'd say, modest consolidation of implement manufacturers. But the big 3 or the big 4, again, there's 3 publicly traded companies, there's 1 privately held company. I think that's a family-run business and if they decide if they want to consolidate, and if so we're always -- we've grown through acquisitions as a company. And so we're always going to be inquisitive. But that's more for the other side to decide if there's an opportunity for efficiencies through consolidation.

Right. Maybe pivoting to South America. I guess, before I move on, any questions from the audience? I think we have one up here, if we could get a mic down here. Yes, I think it's for the webcast. I don't know if we're doing one for this. All right. It's actually all the way up. Go ahead, sir.

The Trimble acquisition, could you talk about that and about your tech stack and how that differentiates from your competitors?

Yes. So with the consolidation of the Trimble joint venture here in April, it really became sort of part of the cornerstone of one of the pieces that we were missing as you start to think about the guidance, the telemetry, so coming from that satellite down to the rooftop. And what we now control as part of the joint venture is all aspects of the ag technology that Trimble used to have. And so it's really helping us in two ways. One, as we think about AGCO, one of the differentiators for us is this mixed fleet retrofit mindset. We have our own separate distribution channel versus the new equipment channel, very much a mixed fleet retrofit mindset with Precision Planting. Trimble was the other one, which was probably the well-known brand that was also mixed fleet retrofit. We've now brought Precision Planting and Trimble together under the PTx portfolio, creating the industry leader in mixed fleet retrofit. So combining those two, very little product overlap. And so what you've looked at their technology, from their data management system to their water management system, their WeedSeeker product, coupling with our product portfolio, very little product overlap, so now giving the farmers really a one-stop shop for all the technology around the crop cycle. So very excited that those two are coming together. The dealer channels were very complementary. Again, with Precision Planting, very strong in the U.S., looking to really expand in Europe with their Vantage channel; their Müller team there very strong in Europe, looking to grow here. Again, we talk about $100 million of synergies after 30 years was our plan. I'd tell you more than half of that was coming through cross-selling between the different brands. So good momentum, good excitement from the farmers who now have this, again, mixed fleet mindset, reinforcing what we were doing already with Precision Planting. So great and sort of near-term opportunities. Industry is a challenge right now. We're working through some of the historical how they sold with CNH. That churn is happening this year. But we've signed up over 200 CNH dealers to be PTx Trimble dealers, so very excited about the opportunity on that. If we think about the future, and one of the reasons why it was important for us as well, as we start to think about the future of technology and autonomy, again, knowing today not as critical because we do more edge processing, but as you move into the autonomous state where you need to know where the vehicle is, having that connectivity becomes a much more important thing. So now building our autonomous platforms, and I'm sure we'll get to it, Farm Progress we just showed OutRun, which is the autonomous grain cart, having that connectivity. And that's what Trimble brings to the table for us. It's allowing for us to keep that real-time connectivity through that system. It was really important for us as we were building out the autonomous platform between now and 2030. So short-term, great opportunity; long term, even more critical as we think about the automation that's coming.

I think we have one over here.

Could you just help us understand what's going on with TAFE and where you're not seeing kind of eye to eye?

Yes. So I mean maybe for the broader group here, TAFE, which is a large privately held Indian company, TAFE, we have multiple different relationships with them. We historically have bought low-horsepower, low-tech tractors from them that we would then sell in countries like Mexico, South Africa, U.S. We bought last year about $170 million of equipment from them. We also historically would license the Massey Ferguson brand to them in India. We own 21% of TAFE. They own 16.3% of AGCO. And then as part of an agreement that we have with TAFE, they have a member on our Board. And so there's 4 different facets of the relationship. As we've said on a couple of public calls here, we were working with TAFE through supply chain challenges. They were not performing to our standards. We have been working with them to try to improve their performance, their delivery, their quality. Unfortunately, despite multiple conversations about trying to get better, they were not able to meet the standards. And so in April, we gave them notice that we were going to be terminating those supply contracts with them. And those have a window of when they'll expire. So that $170 million that I bought from them, we're working to bring alternative suppliers online to be able to provide our dealers those type of low tech, low horsepower tractors in those markets. So working through that. At the same time, we gave them notice of our intent to cancel the licensing of the Massey Ferguson brand in India. And we said we'd be looking at an alternative for that going forward post the expiration of that notice period. We've also then gone into the ownership. And again, our goals would be that since we don't have an operational relationship, there's no need for us to be owning 21% of TAFE, so we'd like to exit that. Again, we're working with them, whether it makes sense for them to own AGCO. And then the Board position, obviously, would connect with the ownership. There was a 13D that was filed a little bit over a month ago. Again, if you read through the 13D, it was referencing things related to the supply contract that maybe the Board and management didn't act in good faith. We're trying to work through that. We understand some of their pinch points or what they're looking to do, and we're hoping to come to an amicable resolution. It's just so challenged. It's a little bit unfortunate that it's in the public domain versus being done sort of behind the scenes. But it's a lot more than just an equity ownership in the two. There's operational absorption issues at play here at that side. So those can influence things maybe a little bit more than just pure financials.

Perfect. Any other questions? Now I wanted to move on to the Precision Ag side, particularly, you mentioned the PTx announcement, the autonomous cart. I guess, I wanted to dig in a little bit more not just from what you're seeing in terms of the early kind of insights from customers, the take rates on a product like this, but also the receptivity to more of the kind of subscription models around some of these products.

Yes. So I think a lot of focus -- I know you were at the Farm Progress Show, but if you went to the PTx booth, I think you saw a lot of traffic, a lot of foot traffic, going through the PTx booth as farmers are very excited about how do they drive better productivity, better yield, lower input costs, especially in this environment. And that's where Trimble -- the old Trimble products and the Precision Planting products have really gained a lot of traction because, again, a unique facet in that you're able to buy these lower entry point modules to drive yield. So rather than buying a brand-new $450,000 planter, for a farmer who may be a little bit more cash constrained, he or she has the ability to buy a module, a couple of components, to drive better yield or lower input costs, sort of test it out. If you think about our cornerstone module, you can bolt it onto your existing metal or your existing iron. So again, you're reducing your price point but yet, hopefully getting some incremental value and also getting to see it with your own eyes through the course of the planting. So really good interest in that retrofit, the replacement market. If you think about what we announced, the exciting part was the combination of PTx Trimble, we announced the OutRun, which is the autonomous grain cart. And so again, that was our old JCA Technologies that AGCO acquired several years ago. We put it into the joint venture. Together, that group was able to get that to market here at Farm Progress. We're seeing a lot of excitement from farmers. Because when they're in the midst of the harvest, getting that crop off the field, tight windows when they're going to maximize their yield. But they'll also tell you that's when they're the most resource constrained. And so now they have a choice, "I take that operator out of the grain cart." And at our Tech Day, we showed 2 grain carts moving simultaneously with the farmer, controlling both of them in the middle of the combine, so he or she could be running the combine, 1 grain cart coming next to the combine, getting unloaded. The second one in autonomous fashion, going out to the truck to get unloaded. So he was running or she was running 3 different pieces of equipment, all from the cab, taking that labor cost down or allowing that labor to do something else. And at the same time, that combine is never stopping. So they're getting it off the field, they're getting it out when they need it, and they're not sort of dealing with the labor constraints that they normally deal with. So a lot of excitement. We're demoing it at about 12 farms. We're testing it right now in Nebraska with 12 different farms, then we'll go more into full commercial sale next year. The pricing, again, we hear a lot from farmers, "I'd like to buy it upfront. I have my good years when I'm profitable. I want to spend the money then. And I get into my years where I'm maybe a little bit more difficult, I don't want to have to come out of pocket for cash. And I got to fertilize my field in good years or bad. I got to buy my seeds in good years or bad. So I don't want to pay more than I have to." We're trying to create at least with OutRun, we have a hybrid. So the farmer buys the equipment upfront. But then because of the software, the upgrades that are going through, we're offering the farmers sort of 3 versions to buy on an annual package. So for these big farms, they can buy unlimited number of hours because as this is getting bolted on to a tractor, that tractor is not in autonomous mode 24 hours a day, 7 days a week, so you don't want to pay continuously. You want to pay that when you're using it. So you can buy unlimited hours, you can buy a prepackaged number of hours or you can pay as you go. So it's going to be depending upon the farmer, are they really going to trust it or do they want experiment. But that's sort of more of that annual subscription. And we think the combination of the two will give the farmers the ability to sort of lower their annual cost but still get the technology upgrade as we refine the algorithms in the software but yet still do the purchase of the equipment upfront. Our thesis for those farmers, like the rest of Precision Planting, is how do we get you a 1- to 2-year payback. And so again, even with the upfront cost in the subscription, how do we keep you sort of in that, let's say, maximum 2-year payback is sort of how we're trying to price that for them.

Yes. No, that's very helpful. And then maybe just one last one on Precision Ag. Just you had a goal for $2 billion in Precision Ag by 2028. You mentioned Trimble. You mentioned Precision Planting. How do you think about your technology stack, where you are today in terms of your capabilities? And as you look to achieve that $2 billion number, how much of that is maybe organic or inorganic? And again, maybe where is the white space around the tech stack?

Yes. So if we think about the tech stack, with the combination of PTx Trimble coming into the portfolio, no real gaps for us from a technology stack standpoint. That doesn't mean that we're not going to stay inquisitive. Again, there's lots of things that we're doing. And if you think about it, there's 350 tasks in the cab that need to be automated. We're working on all of those, but there's a lot of small entrepreneurial companies that may be working on something as well. And if they're a year or 2 ahead of us, do we partner with them? Or do we buy them to accelerate that task? And again, you look at some of the smaller acquisitions like JCA, we've been able to absorb them with our cash. We'll continue to be sort of opportunistic in that regard but nothing that we have to have. If we think about the $2 billion, it's all organic. That is not assuming any inorganic opportunities. The goal for us is going to be continuing to add new products. If we go back, Precision Planting used to introduce 1 or 2 new products when we first acquired them. Now we're moving 3 or 4 per year. With PTx Trimble coming in, we want to move that up into the high single digits, close to 9 or 10 new products a year. And that sort of continuous innovation on that retrofit is really what's going to help drive that, coupled with it then moving into the OEM channels. And again, we service an array of OEMs around the world. Trimble had over 100 OEMs that they were servicing. We haven't lost any of them as part of PTx Trimble. Precision Planting was serving several other OEMs. And again, so we have this mindset of really being farmer-focused. And whether we're serving them directly through the retrofit channel or serving some indirectly through other OEMs, we're somewhat indifferent as long as the farmer is getting more productive at the end of the day.

Perfect. And then maybe just with the last minute we have, just shareholder returns, how are you thinking about that? Particularly, given the cycle and some of the pressures that we're seeing in the market today, just how are you thinking about the shareholder return?

Yes. So we continue to stay diligent in our capital allocation. I think with the Trimble acquisition, we added about $1.6 billion of debt on the balance sheet. And we also announced at that time that we'd be putting our Grain & Protein business under strategic review. We subsequently announced the sale of that. We said at that point, we'd likely use the majority of those proceeds to pay down debt. So debt paydown becomes an increased level of focus for us. That $700 million of gross proceeds, that will go down to pay down some of the Trimble debt that I used. Then we think about R&D. That's a primary focus for us. We've increased our R&D around 60% over the last couple of years. We want to stay focused on increasing that or at least maintaining that focus. CapEx has been up. I'd say that's going to be relatively consistent. Then we get inorganic opportunities, again, if there's bolt-on acquisitions. After that, we've been very good at returning capital to shareholders. We've increased up until this year the quarterly dividend, in the last couple of years, we keep paying that. And then we've been opting given the ownership and the question that showed up related to TAFE, we've been opting to do a special variable dividend annually. So this year, we did $2.50. We've done $16 in special variable dividends or about $1.2 billion over the last 4 years, and we choose to do that in lieu of a share repurchase program given the ownership concentration that we currently have.

Perfect. And I think that brings us to the end of time. Again, gentlemen, appreciate the time.

Thank you.