AGCO Corporation ($AGCO)

Thank you, everyone, for coming. I'm Michael Feniger, the machinery, engineering and construction analyst in the U.S. And I'm happy to host AGCO. Greg and I were talking. We've been doing this for over a decade, and the rooms just keep getting bigger. So credit to you guys. So really happy to have AGCO here at the conference and to host them. They're one of the leaders in the farm equipment space, which is a little different for a lot of the European investors relative to what you see in the capital goods space in Europe. So with that said, I'm going to actually pass it off to Greg, and they'll introduce themselves, and we'll jump into some Q&A. So Greg?

Great. So Greg Peterson, I handle Investor Relations for AGCO, have done for almost 20 years. Prior to that, other Investor Relations roles outside of our industry.

Well, good morning. I'm Damon Audia, the Chief Financial Officer for AGCO, and I'm coming up on 4 years in the position here.

Great. Thank you for being here.

Yes, of course.

Well, maybe just to kick it off and bring everyone online and in person on the same page. When you think of the farm equipment space, Deere is usually the first name that comes to mind, particularly in the U.S. For investors that are new to the space, new to AGCO, where does AGCO fit in into the ecosystem when you think of the global farm equipment industry?

Yes, sure. Maybe I'll give a little bit of a backdrop here. So AGCO is the largest pure-play agricultural equipment company in the world. Unlike our 2 other global competitors, we don't play in the construction business. So we are purely focused on ag. We go to market on the equipment side under 3 primary equipment brands. So Fendt, which is our premium brand and then Massey Ferguson and Valtra, and those play more in volume-orientated segments of the market. So those 3 on the equipment side. And then with our strategic joint venture with Trimble that we did in 2024, where we own 85%, we combine that with our other technology businesses under a technology umbrella called PTx, so Precision Technologies multiplied. And that basically covers all of our technology that we sell to our AGCO OEM equipment part, but we also sell to 100 other OEMs, and we sell in a unique differentiated retrofit channel, and we take that technology straight to the farmers first through this differentiated channel, and we'll touch on that. And when you look at those brands in the PTx Trimble or the PTx umbrella, last year, we delivered revenues just over $10 billion. And sitting in the trough of our industry last year, we delivered adjusted operating margins of 7.7%, which were almost double what they were the last time the industry was at this level. And we did that through an array of strategic changes in how our CEO has transformed this company, where we have really focused on bringing our Fendt brand into North and South America. We've doubled down on our parts business, so leveraging things like e-commerce, having the industry-leading fill rates in North America and in Europe, but then also growing our technology stack. As I mentioned, bringing on the Trimble joint venture, growing our Precision Planting business, all of those things, improving the profitability of our business while at the same time, driving incremental growth. And if I look at last year, in addition to the adjusted operating margins, we generated record free cash flow of $740 million. So really positioning ourselves in a much more profitable position than we were the last time the industry was at this level back in 2016.

Perfect, Damon. Look, the world is as uncertain as ever. You were formerly the CFO of Kennametal. A lot of members in the audience will know Kennametal well as a peer to Sandvik. Obviously, that's short cycle. That's PMIs, it's industrial production type of stock and sentiment. I'm just -- if you could help everyone for AGCO, what is mostly tied to those farmer purchases? What are the drivers of farmer equipment purchases that we should keep an eye out for as we've gone through an upswing. And now obviously, we've been in more of a downturn in the last few years.

Yes. Well, at the highest level, net farm income is the biggest driver to a farmer willingness to engage in upgrading his or her equipment. But it's important that when you hear the profitability or the net farm income, you've got to unpack it because depending on how that's driven, in many ways, in many parts of the world can influence the farmer's desire or willingness to purchase. And so when we look at it, what we would say is commodity prices are by far the most important thing because that's what's giving the farmer confidence or comfort as he or she sells their grain into the market. So the biggest part is going to be what are the commodity prices, which can be influenced by stock-to-use ratios, weather events, global trade dynamics. But you look at commodity prices first and then you look at your input cost second. Obviously, a lot going on in the world right now. You've heard a lot about fertilizer prices going up, but they've been going up for a while. Seed prices have been going up. And so when that farmer looks at what he or she is selling their grain at versus what their input costs are creating that net farm income is really the catalyst for reinvestment. Now here in Europe, farmers get a lot of subsidies from their government. Those are fairly stable and consistent. So their order patterns tend to be more consistent because they have a base that they can rely heavily on. When you look at the U.S. farmers, the subsidies tend to be more infrequent. And so even in the U.S., you've heard about some of the subsidies given to the U.S. farmers. But because those are not consistent, the farmers are less willing to invest that money into equipment, but using those sort of subsidies because they're onetime in nature to pay down their debt, buy their seeds, do the things they have to do rather than upgrading their equipment, which they'd like to do. And so that can fluctuate, can improve the net farm income, but it doesn't necessarily translate into equipment demand. So we've got to see commodity prices strong, input costs, hopefully stable or lower driving net farm income. And then you get to some of the secondary things about the age of their equipment, interest rates can influence that because as a farmer is trading in a piece of equipment, he or she is likely going to be borrowing some money. And so interest rates can influence that. But those are much more secondary effects versus that net farm income.

And I'm curious, obviously, it's been a volatile to weak period. When we think of some of these moving pieces, obviously, with the Iran war and the conflict, you're seeing really outsized moves. You're seeing outsized moves when it comes to certain chemicals, certain fertilizers. Obviously, it also depends on the timing in terms of harvest and planting. Just when we sit here today, when we see soybeans have had a nice move higher, corn is actually breaking out a little bit, it looks like, but also see these inputs, how should we put that all together to think about what are the farmers sticking and watching right now?

Yes. Well, I think the global environment we're operating in creates a lot of uncertainty. And generally speaking, when there's uncertainty, that's reasons for farmers to pause in making large investments. We saw that in the U.S. last year during the trade dynamics between the U.S. and China. Again, farmer's sort of conservatism in waiting to see what had happened. And whenever you see an event like this happen, and we'll talk about some of the near-term and medium-term effects, that just creates another reason to pause to see what's going to happen. So what are my costs going to be, who's going to buy my grain and when will they buy my grain. So all of that uncertainty creates reasons to hesitate. If I look at the events themselves, obviously, the nearest-term issue for the farmer is dealing with are diesel cost. With the event in Iran and how that's affected the gas prices or diesel prices, farmers are going to be paying a little bit more for running their operations right now. In the grand scheme of the farmer's cost, it's probably not going to make a decision to buy or not buy. But it's one more thing when we think about that net farm income. If fuel costs have gone up by, pick a number, 10%, that reduces or compresses his or her net farm income and thus their willingness to have excess cash to invest elsewhere. So that's the near term, and that's going to affect most farmers around the world. The bigger issue is going to be fertilizer. Again, you've probably read fertilizer costs have gone up. As we look at farmers probably here in the Northern Hemisphere, probably not as big of an effect on most of them. Most of them have probably already purchased what they'll need for the season. There may be a couple that have to deal with spot purchases. But that's more of a medium-term effect if these prices stay elevated for the longer term. Now you do have a lot of farmers down in Brazil, which have a different planting season. They're going to be effectively having to look at those costs and manage that as part of their overall net farm income because those input costs that they don't come down here in the near term will affect what they're purchasing. So you're going to sort of see that fertilizer costs have an effect here in the medium term. And again, to the extent that this is a new level, that will affect farmers a little bit more in the longer term as they have to buy their fertilizer for the following year.

So it would see -- when we see these charts of what's happening in fertilizer, it's going to hit probably the Brazil farmer first. As you just said, the northern farmers kind of have locked in their costs for basically the season. Is that correct?

Most likely, most of them have.

And is that going to change, you think, just because we're on this, I'll pull a thread, does it change any planting expectations or any rotation crop? Because while this is happening, we're also seeing soybean prices starting to go up a little bit, and that might be some disruption to the Brazilian farmer at that point in time. Some of it might be just oils going up and maybe some biofuel displacement. But I'm just kind of curious how we should kind of think of this as its impact in Brazil to the U.S. farmer.

Yes. I mean, on the margin, you may see some changes. But generally speaking, the farmers have the rotation that they go through, whether they're planting soy in certain fields or whether they're planting corn in certain fields. There's always a little bit of variability that they [indiscernible]. But short-term changes like this are not likely to have a significant deviation on their long-term plans. And again, if you look back and you're seeing corn, as you touched on, corn has ticked up, soy has ticked up. A lot of farmers stored their grain last year because if you remember, commodity prices were quite low. They were below the breakeven point. You heard about the storage, a lot of farmers just sort of holding that grain. So as that's now coming out into circulation, they're getting that value. Now does that change? If they sold their soy, do they plant more. If they sold their corn, do they sow more? So again, I think in the grand scheme of things, you probably won't see a significant change on what they're planting. But on the edges, each farmer is going to look at what he or she could do maybe modestly to see if they can pick up a little bit of incremental value.

Mike, the flip side of that would be that if there is less fertilizer used this year and even next year, that probably means yields go down, which should result in higher commodity prices. So it might be a negative in the medium term, could be a positive as you get out maybe beyond that first harvest.

I see. And I think just to go back -- circle back to what you were saying prior is it just feels like the last 2 years, for farmers going into their early order season, when they're starting to place those orders. It seems like there's always some macro event hitting them. And one of them, obviously, as you referenced, was the trade war. I'm curious, is this something that you think farmers are watching because we're months away before they start placing orders for next year. Is this, do you think, one of the single most things that the farmers are keeping their eye on because they did lock in their costs, so their costs aren't really that high yet. Is that something that you think is making people look at their earlier [indiscernible] for next year?

Yes. Obviously, they're watching who is going to buy their grain. Again, we have the agreement between the U.S. and China where they've said they're going to purchase 25 million metric tons of soybeans. To the extent that comes to fruition as planned and the farmers see that, that demand actually translate into their -- or for them, that will rebuild confidence. And as Greg said, as whether it's lower fertilizer uses, whether it's increasing demand, at least here in the U.S., they talk a little bit more about changing the policies on things like ethanol, looking at more on renewable fuels, which if they do, make any changes to renewable fuels for renewable diesel, that could consume a very large percentage of the U.S. soybean crops. And to the extent that, that is incremental demand, you will see the prices of those commodities pick back up. You'll see the farmers' net farm income improving, again, because it's coming from a commodity price, builds more confidence for them, knowing that they need to change out their fleet. When we look at the age of the fleet in the U.S., unfortunately, the way our industry works because of the cyclicality, normally, the fleet goes from old to average to young. And when we went through the last peak in '22 and '23, there was the supply chain challenges that our industry was dealing with. So the fleet in the U.S. only went from old to average. And then in '24, '25 and '26 now, because we're below this mid-cycle, the age of the fleet is now creeping back up to being at the peak or what historical high levels. So farmers know they need to upgrade their equipment. The technology, the fuel efficiency, there's a lot of value in bringing on a new piece of equipment onto the farm. But if you're not profitable, there's that ability to defer. And that's what we're seeing right now. So as that commodity price comes up, as that farmer feels that's more stable or sustainable, he or she gets the confidence to then start to reinvest into their equipment and bring on the latest technology.

And maybe just to help put this in full context for everyone because you mentioned there was a peak in 2022, '23, and we've been in this downturn, and many are hoping and calling that '26 is going to be the bottom that we're going to start to stabilize at this bottom. I mean, how far below on units are we from peak to trough to mid-cycle? Just to give everyone context of like where are we on the cycle, if we are bumping along the bottom to start to look at, what does this look like on a mid-cycle basis or what the next peak looks like?

Yes. Let me take a shot at that, Mike. So Damon mentioned that commodity prices and farm income tend to be the biggest or most highly correlated demand driver for the industries. Now if you look across the 3 major markets, so for us, that's North America, South America and Europe, the consistency of that farm income tends to be the most stable in Europe. So not surprisingly, the cycle in Europe tends to be more muted. So we would say between maybe 90% and 110% of what we call mid-cycle. So as we saw last year, we ended the year, I think, right around high 80s, almost 90% of mid-cycle. This year, we're calling for that to improve 1% or 2%, so low 90s in 2026. In South America, that's kind of at the opposite end of the spectrum. Income tends to fluctuate more significantly in Brazil. There's not as much subsidies. And so farmers' income tends to fluctuate. So in Brazil, the normal cycle, I would say, would run from maybe 70% to 125%, 130%. This cycle has been a little bit different. Last year, Brazil was in the mid- to upper 80s. This year, we're saying it doesn't change much. So maybe up 1% or something. So upper 80s for Brazil. And then lastly, North America tends to be kind of in the middle. So normal cycle in North America tends to go from maybe 85% to 110% or something. This year, though, North America is going to be in the upper 70s. So we're in a very unusual place. And if you look at demand for big equipment in North America, we are bumping up against times that are into the 70s and 80s kind of to go back to find the kind of volumes we're looking at for 2026 in North America. So this year, we're going to be below 80% in North America. So very unusual. Damon touched on Asia fleet. So that is really creeping up and ultimately will be a demand driver for us here.

So below 80% of what we would typically look at as like replacement demand and mid-cycle, just to give some context. And look, you guys are a global manufacturer. You touched on a lot of the reasons. Just -- the other news was Supreme Court decision. I know tariffs has been a headwind for you guys. Maybe you can just update everyone on the tariff impact that you guys faced in 2025, what you're kind of guiding for 2026 and how we should look at some of the -- basically policy changes that we're starting to see after the Supreme Court decision and where ultimately you guys are kind of ending up?

Yes, sure. So last year, we incurred right around $40 million or so of tariffs in our P&L. Again, pre-Supreme Court ruling, what we had said is this year, there would be about another $65 million of headwinds rolling through our P&L. So put the total tariff cost somewhere in the range of $105 million, $110 million of total cost. With the Supreme Court ruling related to the IEEPA tariffs and now the new 10% tariff in place, we're still working through the calculation. There's also been a couple of other rulings on the 232s and how they're calculated. And so we're sort of bringing all of that together, refining our number. We'll get probably a more concrete update on our first quarter call. The general answer is I don't expect a significant move between the 232 changes and the IEEPA tariffs coming off with the 10% coming in. So we still expect to be directionally in that $65 million of an incremental headwind, but we'll work through that, and we'll give a more refined number in Q1. The way that we've tried to address this, again, if you think about the cost of the tariffs are really centered in our North American operation, and that's really challenged the profitability there. Working to mitigate it where we can. So wherever there's dual suppliers that we can mitigate or reduce the level of tariff shifting to supplier 2 instead of supplier 1, trying to find ways to minimize the overall cost. To the extent we can't do that, and at least based on our forecast, we've not been able to offset those costs, we've tried to handle our pricing more globally. So even though the costs are centered in North America, our products are positioned relative to our competitors in a relative value position. So we know that our Fendt products usually price at around 105% of one of our competitors. And to the extent that pricing dynamic needs to sort of stay in that environment, if we're not able to push through the full cost, we're now looking to push that more horizontally across the globe. So where do we have stronger positions, where maybe there'll be an opportunity to pass an incremental 0.5% in a region that may not be subject to the tariffs. And so the way that we've approached our outlook this year is we have our pricing at around 2% to 3%. And what we've said on the call was if we were to hit the full 3%, that would cover our inflationary headwinds and our tariff costs on a dollar basis. So it would still be margin dilutive for us. But from a dollar standpoint, we would cover. And if we were at 2.5%, which is the midpoint of our outlook, we would be negative from a margin standpoint and from an EPS standpoint. But really looking to try to spread that pricing across the globe where we can to try to mitigate that for the total company.

That makes sense. I mean you talked about Fendt, which is the product in Europe. It is that premium product. And what was interesting, Greg, when you were giving the -- where we are globally by cycle, Europe is right now in one of the best positions. It kind of feels like it anchor really to your earnings. It's such a big part of your profitability. Can you just help everyone understand why has Europe been more steady relative to North America, Brazil? What are you seeing to start Europe? People look at the SEMA index. It came back, it looks like a little bit. So what would kind of surprise that European market positively? What would maybe make you start to be a little bit more concerned on the durability about that region?

Yes. So for us, again, the European market is -- for those who are not familiar, it's about 2/3 of our overall business comes here out of the European market. Europe tends to be the most stable region for a couple of points. One is you have the highest level of government subsidies. So generally speaking, in Western Europe, a farmer around 50% of his or her income comes from government subsidies, and those tend to be very consistent. In addition to that, you have much better crop diversity for these farmers here. So they're not completely focused on soy or corn, but you see much better crop diversity, and you also see a higher percentage of livestock here in Western Europe than you would see in the U.S. farmers. And so livestock and dairy tend to be somewhat inversely correlated. So as grain prices are low, livestock and dairy farmers are doing well. And so because you have a much better diversity of what's being grown here, coupled with those subsidies, it tends to result in a much more consistent order pattern. As Greg said, as we think about relative to mid-cycle here, Europe usually fluctuates in the 90% to 110% range. And so a much stronger, more consistent order pattern for our farmers here. Now the team in Europe has done exceptionally well. If I look at all of the volatility, whether that's been the Russian-Ukraine war, the supply chain challenges in '22, '23 and just the general uncertainty around the world, our European team has excelled. We've grown market share. Despite the strength of Fendt, they've actually grown share in the last couple of years with some of their new product introductions. The profitability has stayed exceptionally strong. And our Massey Ferguson and Valtra teams have also done very well in introducing new products, improving the quality of those products, improving the delivery to the dealers and doing quite well and improving their share as well. So the team in Europe has done an exceptional job in really maintaining a very strong margin profile while continuing to introduce new products that set the standard for the latest technology coming out of Fendt.

Perfect. And we just talked about Europe, which if you look, really has given you guys a steadiness to your earnings. And the torque one could say is like North America, where if you look back at North America, you guys were doing near a 13% operating margin just 2023. Now the business is loss-making given the deep downturn and what you were talking about with tariff costs. Just curious, how far below when you look at that U.S. market, Greg gave us where we are at mid-cycle, just where do you feel like, Damon, is the breakeven level where we start to see these volumes come back and you laid out what could be the driver of that. How much do we need that market to come back to get back to breakeven? Can we get to be more profitable on a lower unit number relative to where we were last cycle?

Yes. So I think if I had looked -- if I asked this or answered this question pre-tariffs, I would have told you we needed to be around $2 billion. That's about the breakeven point for our North American business. Obviously, with the current situation with tariffs rolling in, we would have to be a couple of hundred million above that. Now we're working through that. Again, that North American industry, as Greg touched on, is extremely low right now, and our dealer inventories are a little bit above where we want them. So we've been underproducing significantly now for the last 6 or 7 quarters in North America. When you look at the level of our factory utilization in North America right now, it's down around 70% versus 2024 levels. So you hear us talk about 50% year-over-year, but we started underproducing even in '24. So you're running these large factories in North America at around 30% utilization. So you can imagine the cost and the inefficiency rolling through those factories right now as we try to rightsize dealer inventory relative to retail demand. So when we think about the long-term run rates for all of our regions, ideally, we see them all in that mid-teens sort of range. So call it, 13% to 16%. South America was higher at the peak. We saw that hitting 18% to 20%. You alluded to North America. So the potential for our businesses are there. But again, given what we do in manufacturing large piece of equipment, when the industries are low, that absorption is quite punitive to us. So when we think about the long-term run rate, we can definitely get back into the double-digit margins in North America. When you look at what we've done, 2 things with adding PTx, the Trimble business into the portfolio, that's running -- at the time when the markets were stronger, that was running at around a 30% operating margin or EBITDA margin. We see no reason that business can't go back to that. The gross margins continue to be strong. It's just that the industry has gotten so weak that, that business carries very high incrementals and decrementals. So as we see that business coming back, we see huge opportunity there. The other thing that we did is we sold off our Grain & Protein business, Michael, and you remember that, that was sort of an ancillary business heavily centered in North America. It was a low growth, single-digit margin perspective. And so when we look at just the acquisition of Trimble, PTx Trimble into our portfolio, the divestment of Grain & Protein, moving us back up to mid-cycle, that alone adds around 150 basis points to the total company's business, just that portfolio change. So significant opportunities for us to improve our profitability, but significantly in North America where PTx Trimble has good margin profile and there was a heavy weight of Grain & Protein there.

That was really helpful. I'd like to actually bring that to another big conversation that was happening after your Q4 results, where in Q4, you hit what a lot of like cap goods analysts would say is kind of like the trifecta where you got inventories down, you got better-than-expected pricing and you were able to gain share. And I think the question I got from investors was how is that possible? And is that sustainable? And I know there's a lot of moving pieces there. But like you said, you guys are taking inventory out. We're trying to get pricing because of tariffs and you're even gaining share. Can you kind of walk through what you were able to accomplish in Q4 and how that kind of sets you up of being able to pull on all those different levers as we think of 2026 since we are in a very dynamic environment right now?

Yes. So again, the team in North America did an exceptional job last year, and it's kind of a culmination of several things. There's not one variable. Last year, we had great market share performance. North America had its best market share gain ever in our history. And when I unpack the market share gain, it wasn't one brand. It was both Massey Ferguson and Fendt. And it wasn't even one product. It was across the portfolio. So tractors did well, sprayers did well, combines did well. And so when we step back and say, well, what are the drivers that are leading to that? It's a couple of things. And there's a few things. One is we've worked to be the most farmer-focused company in the industry. And so what does that mean? It means trying to deliver the products that the farmers want, but also delivering in a way that's advantageous to them. So we talk about our Net Promoter Score hit the highest level we've ever had in the company. So that means -- for the Net Promoter Score, that means the farmers like what you're doing. But it's making sure the products are ready for them. It's making sure they're ready to receive those products. It's making sure that our dealers know what they need to do to help them come up to speed. So it's been a very concerted effort to make sure that between us, our dealers and our farmers, they know what they're getting, they know how to use it, they know how to operate it, they go through the training, and we've really seen that Net Promoter Score step up. The other thing that we do in North America, which is unique to AGCO, is we have what we launched is called FarmerCore. So FarmerCore, because we're really building out the Fendt brand in North America, we've been able to leverage mobile fleets, the connected machines much more effectively than maybe others who have a very strong established brick-and-mortar distribution network. So our dealers now, as we roll out FarmerCore, they're doing 85-plus percent of the work on the farm. So you think about the old days when you and I grew up, we used to go shopping at the mall. We used to go get everything there. Well, today, you and I shop on Amazon, everything comes to us. FarmerCore is the equivalent of Amazon, where based on those connected machines, that dealer is going on to your farm, doing the work there, doing the service, potentially doing other work. So that farmer, he or she, is getting a lot of that work done at a time which is convenient for him or her. They're getting usually more work done, which is great for the farmer. They love it. Our independent dealers like it because now they're building smaller brick-and-mortar stores. Instead of these big 10 or 12 base stores, they're building 3 or 4 base stores, putting mobile trucks in, so they're covering a lot more white space with their trucks, their investment costs go down. So their payback is -- their investment cost is lower. Their payback is better. Their absorption through parts and service is better. So they're generally more profitable. And ADCO is better because we have a happier farmer, and we're getting better parts and service revenue because those dealers are using our parts to really drive the parts and service. So it's really worked out well. And when you explain that to the farmer between FarmerCore, the quality of the products and how we are explaining the value of what we're bringing, that's really translating into a lot of that share gain that we've been able to see here in the North American market. So we feel good about what we're doing. Again, if it was one new product, you may wonder whether it's sustainable. But when you see it across both brands and across all the products, and you know things like FarmerCore are really gaining traction in the industry, those give us a lot of confidence that we can sustain this and continue to grow.

That's great. And an area that always gets a lot of focus when we talk about growth is Brazil, and you guys have good share there as well. Greg, what are we seeing in Brazil? Because it feels like structurally, that is where there's going to be a lot of growth. You can harvest twice. It feels like that is the next ag super power in terms of regions. But it's been in kind of a tough spot, and the data looks like it's been a little tough to start the year. So as you kind of shed light on what we should be looking at in Brazil over the next few quarters to get us comfortable for turning?

Sure. So Brazil is one of the few places in the world where there's actually new farmland being put into production. So that's quite unique. So that's in the Mato Grosso region, the Midwestern part of Brazil. Historically, most of the farming has been done in the southern part of the country where all 3 of the major players have very established dealer networks and where a lot of the smaller, midsized farms are. Well, over the last decade, a lot of resources have been put into developing massive farms using the latest and greatest farm techniques. And Brazil has become leaders in -- if not the leader, one of the leaders in most of the major agricultural categories. They've stepped up -- while the trade conflict has been going on between China and the U.S., Brazil has stepped up and has kind of filled the void, especially for soybeans. So they're quite productive. Farming down there has been very important to their local economy. Normally, the governments are very supportive. This is an election year. We're expecting to see support from the government in advance of the election in order to maybe help them with the election. Typically, that happens during election years. So just because of the infrastructure build that's gone on because of the real fertile land in that Mato Grosso region, that's a very important area for farm investment. And we're expecting, I guess, as we get through this kind of drought condition as we've seen an inflection in commodity prices to see demand pick up in that region.

Makes sense. And Damon, I do want to touch on this because it's usually saved for last is capital allocation. Yet there has been an inflection when we think of AGCO and the capital allocation priorities, it feels like. Obviously, there was a big shareholder and you guys came to agreement. I think this is important because it is a little bit of a step function change for AGCO and how they think about. You generate a lot of cash, how you think about that cash. So just for the audience and everyone online, can you kind of give everyone an update of -- this has been a priority for you, like since you've come here, the change that has been played and how that's kind of inflecting your view on how you guys allocate capital for shareholders going forward?

Yes, sure. So again, I'll elaborate in a second here, but it's a huge opportunity. As I said, last year, we generated record free cash flow of $740 million. And when I think about uses of our cash here, first priority is going to be for us to reinvest in our business. As we said, we're growing. We see huge opportunities to grow our PTx business. We want to get that up to $2 billion. So we're going to continue to focus on capital. We're going to continue to focus on R&D back into the business. I think what you should expect to see for us is an engineering and R&D budget around 4% of sales. So as we grow, we're going to continue to invest for those new innovative products coming out of our equipment side, but also PTx. So that will be, first and foremost, will be reinvesting back in the business. Want to retain my investment-grade balance sheet. So again, we sit here today as an investment-grade company, both by S&P and Moody's. Hopefully, we don't see any changes with that, but I want to make sure I preserve that for access to capital. Third is going to be tuck-in acquisitions. We did the large joint venture where we own 85% of the JV with Trimble. But if you look at -- we did 5 or 6 other smaller tuck-in type acquisitions. We'll continue to be active in that front. Again, as the industry continues to evolve, as we start to bring more and more technology to the market, whether that's autonomy, things like targeted spraying, there's a lot of small companies out there who struggle to commercialize that. And there are things that we may be building internally where if I can buy that technology and accelerate my access to market by 1 year or 2, that buy versus build may make sense to buy. So we'll continue to be active looking in areas like that. I would expect we would use free cash flow for -- there's nothing big out there, but most generally would be free cash flow to acquire those tuck-in type acquisitions. And then we get back to our shareholder returns directly to shareholders. As you alluded to, we were in a period with our largest shareholder who was not interested in selling their shares as part of a broader repurchase. And so given the ownership structure and some of the history of that shareholder showing an activist tendencies at that time, we had opted out for special variable dividends to pay these once a year. With the agreement that we reached with them, they are now willing to participate pro rata in our share repurchases. And so we announced middle of last year a $1 billion share repurchase authorization from our Board. In the fourth quarter, we did a $250 million ASR. TAFE will deliver their $50 million of that here in the first half of the year. So we'll have about $300 million done, and we will focus our free cash flow more on that. We'll still do our quarterly dividends. We normally reassess our capital allocation to shareholders in the second quarter, and so we'll decide whether we change the quarterly dividend at that point. And then we'll also present to our Board of Directors our recommendations for any incremental share repurchases under that $1 billion authorization. But as we look forward here, again, you should expect to see us with our strong free cash flow generation, really directing more of that into the repurchases. And if I look at the outlook that we've given this year, we've assumed nothing related to share repurchases. So any announcements would be accretive to the earnings per share outlook that we've given for the year.

Perfect. All right. Gentlemen, thank you. Thanks, AGCO.

Thanks, everyone.