AGCO Corporation ($AGCO)

Good morning, everyone. This is Tami Zakaria, Head of Machinery, Engineering Construction Equity Research at JPMorgan. It is my pleasure to welcome the AGCO team. We have CFO, Damon Audia, and we have Brian Sorbe, Head of PTx.

So I'm going to start off with Damon. Can you provide a brief overview of AGCO and your objectives in precision technologies to frame the discussion for a more tech-oriented investor base that we have here today?

Yes, sure. Good morning, good afternoon. So for those of you who aren't familiar with us, AGCO is the largest pure-play tech -- agriculture technology company. combines an array of world-class equipment brands, along with the industry's leading most comprehensive mixed-fleet technology platform under the PTx portfolio. So for total company in 2025, we had revenues just over $10 billion, and we operate globally with operations in Asia, Europe, North America and South America, with just around 60% of our overall portfolio in revenues coming from the European market. So our portfolio spans from the equipment brands. We have our Fendt brand, which is our premium brand, think of that as the best of the best around the world. And then we have two more volume-orientated brands called Massey Ferguson and Valtra. Those 3 create our equipment brands of how we go to the market. And then we have a separate technology platform that we call PTx or Precision Technologies Multiplied and that PTx portfolio that Brian will talk about a little bit later, really has two sub-brands. One is the legacy Precision Planting group that we acquired in 2018, and the other one is PTx Trimble, which is an 85%-15% joint venture we have with Trimble, which we acquired in 2024. And so together, we have them under the PTx portfolio. If I look at the company over the last couple of years, we've done a lot to really reshape the company in how we approach both the technology side of the market and the equipment. With the PTx Trimble acquisition or joint venture also made the decision to divest our grain and protein business in 2024, really allowing the company to hone its focus on technology and equipment moving away from the green storage business. So all of our R&D and the technology that we're investing in is on equipment and ag technology-related investment going forward. And as a result of that investment and the divestiture, we've really become a much more resilient company. As we've chosen to play in certain areas in the market, mixing up our portfolio into more performing products or higher-margin products, we've become a much more financially resilient company. And when you look at last year, we were at around 85% of mid-cycle. So at a fairly low level. Our operating margins last year were around 7.7%, which were almost double where we were the last time the industry was at that level of mid-cycle. So a significantly more profitable company and a more resilient company through the trough based on a lot of the actions that we've done. And if I look at the precision ag portfolio, and again, Brian will elaborate on this. Last year, we were just around $850 million in revenue. Our 2029 target is to take that to $2 billion. And we'll do that through an array of new product introductions, geographic expansion and really harnessing the mixed fleet retrofit channel that is very unique to AGCO. And so together, that's sort of what makes us unique in our industry and a differentiator with this PTx retrofit channel that we have.

Perfect. So in your last earnings call about a month ago, you mentioned PTx revenues are expected to be flat this year. Can you remind us where we are now in terms of revenues versus the last cycle peak of 2023-'24, both the legacy Precision Planting business and also the assets you bought from Trimble?

Yes. So we -- in 2023, our PTx or our Precision Planting portfolio was around $750 million in revenue. When we acquired the Trimble part of the business, Trimble was a little bit bigger or a different portfolio at that point in time, the revenue at that point was a little bit over $500 million. But if you remember, Trimble used to sell directly to CNH OEM, and we knew that, that business was unwinding there was around 20-plus percent of that business that was going directly to CNH as they were moving to their own internal supplier. And then there was a portion to the CNH channel, we knew that, that would shrink. So -- but when you look at the two numbers together, it was around $500 million for Trimble, inclusive of all of those sales to CNH and CNH dealers, around $750 million for our Precision Planting. Last year, we were around $850 million. This year, we'll be $850 million to $860 million to a little bit closer to $900 million depending on the industry. And as you break that down and Brian will elaborate here, we have the OE channel. So the AGCO OE, which is fluctuating with the industry. We have the other OEs, so another 100-plus OEMs we sell to affected by the industry and then you have that retrofit channel that's less cyclical, and we expect to shrink less than the overall industry.

Remind us what's the mix of that own OE versus third-party OE versus retrofit within that...

Yes. The best way to split is about 1/3, 1/3, 1/3. So 1/3 to AGCO, so direct sales into our factories; 1/3 of those other 100-plus OEMs and then 1/3 or so to the retrofit channel.

And how has that 1/3 that's in the retrofit channel trended as this downturn unfolded?

Yes. So it's about 1/3 the level of cyclicality that we see with the traditional OEM business. So it is down a little bit last year, but it was down about 1/3 of what our overall industry was down.

Understood. And at your last Investor Day, you talked about -- you just mentioned also $2 billion-plus revenues for PTx. And you're now targeting more like $860 million to $900 million. Help us bridge this over $1 billion of increment over the next few years.

I can comment on that. Good morning, everybody. So yes, we're holding our expectations for 2026 to be mostly flat, slightly above 2025. We do have a plan to bridge the gap from here to $2 billion. It's a multipronged approach, you might say. First and foremost, activating our channel is the most important piece to this is that when we combine the companies together in unified PTx, we obviously have a large channel that needs to be activated, meaning cross-selling across all the different brands, et cetera, in order to maximize that revenue. Obviously, we also have a certain amount of the business, as Damon just covered with having our AGCO OEM channel as well as our third-party OEM channel. Those are still closely tied to machine volumes. So a return to mid-cycle performance is going to give us a boost in those other categories as well. Also, we have a really aggressive innovation flywheel. So developing new technologies and constantly staying ahead of that curve from an innovation standpoint is also another part of our bridge strategy. So things like cloud services, autonomy, sensor development, et cetera, keep us ahead of that cycle. And then obviously, we want to have deeper partnerships with OEMs, not only AGCO but also our third-party OEMs that need more market penetration with technology, we want to be a full stack provider for this.

Perfect. And when we think about the $2 billion revenue potential, how does that compare to the total addressable market as you see by 2029? Meaning, what market share do you expect to be when you have that $2 billion?

Sure. Sure. So broadly speaking, we consider the total addressable market for Precision Technology to be around $150 billion. But it's important to note, inside of there, there's several nuances how we go to market. So it's difficult to say there's one way to go acquire market share because we have a diversified portfolio. So we have to break that market up into pieces. So first is our core business, which is very hardware-centric. We would call that our retrofit business. We're selling in-cab displays, GNSS receivers, advanced controllers, things like this. And that's been the core of the business for many years prior to the acquisitions and the unification of PTx. The second layer is software and connectivity, and that's a whole another approach to the market. You've got data services in there. The -- it's still underpenetrated. We're still in sort of an adoption increase when it comes to data. But farmers are more and more increasingly recognizing ROI in this space, and we're very well positioned for that. The third one is our autonomy endeavors. So much like technologies that are now considered mature, like auto steering and some of these things, 15 years ago, faced the exact same adoption curve that we're seeing with autonomy. And so when it comes to the size of the lever for maximum market penetration, we think autonomy, when that becomes widespread usage is going to be another lever that allows us to gain more market share as well.

Understood. And we've heard you talk about fully autonomous crop care solution by 2030. Remind us what do you have so far? And what else remains to be done? And what would be the time line of the launching of the ones that are remaining?

The way we're approaching autonomy, I would call it a pragmatic approach, meaning we are effectively identifying farming functions or field functions, say, we came to market with a grain cart solution was our first launch in autonomy space. We've now notified the market that we are doing tillage, which is another farming or field function. We'll be launching fertilizer application here shortly. And we're just moving systematically across these functions in a logical pattern where we can create ROI for the farmer, value perception right away. The long-term ambition, though is to fill the crop cycle of the farmer. So when the farmer looks at all of its field functions or farming functions across the year, you start to identify other things, spraying, spreading, mowing, these all -- and they start to get a pretty long list. So what we do is we take a look at a target segment of the market. So for example, we would look at a segment like broad acre farming, large grain. And we would identify what that crop circle looks like for that farmer. And then we would systematically develop those functions one at a time until we complete that crop cycle. And at that point, he becomes a fully autonomous farm. Farmers are not alike, so you have to move region by region strategically and cross balance that with where we think the adoption curve is going to come up first. So wherever labor is a problem, wherever cost sensitivity is an issue. That's where we focus on.

As a follow-up to that, any specific regions where you're seeing a higher uptake of some of these stuff like automated grain card. And then you talked about tillage, any specific regions seeing more adoption?

I would say that from a farmer interest level, this broad acre segment, so right in the center of the United States or in Western Europe, the interest level amongst farmers is probably the highest in those areas, but the adoption, the actual placement of the technology in use on the farm is still moving fairly slow. So that's encouraging, but it doesn't give us that immediate adoption that we need to ride. So other more unique segments we're seeing a lot of tangible buying activity is happening in safe sugarcane in Brazil would be an example. And there are several of these pockets, specialty crop farmers tend to have a sincere interest in autonomy solutions because they have the most labor problems in their immediate market. So there's a balance between broad acre farming, which would be a much larger segment versus these niche markets or segments like sugarcane and specialty crops, et cetera, so we evaluate each one of those on a case-by-case basis, if that gives you some idea.

It does. And how has your view on monetization changed for some of these? I know in the past, some of your competitors talked about SaaS and then it kind of got rolled back because farmers are not necessarily very open to as sort of revenue sharing or payment system. So from your perspective, what does monetization look like, what does profitability look like versus the traditional offerings you have?

So to give you an idea, if you look at the legacy business that's tied to retrofit and hardware, that has always historically been a capital purchase by the farmer, just an outright purchase. He owns the equipment and can use it in an unlimited fashion. But there have always been some little add-on subscriptions in that space, like correction services, how accurate he wants his GPS to be, sometimes as a subscription, and we still notice a large uptick in correction services subscriptions. So while farmers historically have had a certain amount of skepticism and, let's say, resistance to subscription models. It's not because of the subscription itself, what it is, is about ROI. And so we've proven time and time again that when you can deliver return on investment to the farmer and put money either to his top line or to his bottom line, he doesn't mind paying for a subscription. And they're actually increasing that interest now because these -- if you look at, say, models like targeted sprain and autonomy, we start to be able to have very creative pricing models. So for example, with our outrun autonomy solution, it's a combination you can acquire the hardware in a capital purchase, just like a traditional piece of precision technology. But then the subscription model instead of being an annual subscription, it's actually a subscription to the use case that you want to use it for and for however long you want to use it for. So if you want to use your autonomy solution to do tillage, you can actually subscribe for that tillage service, and then you can go get a subscription for fertilizer application, sprain, mowing, all of those different use cases that I covered before. We're seeing a lot of positive response amongst our target audience with those kinds of models as well.

I'm going to come back to PTx in a bit, but maybe one question for you, Damon. As you think about your margin performance, you have a target of 14% to 15% mid-cycle margin. And help us understand you're going to end this year at probably 8-ish if I remember correctly, that's the guide. How do you get from 8% to 14% to 15%, what needs to happen?

Yes. So there's a couple of pieces that we've got to work through here. But we'll look at our guide right now at 7.5% to 8% as a guide. So let's use 8% now because you moved me to that point. We're sitting at around 85% of mid-cycle today. And so the first step is we've got to normalize that 8% up to mid-cycle, so moving from 85% to 100%. The volume associated with that is about 1.5 basis points. So 150 basis points will come from the 85% to mid-cycle level. Then there's three things that are unique to AGCO that will move us up to that 14% to 15%. Two of the three are effectively already done. One is the portfolio transformation that we did in 2024. So when we put that guide out there, we were in the midst of divesting grain and protein. So that was a very low growth, single-digit margin business, and we were in the midst of acquiring PTx Trimble, which was a high-growth, high-margin business. You don't see that reflected in the numbers today just because of the cost structure sitting with PTx Trimble and the incrementals and decrementals. You don't see it with the elimination of grain of protein because it was a single-digit margin business. But as we move the mid-cycle, that adds around 150 basis points of portfolio mix to our numbers. So that's done. We just need to see the industry come back. The second lever is the restructuring actions. As ADCO is a company that's been built through acquisitions over the last 35, 36 years, we've never gone through the process of creating that skeleton. So as we were going into this downturn, it was a tremendous opportunity for us to look to standardized tasks, centralize them where appropriate and then either offshore them or outsource them where we could. So we've gone through this evolution with our internal processes coupled with a lot of AI investment on top of that, where we're taking out around $200 million. We said at the end, we were hoping the run rate between $175 million to $200 million of cost savings by the end of this year. Based on our cost actions, we'll be run rating over $200 million by the end of this year. And again, this is not sort of pruning due to the economy. This is sort of offshoring, outsourcing, really transforming how we do work. How we make the work for our farmers better, how we make the work for our teams more efficient. So structural costs coming out of the system. So we're pretty much done with that. There'll still be around $60 million to $70 million of savings that hits the bottom line this year. But from a run rate standpoint, we feel good that we're already hitting north of that $200 million. That's around 150 basis points of margin improvement as well. So as we come back to mid-cycle, that will start to continue to flow through our P&L. And then the third is our three growth levers. So between portfolio, cost and then our three growth levers, which are growing our North and South American businesses. We want to get that to $1.7 billion by 2029. We want to get the PTx business that's just under $900 million this year to $2 billion. And then growing our parts and service revenue, which is around $1.9 billion this year, up to $2.3 billion. Those three portfolio, those three growth engines will contribute about 150 to 200 basis points of margin. So when you put that together, we're at about 14%, a little over 14%. And this year, we're at a low point because we're of the tariff cost. So we're sort of not covering inflation this year, which is a little bit below, but we expect to recover that hopefully over time. And that will put us in the middle of that 14% to 15% range.

That's very helpful. And since we are talking about the ag cycle, so maybe it's a good time to ask you the question. I think you're seeing low 80s is where overall the industry would be this year in terms of -- versus the mid-cycle. Can you remind us what that means by region? And any thoughts on 2027 given grain prices are moving up again. And there's a lot happening with RVOs and E15, the possibility of E15. So any thoughts?

Sure. So if we look at -- so as for AGCO, we would say we're around 85% of mid-cycle right now. And the way we calculate is the dollar value of all the units that are sold in the industry, and it's not a unit calculation. It's a dollarized value of all of those units, and we look at the 10-year average. And then it's geographically weighted based on our portfolio. So when we say at 85%, it's based on our geographic mix. If I unpack that by regions, Europe is the strongest right now. Europe tends to be the least cyclical of the three major regions we sell in because of the level of subsidies that Western European farmers get. You normally see the European cycle trend somewhere from 90% to about 110%. So never really gets too high, never really gets too low. Europe is sitting at right around 90, low 90s right now. So it's at a low point for relative mid-cycle convention. North America is in a trough. Normally, I would have told you that North America doesn't dip below 80%. This year, we're seeing it around 72% right now. it is probably as far back from we can track at least 3 decades is the last time we've seen something as low. Some analysts have said, it's gone even lower than that. But give you a projective North Americas at a very low point, well below what we would have thought from a mid-cycle level, sitting at around the 72% mark. South America or Brazil is kind of in the middle, it's around 85%, low 80s right now. So a little bit above. That's usually the most volatile, usually flexes from around 70% to 130%. So still low, but a little bit better than North America. So that together waits at around 85%. When we look at all of our models when we look at the age of the fleet here in North America, the age of the fleet in Europe, it's back up to an all-time high. Because when we went through the supply chain challenges coming out of '22, '23 and early '24, the industry could not meet the demand from the farmers who are trying to refresh their equipment. So the age of the fleets in most countries only went from old to average. It never got young. And then in '24, '25, the industry downturn hit. So the age of the fleet has gone back up. So when you look at the age of the fleet, when you look at the industry downturn here, we start to see this being the trough year and then an improvement next year. To your point, grain prices are ticking up, we know farmers, especially here in North America, had some record yields. A lot of them stored their grain. So starting to monetize corn in the [ mid-480s ] right now relative to where it was earlier this year is not too bad for them. The big question mark on the speed of the recovery, I think right now is sort of sitting with the backdrop of what's going on with the war, how that's affecting fuel prices for the farmers, how it's affecting fertilizer prices for them who are going to have to buy coming up in the back half of the year? What decisions do they make? So do they incur more cost to buy the same amount of fertilizer, do they reduce their fertilizer purchase, which likely compromise yield, which may then drive prices up even further in 2027. So a little bit more uncertainty in the back half of the year. but all of this in theory trending positively for grain prices and hopefully, the industry is starting to recover as we move into 2027.

And when we look at some of the sentiment indices coming out of Europe, given milk prices are down double-digit percent fuel prices up there. Sentiment indices show the community is not very hopeful about the medium term. So given you said Europe is still in the low 90s, what are the odds that it can move lower before it goes back up again?

Yes. If you look at the SIMA index, which is a fairly good barometer for farmers views. It's been -- for the long time, it was sort of stable in the category. It's trended back a little bit over the last couple of months. And again, a lot of that has to do with the fuel prices that they're currently dealing with. But also the uncertainty of what they may be forced to deal with when it comes to fertilizer purchases later on this year. So I think right now, there's a little bit of that uncertainty or that doubt is weighing on their current sentiment. But when you look forward and you look at the underlying fundamentals in Europe, it's a very strong market. Generally speaking, Western European farmers around 50% of their income come through subsidies. So those maintain relatively consistent throughout the years. You have much better crop diversity there. So whether it's grain crop diversity or a higher concentration of livestock and dairy, which tend to be a little bit more inversely correlated to grain, you have a much better diversity for the farmers in Western Europe. So when you look at those couple of things together, it tends to create a more resilient market. When we look at the industry, our dealer inventories at 4 months, which is the optimal level, it's been there for well over a year. So you're not seeing us as a company have to underproduce, there's not excessive discounting to move aged equipment on the dealer inventory. Our order boards in Europe are out 3 to 4 months. So despite everything you're sort of seeing at the macro level with this uncertainty in the SIMA index, the fundamental still sound and feel very solid. And we still have the Western European market up sort of in the range of 0% to 5% this year.

Understood. And before I move back to PTx, how do you -- what is your expectation of being able to produce to demand in North America and South America? At what point do this year do you plan to produce to demand? Or is it going to be not until next year that you'd be able to achieve that?

Yes. So I think right now, again, for us, when we talk about dealers' inventory, their month of supply, ours, it's always based on a 12-month forward-looking look. And so if the industries were to pan out as we have currently forecasted them, we should be producing in line with retail before the end of the year here. If I look at North America, ideally, we would like our dealer inventories at around 6 months. We finished at the end of the first quarter at 7. We did reduce the number of large ag units on hand at the dealer. So we took that down. But because of the seasonal selling season, the low ag, this is the time of year where farmers come in, they buy the equipment and they take it off the dealer yard. So we saw the small ag tick up. That's more seasonal. So we're making good progress there, but we've got about 1 month ago. So I feel good. We'll be underproducing a little bit to get that in line here in the next quarter or 2. South America, we were -- we came down 1 month. We reduced the number of units around 10%. But because our industry outlook dipped from our original outlook to the first quarter, that month of supply is still sitting around 1 month. So we'll underproduce here in South America in the second quarter, 20% or 30% will underproduce again likely in the third quarter. And then it will be a little bit more what is the '27 industry look like, but I think we should be in good shape if the industry doesn't continue to deteriorate there as well.

Understood. That's very helpful. So going back to PTx, can you remind us who are the main competitors? Are you competing with John Deere and the big, big players? Or is it more in the local smaller innovators and providers?

It's a little bit of all of that. So certainly, in -- as far as the traditional business and in some cases, even our cloud services and our future autonomy stack, you would say that the OEM-centric ecosystems, the John Deere and the CNH of the world would be our principal competitor there. But inside of each one of those buckets, you're also dealing with technology startups. Now in there, you sometimes have leading-edge innovators that you're competing in certain segmented markets, certain geographies or certain segments of farming in general practices. You also have some stand-alone cloud services providers that are trying to serve data analytics, decision support tools to farmers. So it's actually a wide variety of competitors. PTx is unique in the sense that we're not only serving farmers through traditional technologies like GNSS, auto guidance, things like that. We also have a lot of investment and activity going on in the autonomy space, which is arguably the future. We also have a data portfolio or a platform that overlays all of that precision technology that keeps data flowing regardless of the color of the machine. And so I think that gives us a unique position from a product standpoint. I think we also have a unique position because of our distribution strategy as well. So those large OEM-centric companies sell their technology through their own dealer network. So while we do that as well through AGCO dealers, we also have an independent tech channel. And that's a huge lever for us in the market because those are the best of the best. They are 100% dedicated to Precision Technology. They might even have agronomy services baked into them. And so what that does for the farmer, and it's a big part of even AGCO strategy is we meet the farmer where they're at on the farm. And we would not only give them great service and support through a local AGCO dealer, but for the higher degree of technology solutions, the ones that are more complicated, we double that down on that with an actual tech channel that can support that equipment.

So I want to ask you about farmer core, the farming ops platform that you launched recently. If I'm a farmer who largely operates green or red equipment, how would you make me adopt farmer core and not something that one of those other guys are providing?

FarmENGAGE.

Sorry, FarmENGAGE, yes.

Yes. So -- well, there are similarities to both of those, actually, but specifically around FarmENGAGE, what we're trying to do is we're trying to ease the pain points that farmers have by switching platforms. So farmers are naturally reluctant. Once they have entered into an ecosystem of some kind or another to hit a light switch and switch over to somebody else's platform. We very intentionally designed that out of FarmENGAGE. And so the way we're positioning that product is we leverage obviously the multi-brand agnostic approach to the market, so mixed fleet. So data from effectively anywhere flows into FarmENGAGE. So we do a better job of collecting the data out in the field from basically any technology provider and get it into one central location. Now on top of that, we offer value-added user experience tools. So user interfaces, reports, visualizations, analytics, all those things you would expect from the platform. However, we don't require that the farmer fully uses all of those services. He can use FarmENGAGE just to collect that data and still output that data to another platform that he is currently using. So it's a -- it's more of an ease in than it is really a dramatic shift. So our approach is start getting your data in one location, take it to wherever you want if you're comfortable with another tool. But slowly, but surely, the stickiness of the product starts to gravitate them back into FarmENGAGE and then they're living inside of our ecosystem with almost no disruption to their operation.

So a question on AI. I get this question a lot from investors who worry that enabled by AI compute capabilities and maybe a few cameras, any innovator could come in and create a plant or a sprayer or an implement they can make, which can basically democratize Precision ag. What is your take on that? And what is your moat against disruptors like that?

I think what it boils down to for stand-alone AI solutions, I think that that's largely true. The cost of technology is lowering. Sensors compute power, all of those costs are lowering. And so you fully expect innovators to enter the market and attempt to disrupt some of the larger players like us. However, the real unlock for AI and really AI is only as good as the data that it sits on top of and that it can actually extract and manipulate for the benefit of the farmer. That's where the real value unlock is, and there's only so many providers, us included, that are sitting on that kind of quality data. It's not easy getting data out of the field. It's a wide variety of data types from a lot of different sources. We've spent an incredible amount of our engineering and R&D dollars solving that equation because we believe when -- as we continue to develop AI into our solutions, not just the ones that are in the cab and on the machine, but also living in the cloud and such having access to the largest, most robust pool of data is going to unlock more value for the grower than any stand-alone technology could.

Got it. So we have about a minute left. Maybe the last question for you, Damon, on capital allocation. You started a buyback, and I think you sold your stake in one of the fincos. What's next? Should we expect buyback to be a core and continuing strategy here on? What else is there?

Yes. So I think the -- with the resolution that we had with our largest shareholder late last year, they've now agreed to participate pro rata in any future share repurchases. So last year, this time, our Board approved the $1 billion. We have now announced $650 million of use of that $1 billion. So we're in the market right now for the second tranche, which is the $350 million. I think you'll continue to see us as a company, generate free cash flow in the range of 75% to 100% of adjusted net income. We always prioritize reinvesting back in our business first, capital requirements. You see we're at around $350 million. We then look at targeted acquisitions. So tuck-in or bolt-ons, heavily focused on the technology space. I don't see anything significant or big now that we've acquired here done the Trimble acquisition, but always opportunities to accelerate some of this innovation that Brian has been talking about. Outside of that, it's then returning it back to the shareholders. And again, with that settlement with we're now more focused on share repurchases. The agreement that we did with Rabobank to sell our entities. Again, it was just another incremental opportunity for us to generate some capital in the market, not compromise our relationship with Rabobank. Nothing changes for our farmers or our dealers. Those will continue to be serviced by Agile Finance as our primary lender, but it was a capital opportunity for us to monetize that without compromising quality to the dealers and the farmers.

Perfect. I think that's all the time we had. Thank you so much, Damon and Brian. Thanks, everyone.