AGCO Corporation ($AGCO)

Supporting the maiden voyage here at Wells. Thank you for being here.

To start the conversation, David, I just want to go back to the Analyst Day, where you folks laid out key growth targets. You spoke about the tent opportunity in North America. You spoke about product and technology offensive and building the brand fast forward to today, where do we stand on progress towards those pillars that you laid out? .

Yes. Sure. jerry, thanks. I think, overall, we feel very good about what we're seeing against all 3 of the pillars here. We're seeing some real tangible results in our market share, gained share both in North and South America last year. So farmers continue to see the value of the benefit of the most fuel-efficient products out there, along with the warranty and our new farmer core initiative of servicing them. So if I break it down a couple of the components that you touched on here with the distribution, the dealer footprint for us in North and South America over the last couple of years, we've been rolling out these spent dealers here in the North American market and our Latin American market today, we're just over of the white space covered. So we have a dealer present. We've enhanced that through our farmer core initiative. And if you remember, that's not having a brick-and-mortar store, every 25 miles or every 40 kilometers, but rather having a smaller store for the dealer and then enhancing that with mobile trucks. And those mobile trucks can do 85%, 90% of the work on the farm -- and what this allows is our farmers to get service more how they want to be serviced. It allows them to have work done on the farm in addition to what the dealer is there to service what do other work on the farm that helps them become more productive. Our dealers love this because their breakeven cost goes down. So instead of building these large brick-and-mortar stores with 10 or 12 days, you build a smaller store, 3 or 4 bays. You add your mobile trucks. So you're able to cover more white space. you're able to shift your resources to where the demand is in your territory. And for AGCO, we love it because our farmers Net Promoter Score was an all-time high last year. farmers are getting served, how they want. We're able to better connect with them through telemetry and other information we're giving off the machines to help our dealers service them. So farmers are happy our dealers are happy because they're getting usually a higher attachment point and we're happy with better parts and service revenue. So the Fed dealership rollout with farmer core has been extremely successful. We see that momentum continuing. Product technology, we continue to see great performance with the new introductions of our brands here in North America, new introductions South America, along with Europe. So overall, we have good momentum here in the North American market. industry's challenges. We know no surprise, but we're gaining share here and optimistic that as we see the markets recover, we'll start to see that drop to the bottom line here.

And I wonder if you could just double-click on progress on Fed. What's the revenue footprint for Fed in the Americas today? How does that compare to where the challenger brand was before you folks made .

With the large ag being so cyclical right now, and we know it again before I go through the details here, if you remember, the industry for AGCO, we're sitting at around 85% of mid-cycle right now. go back a couple of years as a company, we were sitting at around 109% of mid-cycle. So we've come down almost 25%. If I look at North America, so in large ag this year, North America, we will be in the 70s. So 72% of mid-cycle. So we are sub-trough from what we would normally have talked about for our North American market. South America has been equally challenged. Even though the industry as a whole is sitting at around 85% of mid-cycle, when you start to look at some of those products like combines, high horsepower tractors, they're significantly below that 85% that 85% has been buoyed by medium to low horsepower. So sent in 2024 in North and South America was around $1.4 billion. with the industries coming down in both of those regions, we were just under $1 billion last year and will probably be a little bit lower than that this year because the industry is contracting both here in North America and in the Latin American region for the high horsepower, so sub $1 billion right now.

And then, David, you mentioned 80% covered today. What's the time line to get to 100% covered?

So we'll ever get to 100%. I'd say our goal is to get into the low to mid-90s, and you'll see that more over the next several years. Again, -- it's very important that as we pick the dealer, we have more demand to be a fed dealer than what we have an appetite because every dealer has got to go through a qualification process. He or she has to have the political -- or sorry, the capital to be able to invest in loan and machines, they have to have the ability to invest in the right type of technicians, and we've got to demonstrate the ability to do farmer core. And so for us, we want to make sure that whatever dealer we pick to represent at the stores that they're putting in place and the dealer themselves can represent that premium brand. So we're very selective. We're just not going to put a dealer in everywhere. We want to make sure that where we put it, it fits the needs, but at the same time, that dealer can service us as our key ambassador. At the end of the day, there are face to our customer in a lot of ways, and we want to make sure that when they go on the farm and they bring fence to that firm, it helps that farmer understand they're getting the best of the best.

And what proportion of your distribution is through Caterpillar dealers did you transition the call .

Yes. In the North American market, I would say the majority of our revenues in the North America still are coming from a cat affiliated type dealer. So our largest dealers here in North America are -- would be Ziegler and Butler here in the Midwest part of the country and both of them have a strong cat business still. .

Very nice. So that part of the challenger transition really well. And then how does the Fed brand work in South America? You have Valtra, you have Massey, how do Fendt fit in South America?

Yes. So when you look at Fendt in South America, again, think of that targeting more of those large professional growers in the Mato Grosso region. So Massey Ferguson has its own distribution channel. And then for then, it's usually complementing to ultra -- and so you'll have a tent Valtra dealer when you -- I was just in South just in Brazil a couple of weeks ago. When you walk into these large dealerships in the Mato Grosso region, it turned to the right and it's all sent it turns to the left and it's Valtra. So that dealer is sort of servicing 2 different types of farmers. You have the large professional growers who are tech seeking, looking for maximum fuel efficiency they're going to appeal to send. And then when you look at the ones who are a little bit more value-orientated or more sugar where Valtra has a really strong history and legacy there, they're going to -- that dealer is going to service them with Valtra, but think of Massey as one channel and then Fendt Valtra as a complementary channel. .

And then what has played out from a market share standpoint in South America. Dear has spoken about gaining share over time? What's been the shift in the industry from an AGCO standpoint?

Yes. So again, I think we've been growing share with tent in the region, but the industry has been shrinking. So when you look at the number of units being sold, we're selling fewer units. But when we look at that high horsepower segment where the Fed tractors play. We've gained share. We look at the Momentum plant or best planter in the industry. It's got the articulated frame. And if you look at the topography in the Mato Grosso region, that frame flexes around the landscape there. So that then tractor and the momentum our South American team calls it the combo deal, where the momentum is driving a purchase of the pen tractor. We've seen good share growth in both of those sprayers, we've got some good momentum with our rogator there and combined with our ideal combine that we make down there, we've grown as well. Again, all of these are getting good momentum just in an industry that's been very challenged. The -- the exciting part for us is we're at the Argentinian fair a couple of weeks ago, and we announced we're bringing sent into Argentina. So again, Fendt had historically been going solely into Brazil. So with the momentum we're seeing there, we've now announced our plans to bring that brand to Argentina. I can tell you the farmers were ecstatic because there are a lot of tech seeking large tech-seeking farmers in Argentina and now they have the ability to access the premium Fendt brand is really exciting for them. So we're excited -- it's not a huge market for us. If you think about South America or Latin America, 80% sits in Brazil, 10% is around Argentina, 10% is the other parts of South America. So not a huge market in units, but a good profitable market that we're excited to bring the Fendt brand to.

And unfortunately, and Fabia stopped giving us mark share numbers, 6, 7 years ago, if we were to pull up the data, so the AGCO is gaining share at the high end, years gaining share, that implies cases and New Holland is losing share. Is that what the beta would show? .

Well, there's always a mix. Again, I think in isolation, every one of us can point to winning and someone's going to point to someone losing. But I think when you look at the revenue growth of what we had seen in Fendt, going to go back a couple of years, there was little to no revenue from Fendt in South America. As I said, 2024, we topped out at $1.4 billion, and I think that was around $500 million or so coming from Fendt that had to come from somewhere, Jerry. And so for us, we're penetrating these large farms. We're giving them an alternative to the competitors. -- out there, we feel good about the share we're gaining and we feel good about the opportunity to continue to gain share. where a farmer picks what they choose to trade in. Again, we'll leave better for them. .

And Jerry, also Brazil, there's kind of 2 segments of the market. There's the southern part of the country where historically, most of the farming was done. So I think smaller midsized farms. The real opportunity in Brazil is the Midwest part of the country. We have historically been under-indexed there. But since we brought 4 or 5 years ago, that's where our share gain has happened -- so again, depending on where you are in the country and what segments you're talking about for us has been in the Motoroso region. .

A really interesting perspective -- thank you. And then in terms of the overall profitability of vent in North America and South America, can we just spend a minute, unfortunately, tariffs were not helpful to ago. If we were to peel back Fendt economics in North America, what would that look like compared to the other product lines? .

Yes. So I think there's a couple of layers to the question. I think if I think about the tent-wheel tractors, generally speaking, the price point of a tent wheel tractor in the industry is it prices above the competitors. So even here in North America, the fed wheel tractors are the most expensive products out there. They price above the competition. because they deliver significantly more value, whether that's fuel efficiency, better warranty, there's an array of things we could talk to as to why a farmer is willing to pay more for that pet product versus the competitors. . Now there's been 2 challenges when I think about the North American. One is the tariffs. So those wheel tractors are imported from Germany. The combines imported from Italy. And so that has put pressure on the margins, if I look at that. So when I look at North America this year, we will not make money given the level of tariffs that we're dealing with. But also when you look at some of the other products, spent products or track tractors, we make here in Jackson, Minnesota, our sprayer we make in Jackson, Minnesota, our ideal -- or sorry, our Momentum planter we make in Beloit, Kansas. So we make a lot of the fence products here in North America, the challenges the industry has been so low. Those factories are running at very low levels of utilization right now. So when I look at the profitability, it's hard to give you a how is the properly often looking right now because you're dealing with factories that are running at around 30% utilization and that is putting a lot of incremental cost in the North American P&L that's not getting us absorbed by units. So when I look at the price point, though, of what we're selling these products, I feel good about the price that we're selling them at relative to the competition. We just need to get the volume flowing through to get those factories better utilized to get that -- to get the overall profitability of North America.

And what's interesting in our field work, even deer dealers talk about how strong the Fed -- can we just spend a minute in terms of your R&D budget is far smaller than Deere's R&D budget Yet you have a phenomenal tractor. Can you just talk about how you folks are able to continue to drive the level of outperformance for your tractor specifically with Brent?

Yes. I mean I think it's beyond just Fendt tractor. I think our innovation engine is the most farmer-focused innovation engine in the industry. Again, when you look at what we do, we spend around 4% of sales on R&D. But you look at the results, you go back and look at the AE50 awards here over the last several years. I think AGCO in most years, has won as many or more than the other 2 when you look at the awards from Agritechnica Tractor of the Year, I mean, AGCO continues to deliver award-winning innovation not only on the equipment side, but also in PTX, the Davidson Award for our Trimble -- or sorry, for our autonomous grain cart, autonomous tillage 2 years in a row, we've won the Davidson award. So -- the team is focused on farmer value and innovations which contribute to the farmer, and I think you're seeing that in the marketplace with the awards that were being given, and it's sort of a recognition that we're in the right way [indiscernible] spending more broad. We're very concentrated where we're spending hours and the end of the nations are delivering for the farmers.

And in terms of we were to especially apply normal operating leverage to your business in North America abnormal to in line with normal. I think that would imply North America margins in the mid-single-digit range. Is that how you're thinking about normalized margins in North America at this point? And where would that be relative to that?

Yes. It's a little bit hard with tariffs embedded in the numbers right now. It's a little bit hard to sort of understand what's permanent versus what may change longer term -- but fair to think about as we get those revenues up into the low 2s today, I would tell you with tariffs, we probably got to get into around $2.2 billion, $2.3 billion of revenue to get to be around breakeven, maybe a little bit less with some of the recent pronouncements on tariffs last week and this week. But I think if those are more permanent cost structure, you're sort of seeing in the low upper digit single margins. Ideally, we like to get all of our regions into that double-digit margin range. But with the North American market being burdened by a high level of tariff costs right now, that's definitely a little bit more challenging sent overall, again, you got an array of product in the portfolio there between all of the wheel tractors, the sprayer, the combine, the track tractor I'd say the profitability ranges depending on the product type and again, where we are from a share standpoint. But I think generally, the way to think about this is spent is our highest margin equipment brand usually is significantly above the company average, and it sits up there. We're not as high as our parts or our PTX margins. But from an equipment standpoint, it's above the corporate average.

And then in terms of -- on the tariff point, as you alluded to, favorable for AGCO, the recent changes, I think the tariff headwind that you had guided to was about $130 million. Just mathematically, it feels like you've got about a $60 million, $65 million tailwind relative to that number on an annualized basis, recognizing that you pay full tariffs before -- but on a run rate basis, is that right? Or are there any carve-outs that we should know about as we look at the decline from 25% to 15% rate on pharma.

Yes. So not exactly that one. So a couple of pieces to take into consideration. So you -- we said the full year tariff impact this year was around $135 million. With the recent change in the 232 going down to 15%, that would reduce my annual tariff cost by about $50 million or so right now. If I think about what that means for 2026, that will take it down by around $20 million based on what came out. Now yesterday, there were some new HTS codes that were published that could take it down further. So we've got to run that through our machine, see how that affects us. And then we're still waiting. There are still 301 tariffs pending. So I think if we just look in isolation, we're $20 million better than what we said at our Q1 call for will be about $50 million better run rate if nothing changes, but we've got to factor in potentially some positive on the HTS codes and potentially some negatives on the 301s. And again, just to remember, in North America, about 35% of our revenue is imported into the country. Of the North America were 25% of that is coming from Western Europe. So that's the in tractors, that's the Massey Ferguson high horsepower coming out of France, Ideal Combine coming out of Italy those are at 15%, give or take, but we also import around 10% of our revenue from other countries for more of that medium to low horsepower. So we have supply coming in from Japan, Indonesia, India, Brazil to a certain degree. So depending on those 301s and what country is and what the rate may be, that could potentially be an incremental headwind. So we've got to see how these things sort of come together over the next couple of months. we'll give a more -- a better outlook when we get on our Q2 call. But at least right now, the last couple of weeks have been a positive relative to what we had communicated in Q1.

And Jerry, just to be clear in terms of our guidance, we have not assumed any benefits that Damon is addressing here nor did we include any of the refunds that were set up to receive -- so we're -- our guidance today, I would say, includes that full $135 million that Damon talked about.

Right. We did not book a reserve for the EPA refunds. Although we've submitted $30 million as part of Phase -- we have received some cash already back, but none of that has been embedded in our outlook, as Greg said.

Well, a great recap of trade policy those super -- and then in of thinking about the trends in the cycle. So over the past couple of months as corn emergence has unfortunately been ahead of fiber average corn prices, but pretty tough in May. We saw used equipment inventories for large ag in North America, move in the wrong direction. Are you seeing higher farmer anxiety today versus 3 months ago in North America, given the move in the wrong direction for soft commodity prices?

I think we're seeing higher anxiety from farmers around the world today versus 3 months ago, given the war. Again, when you look at where we're sitting with diesel fuel cost increases, the fertilizer cost increases that farmers are potentially dealing with. It's created a tremendous amount of uncertainty -- and if you just look at some of the health indexes of the barometers, here in the U.S., we look at that Purdue ag broer, and you've seen that tick down over the last couple of months. So we know there's a lot of anxiety -- the good news is for farmers at least right now. Most of them had procured their spring fertilizer in advance of the war. So they really weren't dealing with the significant increase in prices that they went into spring planting. Now they have their mid-season passes. And more importantly, they start to think about locking in their 27 fertilizer, -- what's the cost they're going to pay here in the fall? And will they buy the same amount at a higher price -- are they going to have to rotate some of their crops to less nitrogen-intensive crops, -- or are they going to buy less fertilizer to try to keep their cost level low, which will then compromise 27 yield, we're going to have to see -- I think there's a lot of anxieties what does each farmer do and how does that affect his or her growing pattern next year. So there's a lot of uncertainty more forward-looking. In the near term, though, I think what we're seeing is a lot of farmers monetizing the yields that they had last year. If you remember, last year was a great harvest here in North America, very strong yields. -- corn prices were not that great a year ago. So a lot of farmers stored their grain. So with corn sitting in the 80s or so, you're seeing a lot of those farmers right now taking advantage of that price and getting some cash into their bank account. So a little bit of a short-term benefit, but a lot of uncertainty as they look forward here as to what they're going to be forced to pay as they go into the back half or the end of the calendar year.

And then you mentioned capacity utilization for large ag in North America, 30% for you folks, very similar numbers across the industry and used values are now improving. What's the level of confidence that we'll produce at a higher level than 30% in 2027 based on the improvement in used values? How would you weigh that against the uncertainty of the [indiscernible] ?

Yes, I think -- well, it's hard to forecast what the industry is going to look like. But if we look at the data, the age of the fleet is at a record high. in North America. We normally average the age of the fleet at around 6.5 years. We're closer to 8.5% right now because when we went through the supply chain, we went through the peak in '22, '23 and early '24, the industry because of supply chain challenges, we could only get the age of the fleet and the firm from old to average. We never got it young. And then end of '24 into '25 and '26, we've seen the downturn now. And so that age of the fleet has creeped back up. So we know the age of the fleet is high. We know that if we look at, again, all the decisions farmers are going to have to make on a crop rotation potentially less fertilizer will likely result in less yield in '27 as that starts to trickle through some of the USDA and other estimates for '27, we'll see corn futures rise -- that could be a windfall for farmers as we get into the harvest of '27. So there's lots of reasons to think that the industry could be in a much better position next year as we look at our production, if that industry starts to pick up or even stays flat, we're going to see higher levels of production either way. because today, we're underproducing relative to retail demand. We're still trying to work our dealer inventory down. We're sitting at around 7 months. right now, we want to get that down to 6%, but we were up in the 9s a couple of quarters ago. And so we've been underproducing that retail demand trying to bring that dealer inventory to the right level. So as that sort of stabilizes here over the next quarter or 2, even if that industry doesn't pick up, you're still going to see a higher level of production flowing through our factories because we'll be producing more in line with retail.

And then in Europe, you folks are executing phenomenally well. And we're seeing record margins or near-record margins out of your business. Given the pressure on farmer economics, how do you view the risk to your European business, especially given your orientation very heavy in Germany. What implications does that mean for the business over the next 12 months, given all the moving pieces?

Yes. Again, I think similar to North America, there's a lot of uncertainty for those for the European farmers. If you look at the SIMA index, which again is another European barometer that had been sort of circling in that growth category for probably around 15 months, really had to move. And if you look at post the start of the war, that index has sort of started to tick down a little bit. . So again, a very similar dynamic that we talked about for North America as farmers are going to have to make some decisions as they fall now a little bit different in Europe. You have a lot of winter wheat there, so that's harvested here in the early summer. You have a little bit more crop diversity farmers tend to carry a little bit more livestock and dairy on their farms, more grain diversity there. And so you have a little bit more variability, but that farmer is going to have to go through the same decision. Do they rotate their crops? Do they buy less fertilizer. Do they buy at the same cost or at a higher cost. So they're going to go through all those dynamics -- the good news for us and the good news in Western Europe is you still have a high percentage of those farmers income comes from government subsidies. So in Western Europe, close to 50% of their income comes from subsidies, and that tends to be relatively consistent. So you have less variability from an order pattern there. Our industry in Europe usually flexes from around 90 to 110. So it doesn't usually get too high, but doesn't get too low like we see here in North America or in South America. So you have better crop diversity, better stability from subsidies. We look at the dealer inventory, we're sitting at around just under 4 months. So we're very -- in a very healthy position there. We haven't had to go through a significant level of destocking. We look at the order boards. We're sitting within the 3- to 4-month range for our European business. So we have a pretty good visibility based on historical standards. So again, a lot of uncertainty but the teams have done a really good job staying at the farm table, talking to the farmers, new product introductions coming out that are driving better fuel efficiency, better innovation coming out of Fantom along with Vault and Matthew. So again, it's uncertain, but I think overall, we're -- Europe is in a relatively good position.

And then on your mid-cycle framework, can you remind me, is that a 7-year average -- and where is Europe relative to 91 .

Yes. We look at the 10-year average. And Europe is sitting at around 90% of the 10-year average, and that's usually the low point that we sit at in the European market.

Very interesting. And Germany has done better, I believe. Is that right?

Germany has done well the last couple of years. France has been a little bit weaker this year. So the 2 biggest markets in Europe are Germany and France -- where our AGCO has great market share between Massey and Valtra. Fendt has done well in gaining share in both of those markets the last couple of years. German market has been stronger this year. French market has been a little bit weaker for the industry, though.

Got it. And then on the Precision Ag side, so your planters, especially an aftermarket business, really phenomenal position in the industry. Can you talk about what demand looks like this year? Obviously, planting season is over? What were the results for AGCO how did the business perform?

Yes. So still in the second quarter, so we'll give you a little bit more information on that at the second quarter call. But if you look at our PTX portfolio, again, one of those unique differentiators that AGCO offers is that we have 3 different channels in the PTX business. We have -- last year, that business was -- we said this year, it will be around $860 million to $900 million. And if you can break that down to the 3 primary channels, about 1/3 of that goes to AGCO. So that's PTX technology. getting into the factory floor for a fed product, the Massey product or a Valtra product. So think of that AGCO OEM direct, about 1/3 goes there. That's going to cycle with the overall ag industry. We have -- we also sell to 100-plus OEMs, again, between precision planting and PTX Trimble, we pretty much sell to every OEM other than the big one. Look at a back of a planter from competitors set precision planting guidance systems from major companies using PTX Trimble. So we have 100-plus OEMs that we're selling to. That's around another $300 million directionally. And again, that's going to follow the overall industry cycle. The third part is that unique part about AGCO, where we have that separate retrofit channel. So these are independent technology dealers. These are usually not the equipment dealers who are selling a new tractor, a new sprayer, a new combine they're selling seeds. They're selling agronomy. They're on the farm driving technology. That business is around $300 million as well. So about 1/3, 1/3, 1/3. That business has been a lot less cyclical. So it's usually about 1/3 the cyclicality of what we see from the new equipment business. And so again, that's because as farmers have been more challenged from a net farm income standpoint, they're still looking to reduce their input cost or drive higher yields and you can get a much faster payback at a much lower entry point. So our whole PTX portfolio targeted at retrofit first, and it's allowing those farmers to keep their old traditional iron, but upgrade it, make it smarter, make it more productive by bolting on these piece of equipment that generally yield a 1-year maximum 2-year payback for them. So if they're looking to reduce their fertilizer, there's options on their planters. -- you look at the targeted spraying, again, reducing the herbicide use because now you're bolting on our vision system and our nozzles to your existing sprayer. You don't need to buy a brand-new sprayer. -- but you can buy the camera system and the nozzles and you can put that on your old spray, so giving them a lot better, giving them the efficacy, the lower input costs at a much lower price point. And then you look at our autonomous systems. So we have autonomous for the grain card. We have autonomous for tillage, -- we're coming out with autonomous refertilizer for that farmer. He or she is buying the system for their John Deere tractor or their Fendt tractor and they own that piece of equipment they can then buy the hours for tillage or grain cart when they want it. So again, it gives them a lot more flexibility. They're not having to buy a brand-new tractor, we're literally just buying the system and bolting on to their existing tractor giving them a lot more flexibility to test out this new technology without having to make a massive investment on a brand new tractor because we know times are tough. -- but yield, efficiency, labor shortages. This is a time where they can get a lot better payback with some of this technology without having to make those large upfront investments.

And then Deere rolled out on a subscription basis, the GPS kits and you folks have a phenomenal position in that business? Are you doing it on a subscription basis as well. So they've got good traction, 4,500 upfront, 4,500 a year. Do you have a matching product? Is that how you're taking them on the market?

No. We're trying to -- as we talk to the farmers, again, in these times, when that in farm comes net farm income is low, adding subscriptions to them for the basic necessities, they tend to run into a lot of resistance. -- that. And so we've tried to serve the farmers how they want to be serviced, where they see the incremental value for the subscription. So again, the way I would look at like our if you look at our guidance systems, you own the hardware, you have a small annual subscription. If you look at our autonomous system, you own the hard work but then you buy the hours that you want or need. So if you want to buy hours for autonomous tillage, you buy those hours or autonomous grain car you buy those hours. And then if I look at like our targeted spring system, -- that's sure. You buy that equipment upfront. So if you want to go into the field on time, 2, 3 times, it doesn't cost you anything different from AGCO. You've already owned the equipment. It's just your labor, your diesel fuel for your sprayer, but we try to sort of service them how they want to be serviced.

Super. Well, thank you so much, gentlemen, for joining us, David, Greg. I appreciate you.