AGCO Corporation (AGCO) Earnings Call Transcript & Summary

Thanks, everyone, for joining us this morning. I'm Kyle Menges. I'm the U.S. machinery analyst here at Citi. Pleased to be joined by the AGCO team. To my direct left I've got Eric Hansotia, CEO; and then Indira Agarwal, new CFO. Thanks so much for coming to our conference.

Thanks, Kyle.

I think this is the fourth year in the row now, you guys have been at our tech conference. So appreciate the support. Good to get out and tell your tech story in particular. But maybe to start, Eric, just would be helpful probably to get a quick overview of the company just as it stands today and maybe discuss some of the key portfolio changes in recent years and then we can go from there.

Okay. Great. So welcome, everybody. AGCO is the largest pure-play farm machinery and technology company in the world. We are focused on farm machines and technology. We don't sell golf equipment or construction equipment or anything else. We're totally focused on the farmer. Over the last 5 or 6 years, we've built a strategy for the next chapter that we aim to be the most farmer-focused company in the industry. You say, what does that mean? Essentially has informed our technology strategy and it formed a distribution strategy and informed our data platform. So Kyle, you're asking about portfolio changes. Essentially, out of that came a few portfolio shifts. First of all, we globalized our most premium brand. That's the 1 that's loaded with technology, that's Ventus sits at the very top of the market for the most demanding customers. And it used to be European. Now we've got it growing in North America and South America. We can talk about that more later. Secondly, we built out, we aim to be the trusted partner for industry-leading smart farming solutions. So essentially built a tech platform. And over the last several years, we've invested in 6 M&A acquisitions, all around tech. We heavily loaded up on our engineering -- and on the path, now we're there, we see ourselves as the market leader in autonomy and the market leader in precision ag, especially in the retrofit environment. So what does that mean? That means we sell technology through a whole separate dealer channel to upgrade an existing piece of machinery with new capability, automated given function. So that was the second one, build out our technology. Third one, as we did that, we sold off our grain and protein business. That was our lowest growth, lowest margin business. And finally, we exited a relationship with TAFE that was problematic for a number of years and constrained us on capital allocation. In addition to these portfolio changes, we launched Farmer core, which is a redesign of the distribution approach. Instead of the whole industry operates at a very brick-and-mortar approach, where the farmer has to come to the dealer to get their research to machine, buy their machine, get their parts, get their service. We flipped that 180 degrees and say, we want to be the most farmer-focused we're going to come to the farm and do the work. And in just the last couple of years since we've rolled it out, our dealers now are at 65% of the work being done on farm instead of at the shop, and our leading dealers are at 75%. And when dealers do that, they have a 4.5 point higher Net Promoter Score and 1.5 points more market share. So farmers like it. And then finally is something called reimagine. That self-help taking our own cost structure and shrinking it. We had about $1 billion in overhead. We took $200 million out of that through offshoring, outsourcing, automating. So that's a quick flyby of the big changes over the last few years.

Some great overview. And before we get more into the tech story, let's get Indira into the mix early here. Indira, your new I know it's only been a few weeks since you stepped into the role, but maybe just talk about some of your key focus areas to start and just how you're thinking about capital allocation as we look into 2027.

So Kyle, I would like to say new CFO, but not new to AGCO. So I joined AGCO 2.5 years ago in the Chief Accounting Officer role, but it was more than always a Chief Accounting Officer role. So it was more an accounting reporting and controls. I was intimately part of FP&A, the M&A space as well as the reimagined transformation that Eric has talked about. So been part of the AGCO journey, part of the AGCO strategy. So for me, even though we say it's a new CFO, it's a continuation of the journey. It's all about disciplined focused execution. So capital allocation, I think I would want to say it right out set that the capital allocation strategy remains unchanged. -- so we've always had a very balanced capital allocation structure, where we invest in our business. We protect our engineering investments. we maintain an investment-grade balance sheet, and we pursue targeted technology capability and opportunities, and we return capital to shareholders. So in the second quarter, we completed $345 million in repurchase, which included $50 million of TAFE participation. So Eric talked about it. Having put the TAFE story behind us gives us a lot of operational ability in terms of capital allocation. It doesn't change the financial discipline, but it does give us that flexibility. So when we think about M&A, I would say we have a bias in pursuing technology opportunities that help us either accelerate the precision ag road map or strengthen our data and our software layer. So between that and share buyback, it's not mutually exclusive. We will assess and we will pace based on what is cash generation, liquidity, operating needs, leverage, and we will assess what is the value of the opportunity set that is out there. And we take a lot of pride in maintaining our investment-grade balance sheet because that's very core to how we can invest as well as navigate any downturn in an ag cycle. So very balanced, and we'll stay very disciplined.

And turning back to the precision ag story for AGCO. It would be great to hear your guys' thoughts on what differentiates AGCO's precision ag offering versus peers. -- and maybe highlight some recent innovations as well. .

Okay. There's probably 3 things that are different about our innovation. Number one, we have the broadest portfolio. We have solutions all the way around the cropping cycle from analyzing soil properties automatically, planting, we are the planter experts. Targeted spring AI solutions that can see the difference between a weed and a plant and just spray the weed, harvesting solutions, data platform, leader in autonomy, water management solutions, a lot of stuff. So broadest platform. Number two, open and mixed fleet. So essentially, when we look at the market, we see the every farmer as somebody we want to serve, not just going back to the brand of people who bought from us in the past. So we will sell on a on a competitive piece of equipment and upgrade could be a 5-year-old piece of machinery, 7-year-old piece of machinery, give that machine new life, new capability through automating a function. Same thing with our data platform. We're the only ones that can ingest data from the -- from any branded equipment, have the farmer analyze it and send task files and requirements back to any brand of equipment. So that's the third thing. And then -- so retrofit open and broad platform are the 3 big differentiators.

And it's been about 2.5 years since you acquired Trimble the ag side of it -- maybe just talk about how you think that's going in this now PTX portfolio, just relative to your initial expectations, Curious what scorecard you'd give yourself so far on the integration and maybe synergy realization on the Trimble ag business. .

When you think of the tech business, that's what this is. It's a tech innovation business and the tech channel. You'd say, well, what are the things that matter. First of all, is talent, and we've been able to retain the talent and the team is working very well together. . Number 2 is, is it an innovation engine? Is it working well? That -- both of those had rate very high. The innovation engine kicked out 14 new products last year, well ahead of our expected pace. This year, we're going to launch another 12 -- that adds a lot of new fresh features coming to market solving the farmers toughest problems. The 1 that's the toughest has been the industry when we bought it the industry kind of fell away from us. And so being able to scale and realize the returns is probably the biggest negative. And in the middle there is the channel. We talked about the innovation muscle, creating new features. The other half of that is having a dealer channel, which is separate from our machinery channel. We're the only ones who are building out a tech-only channel. And this group doesn't sell tractors or carbon mines or sprayers. They only retrofit technology on machines. Building that out is -- we knew it was going to be a challenge, and it is a challenge, but it's also our secret sauce. It's the differentiators, the moat around the business. We're 2 years in. We've got a little over half the market converted to what we call elite tech dealers. Elite means they cover the entire portfolio. The whole market is covered by either form of precision planting dealers or Trimble, that's already covered. But we don't want to have to have the customer go to 2 different dealers. We want to melt those together and have 1 full line tech dealer that covers the whole thing. And we're about half the market cover that. We'll have a little more like 60% by the end of this year. But we've got another year or 2 of channel build out in front of us.

That's maybe a good segue into my next question. I think the PTX revenue this year might be just shy of $900 million. You've got a stated target out there of $2 billion in revenue by 2029. And maybe just talk about what you need to do, what you need to see in the market to get you from just shy of $900 million this year to that $2 billion target in 2029.

Yes. Three things. First of all, market recovery. North America is at about 70% of the historical average or mid-cycle. So we need the market to come back to recovery, which we expect we will, especially now with grain prices coming back up. So that $900 million, just with market recovery, would be closer to like $1.1 billion, $1.2 billion. And then we're at the bottom of the S curve on all these new product launches. We just launched them, so they need to be able to mature and same thing with the channel. The channel is just learning about how to sell this full portfolio. So we've got establishing the coverage, but then delivering the penetration. And so those would be the 3 things: market recovery, maturing in the channel and letting those products mature through the rest curve.

Got it. And market recovery, do you think North America would need to be closer to kind of a mid-cycle type of level to get to that $2 billion .

Exactly. Our future projections on revenue are always pegged to mid-cycle. So we assume at that level that all markets are back to 100%. And we expect that over that time frame that most likely they will be.

And then on the data platform road map as well, I think you're kind of wrapping up Phase 2 of this data platform road map. -- which is consolidating features to a common platform. And then Phase III is completing the farm operations experience that should be executed in 2027. Maybe talk a little bit about how that's going, what that's going to look like and then really final steps to getting that fully integrated tech stack. I talked about 1 of the things I'm happy about with our PTX team is how the innovation engine is working inside of the whole portfolio of all the solutions I talked about, the data platform is probably the best. .

It melted together really, really well. It was former AGCO team members, former Trimble team members on their data platform, and then we actually bought another company, another acquisition that was only a data platform. We brought all those -- now they're all wearing 1 hat, all working on a common data platform and that's progressing very, very well. And then we've got farm Engage that is our machinery fleet management how do you manage mixed fleet of all the machinery working. And then Panorama is our agronomic data platform that allows the farmer to manage all the planted data, spray data, harvested data, be able to make farm insights based on what's going on with their crops, 1 for machinery, 1 for crops. Over time, those will emerge. But even just in Farm Progress Show, we launched the AI assistant sitting on top of Panorama. That allows voice interaction to be able to capture the insight. So you can just talk to the data platform and have it be able to query and understand what insights are buried inside that data. That's 1 of the big complaints farmers have is like I've got all these smart machines. They're generating a lot of data, but I can't figure out what to do with all of this. Turning that into voice, using AI allows us to really 0 win on what should -- where are the variations in their farm, where do they have an untapped potential and what should they change in their operation, what farming activity should they change to be able to capture that opportunity. So we're really excited about that coming to life. And we got a lot of positive reaction from our farmers on the AI system.

And then I know you touched on the Elite dealers. It sounds like you're going to be still adding those in 2027. I'm curious just how that's been kind of pacing? And what's the kind of once it's ramped up, what does that target look like for a number of elite dealers?

Yes. So we've got about high 80s number right now globally. Our target is to get to 120 by the end of this year, and that will get us to about 60% of the industry being covered. And essentially, what's happening is you say, well, what's the deal? Why don't you just have it all done on day 1. We have a whole Trimble dealer network that covered the globe. We had a whole precision planting dealer network that covered the globe but they weren't lined up. It was like 2 puzzles laying on top of each other. And so in each area, you have to go in -- and these are all independent business people. You have to have a conversation with them and say, would you guys like -- would you folks like to merge, does 1 want to buy each other? Do you want to partner? How do you want to come together. And so it's a bespoke recipe in each area that's based on what their inherent interests are and their succession plans and all of that. So 1 by one, we have to kind of help that conclusion come to life. We expect it will probably take another year or 2 for us to mature out to be 90% of the market covered. And that's baked into that $2 billion growth platform in terms of revenue.