AGCO Corporation (AGCO) Earnings Call Transcript & Summary

All right. Good morning, everybody. I think we're going here. So let's kick this off on Day 2 of the Industrials Conference, the Jefferies Industrials Conference. Welcome on behalf of Jefferies. I'm Steve Volkmann. I cover sort of a wide swath of industrial companies now, I guess that's what we do here. We're very pleased to kick off Day 2 by welcoming AGCO to the dais. And so have Eric Hansotia, who is the CEO; and Indira Agarwal is the CFO, fairly newly minted, so we go easy on her today. And very pleased to welcome, Greg Peterson is here as well to that clean up, if necessary. And we're going to run this like a fireside chat, so we'll have a bit of a sort of an interview process here, I guess, and we would welcome very much any questions from the field here. So if anybody has one, I'll come up for air in 10 or 15 minutes and give you an opportunity to chime in. So with that, welcome, thank you guys for coming.

Thanks, Steve.

Thank you.

So let's maybe kick it off. There seems to be a general improvement in attitude around agriculture, generally. We had a couple of other companies here yesterday, can't quite remember who they were, but they seem to be fairly upbeat relative to this sort of cycle bottoming trends. So maybe let's just start off, Eric. I mean what's your view of the cycle and where we are?

Yes. We talked last year even that a lot of the fundamentals we're setting themselves up to establish a bottom. And we're actually even expecting a little bit of recovery this year with the Iran war, the bottom extended. But -- when you look at the -- what do we look at? We look at the age of the existing fleet in farmers' hands. It's as old as it's been. We've got the dealer inventories and used equipment down to target levels. So the pipeline is cleaned out. And now we're starting to see recovery in commodity prices for grains. And so there was a tension in the system of farmers wanting to buy, but they needed to have some profitability come back into the system now at the green prices recovering there's profitability. And I was just at Farm Progress Show last week talking to a number -- several hundred farmers and dealers and the enthusiasm was like we haven't seen in several years. They were excited to be able to come back into the market. Excited about a lot of the new technology that we've got either on our products of Fendt, Massey or our precision technology business, PTx. So -- now we also think that it's predominantly a North America situation right now. It's much less positive in Brazil and kind of Europe is in the middle. And Brazil has got some headwinds of high interest rates and the uncertainty around election coming up with kind of polar opposite candidates and uncertainty who's going to win and Europe's in the middle.

We don't have those polar ops at here. So that's...

Fortunately for the U.S.

So maybe digging a little deeper, though, it seems like a lot of the improvement in crop prices especially has been driven by lower yields globally, which an interesting question, right, because they're going to get less volume, but they're going to get more price. But you believe the net is a positive outcome in that scenario?

Especially in the U.S. market just because of the way the financial model works, the government contribution toward farming shows up mostly in subsidized crop insurance. And so most farmers have crop insurance. And that means that if I have a bad crop year, I've got crop insurance as a safety net below me, and I'll have an average or an okay outcome. If my -- someone a little ways away from me as a good year, they're able to recognize the higher prices and good profitability. So safety net for the losers, essentially, if you want to call it that, and the winners get to participate. So North America with our high participation rate in crop insurance really makes the most out of a market like this.

Okay. So there's a lot of questions and focus right now on what we might call early order programs or next season ordering, whatever you'd like to call it. Any updates for us relative to what you're seeing there?

Very early days on our early order programs. And relative to our competition, we don't have as many customers that sign up for earlier programs. So it's not as great of an indicator for us. But some of our competitors have spoken about what they're seeing and our trends are similar. So we're seeing stronger early order programs, and we think that's just one more signal that in the U.S. market, there's enthusiasm in the marketplace. And then the Purdue Index went up just a few days ago as well, which is a sentiment index of farmers view of the future health of the industry. So a lot of indicators are all pointing in the same direction.

And I'm sure you saw the USDA up farm income number yesterday, albeit slightly, but at least it's going in the right direction.

That's right. And that -- and there's still the potential for another demand driver from biofuels. So E15 all year round would be a really big stimulant that's in the farm bill. If and when that passes, that could be a big boost to a tailwind for farmers.

Good. So we're webcast here. I just want to give you an opportunity, anything interesting that has come up since the second quarter call that you'd like to call out? Or how are we doing on third quarter outlook?

Indira, would you like to say?

Yes. I would say, as Eric alluded, we were at the firm progress. So the positive sentiment in North America, we haven't seen it in a couple of years. So we had a pre-VIP event there were 300 people. We closed deals. So there is positivity in North America. The optimism is good. Brazil is a wait and watch. Farmers are waiting for that certainty out of the elections. They want to see more on farmer economics. They want to see some trade policy. And Europe is in the middle. So the grain rally, the timing of the grain rally and where the European farmers sold their harvest was before the grain rally. So -- there's also a little bit of farmer sentiment, cautious sentiment from the diesel and the fertilizer prices. So the way we talked about it in our second quarter earnings call in terms of Europe being flat, North America large ag being 15% lower and Brazil 5% to 10% lower is still the right way to think about this. But there's optimism in North America region. So it's kind of a mixed bag.

Okay. All right. Good. And I think you alluded to the second quarter, you saw some weakness, I think, specifically in Germany, which maybe you hadn't expected. Has that proved to be sort of temporary? Or is there more to it?

So in the second quarter, we saw Germany industry decline of 15%, even though AGCO, we grew market share. But the third quarter is mostly a European shutdown for us with production shutdown, dealers, farmers, like it's kind of the Europe market comes to still -- so we'll find more in September, so we'll provide a better update with the third quarter earnings call.

Okay. All right. Good. So let's maybe zoom out a little bit and talk about some of the things you can control. So you've been focused on a number of growth initiatives that sort of are above and beyond the market maybe just for this group, if you want to kind of highlight those and we'll dig in a little bit as you do.

Do you want to start?

Yes. So we've been on a transformation journey with our cost efficiency. So from $1 billion of SG&A, we've been trying -- we've been working hard to rewire the business and the trough was the best time to do it to take cost out. So by the time we exit 2026, we'll be upwards of $200 million in cost efficiency savings. So that significantly improves our operating profitability leverage as we navigate and we get prepared for the up cycle. On the other hand, as tariff uncertainties are fluid these days, we are also laser-focused on finding cost actions in terms of our sourcing, in terms of our manufacturing footprint, manufacturing efficiency, logistics. So we are looking forward to all of this. These are all of the controllable actions, and we started ahead and we are poised right for recovery.

Yes. And so that's a lot of hard work on the bottom line. While at the same time, we're doing a lot of hard work on the top line. So we've got our 3 growth levers that we've been talking about for several years, making progress on all 3 of them. The first one was taking our premium brand, Fendt, which is the best of the best products for the most demanding customers in the market, taking that from a European business to a global business, bring it largely into North and South America, gaining a lot of share again in North America this year. Our large ag portfolio is now up to 11%. We didn't even exist in the market 5 or 6 years ago. And so making good sustainable progress in that growth vector through a few things, great products. We've got the best products in the marketplace, highest technology, best support. We've got the best support package in that we have a 3-year bumper-to-bumper warranty. And our distribution model has been redesigned. We call it farmer core. And so instead of having a brick-and-mortar model where the farmer has to come to a dealership to research the machine and get their parts get their service we turned at 180 degrees and say, we're going to remotely monitor all the equipment. We're going to provide digital connectivity in terms of being able to order parts online, service online, research and machine online, things like that. But then anything that we see in the farm, either maintenance or repairs, we proactively call the customer and say, how about we take care of that for you. And next Tuesday, it's going to rain, let's come out Tuesday. And they say, "Great. We come out. We do all the work on the farm." And then once we maintain or repair our machine, we ask the farmer, "What else can we help you with?" And we can do about 85% of the maintenance and repairs and all the competitive equipment on that farm. So instead of the farmer coming to brick-and-mortar, we come to them. Instead of maintaining and repairing the product, we are maintaining and repairing the farm. And so it's a fundamentally different strategy than our competitors. And those dealers that -- our average dealer in North America is already 65% of their work is done on the farm, not at the shop. Our best dealers are at 75%. We want to keep pushing it. And we've only been -- we've only had this out 2 years. Those dealers that are on the front edge of this have a Net Promoter Score, which is our customers' feedback on how they like the experience, 4.5 points higher than the others. And our dealers have 1.5 points market share than those that haven't been adopting as much. So customers like it, dealers like it. They're adopting it aggressively. I talked about the North American number. South America is just the same from 2024 to 2025. South America service truck adoption went up almost 30%. By the end of '26, it will be off that base will be up about 40%. So both dealer organizations are moving forward quickly. The customers, once they experience this whole different way of working, really appreciate it. So that's topic #1 of growing our Fendt business through products and a different distribution. Number two is our PTx business, Precision Technologies multiplied. We are the largest precision ag business in the world. About $900 million in revenue today. We've had about 6 acquisitions we put together. And once again, we're doing this business differently than anybody else. There's a part where we put that technology on our machines, and that's all completed. There's a part where we sell to other OEMs. We have about 100 other OEMs that buy directly from us, the technology and they put it on their machines. But then the real difference is on what we call retrofit, where we have a whole separate dealer channel that these dealers don't sell tractors and combines and sprayers. They only sell retrofit technology. And what that means is they'll go out to a farmer who's got a 5-year-old competitive planter of 1 brand or a 7-year-old competitive sprayer of another brand and upgrade that machine with new automated feature and giving that existing machine, new life, new capability, ability to do something in a smart way. So that whole retrofit business is a payback for the farmer about 1 to 2 years. It's a way lower cost way to get the latest technology than buying a new machine. High growth, high margin and 1 that is less cyclical. We see that only dropping about 1/3 as much as the regular OEM business. So that's number two. And then our third one is parts and service business, moving that from a reactive to a proactive business. And anticipating when the customers are going to need through remote monitoring, rapidly growing our e-commerce business and so on. So those 3 growth drivers are also all hitting nicely and driving a higher margin business where our margins in this business cycle are twice what they were in the last business cycle. Our business at the trough now is performing like the last cycle at the peak and we've made commitments to get to 14% to 15% margins by 2029 through these growth letters and the cost savings that Indira talked about.

Great. So maybe let's dig in a little bit to those. When you talk about the farmer core project, when we talk about that with some other players in the industry, they say, well, we have trucks too, like, what's the big deal? So what's the big deal?

Well, the big deal is what's the priority? What's the focus? So all dealers had some remote service fleets, but they had -- their predominant asset base was fixed brick-and-mortar assets and the predominant mode was bringing the customer to the dealership. Our predominant mode is to do all the work on the farm. These are heavy service trucks that can pull an engine, do a transmission, do all the electronic diagnostics. They can do everything they can weld they can do everything out on the farm. And so our whole mindset is everything gets done on the farm. And the other piece is mixed fleet. Our competitors just do not operate that way. Our technology strategy is a mix fleet, our distribution support strategy is mixed fleet, and our data platform, which we may well talk about later, is mixed fleet. So the ability to take data off of all of these machines from any brand, have the farmer analyze their farm and then send data back -- a task file back to any of the machines regardless of brand. So the whole business is set up in kind of a symbiotic way, where we're managing the entire farm regardless of how it's constructed across the mix fleet, which is fundamentally different than how the rest of the industry operates.

Okay. Fair enough. I guess less capital intensity for the dealer as well, right?

Way more flexible. They love -- a brick-and-mortar operation is very fixed. It's a fixed cost and it's a fixed location. It's fixed everything. Whereas trucks if the west side of the territory is hot for these couple of years, you focus over there. If the east side then becomes hot later on, you can buy us over there. You can flex up and down more easily. The technicians like it because they can operate right out of their home. They don't have to come into the office every day. And so it's something that customers really like deals like the asset efficiency, and we like it because of the strategic differentiation.

So where are we with coverage now? Do you have enough trucks? Do you have enough dealers? Is there still work to do there?

Coverage is good. We have our large ag coverage in North America is over 80%. Same thing in South America. We're really working on penetration. And so one of the things we did this year is -- we worked with our biggest dealers and said, "You've got to step up your game in terms of performance." We've invested heavily in redesigning all of these products for Fendt, and you've got the best of the best products now. Then we invested over $2 billion in our tech business to give you a data platform that's a mixed fleet and cutting-edge technology, that's in place. And we've invested in the service parts business where we've got the top performing better than any other competitor on parts fill rate. When you want a part, it's there for you. All of these investments are done, they're working. And in some of our big dealers, they had still low market share. And so we said, this is the line in the same time. You have got to step up your game and actually, you're going to lose some of your territory. Depending on how you react to this conversation, you're going to lose a little bit or you can lose a lot. And so they all had to come up with a plan about increasing the number of salespeople they had, and trucks and parts, drop boxes and all these types of things, increase their training, and they all react. They said, "This is something we don't want to lose." And so it lost a little bit of the territory. We gave that to the adjacent dealers that are performing better. So it's kind of a -- we all got to perform higher now that we've been making these investments, we've got to make them pay off.