AGCO Corporation (NYSE:AGCO) Q1 2024 Earnings Call Transcript

AGCO Corporation (NYSE:AGCO) Q1 2024 Earnings Call Transcript May 2, 2024

AGCO Corporation misses on earnings expectations. Reported EPS is $2.25 EPS, expectations were $2.29. AGCO Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to AGCO First Quarter 2024 Earnings Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Greg Peterson, AGCO Head of Investor Relations. Please go ahead. Mr. Peterson, your line is unmuted. Please go ahead.

Greg Peterson: Thanks, Jigar, and good morning. Welcome to those of you joining us for AGCO’s First Quarter 2024 Earnings Call. We will refer to a slide presentation this morning that’s posted on our website at www.agcocorp.com.

The non-GAAP measures used in the slide presentation are reconciled to GAAP metrics in the appendix of that presentation. We’ll make forward-looking statements this morning, including statements about our strategic plans and initiatives as well as their financial impacts. We’ll discuss demand, product development and capital expenditure plans and timing of those plans and our expectations concerning the costs and benefits of those plans and timing of those benefits. It will also cover future revenue, crop production and farm income, production levels, price levels, margins, earnings, cash flow and other financial metrics.

All of these are subject to risks that could cause actual results to differ materially from those suggested by the statements. These risks include, but are not limited to, adverse developments in the agricultural industry, supply chain disruption, inflation, weather, commodity prices, changes in product demand, interruptions in supply of parts and products, the possible failure to develop new and improved products on time, putting premium technology and smart farming solutions within budget and with the expected performance and price benefits.

Also includes difficulties in integrating the PTx Trimble business in a manner that produces the expected financial results, the reactions by customers and competitors to the transaction, including the rate at which PTx Trimble’s largest OEM customer reduces purchases of PTx Trimble equipment and the rate of replacement by the joint venture of those sales.

See also Top 25 Stocks in the S&P 500 by Index Weight Right Now and 25 Best Self-Help Books for Women According to Reddit.

Q&A Session

And it also includes introduction of the new or improved products by our competitors and reductions in pricing buyback, the war in the Ukraine, difficulties in integrating acquired businesses and in completing expansion and modernization plans on time in a manner that produces the expected financial results and adverse changes in financial and foreign exchange markets.

Actual results could differ materially from those suggested in these statements. Further information concerning these and other risks included in AGCO’s filings with the Securities and Exchange Commission, including our Form 10-K for the year ended December 31, 2023, and subsequent Form 10-Q filings.

AGCO disclaims any obligation to update any forward-looking statements, except as required by law. We’ll make a replay of this call available later today on our corporate website.

On the call with me this morning are Eric Hansotia, our Chairman, President and Chief Executive Officer; as well as Damon Audia, our Senior Vice President and Chief Financial Officer.

With that, Eric, please go ahead.

Eric Hansotia: Thanks, Greg, and good morning. Before I get into the details of the quarter, I want to take a moment to express my confidence in the team and our strategy. Despite weaker industry conditions, our focus on 3 growth drivers as well as integrating PTx Trimble and staying agile by adjusting production and our cost structure all continue to position 2024 to have the second highest level of full year adjusted operating margin in the history of the company.

With that, let’s look at AGCO’s first quarter results. First quarter 2024 net sales came in at $2.9 billion, which was down approximately 12% from last year due to softening global end market demand for agricultural equipment. Consolidated operating margin was 9.3% of net sales on a reported basis and 9.6% on an adjusted basis.

We focused on reducing production more than the industry decline and further tightened our cost controls in the quarter to align with slowing end markets. Lower sales and operating leverage were a factor in our reduced margins.

Stability in the European region helped partially offset sales and operating margin declines in all other regions. Despite the industry being down in Europe, sales were flat compared to the first quarter of 2023 yet operating margins had an all-time first quarter high of 16.4%, an impressive 230 basis points better than the first quarter of last year.

Margins in South America remained pressured as the industry weakened even further than expected. And we saw operating margins of approximately 5.3% in the first quarter of 2024 compared to nearly 20% in the first quarter of 2023. Market demand remained weak in Brazil. And we also underproduced retail demand there, which helped our — lower our dealer inventories in the region.

More challenging global market conditions are expected to continue in 2024 due to reduced commodity prices and lower farm income expectations. As a result, AGCO is forecasting lower sales in 2024.

To mitigate these challenges, we will remain focused on manufacturing cost reduction opportunities, driving increased SG&A expense efficiencies and lowering company and dealer inventory. In addition, AGCO’s growing precision ag business, full-line Fendt-branded products and our parts business are expected to help us dampen the ag cycle.

To better serve farmers, we will continue our investments in premium technology, smart farming solutions and enhanced digital capabilities to support our farmer-first strategy while helping to sustainably feed the world.

Slide 4 details industry unit retail sales by region for the first quarter of 2024. Global industry retail sales of farm equipment in the first quarter were lower in all of AGCO’s key markets.

North America full industry retail sales decreased 9% during the first 3 months of 2024 compared to the first 3 months of 2023. Sales declines in smaller equipment were more significant than most of the larger equipment categories. Lower projected farm income and a refreshed fleet are expected to pressure industry demand in 2024, resulting in weaker North America industry sales compared to 2023.

In Western Europe, industry retail tractor sales decreased 8% during the first 3 months of 2024 compared to the same period of 2023. Farmer sentiment in the region has continued to be negatively impacted by the conflict in Ukraine and input cost inflation. Industry demand is expected to soften in 2024 as lower income levels pressure demand from arable farmers, while healthy demand from dairy and livestock producers is expected to mitigate some of this decline.

South American industry tractor retail sales decreased 18% during the first 3 months of 2024 compared to a very strong demand in the first 3 months of 2023. Brazil and the smaller South American markets showed the most weakness, while declines in Argentina were moderate after weak industry sales in 2023. Following 3 strong years, retail demand in South America is expected to further soften in 2024 as a result of lower commodity prices and farm income.

Similar to tractors, the combine industry was down significantly in all regions in the first quarter of 2024. Although market conditions continue to soften from the extremely strong conditions over the last few years, we remain positive about the underlying ag fundamentals supporting the long-term industry demand.

Stocks at these levels are higher than recent lows, but they remain supportive of profitable commodity prices versus historical levels. As the demand for clean energy grows, the need for solutions like sustainable aviation fuel and vegetable oil-based diesel will grow strongly, driving the demand for our farmers that will further support commodity prices.

Also, input costs such as fuel and fertilizer are down from their peaks in 2022. We expect farm income to be down in 2024 relative to 2023, closer to the long-term averages but still supportive of industry demand.

AGCO’s 2024 factory production hours are shown on Slide 5. Our production decreased in the first quarter by approximately 16%, slightly more than expected versus the same period in 2023. Reductions were taken in all regions with the biggest reductions in South America and North America. We are aggressively managing our company and dealer inventory to match the softening retail demand.

As I mentioned earlier, we made progress in destocking the dealer channel in the first quarter in all regions but still have work to do. We expect further production cuts during 2024 with all regions aligning to retail demand by quarter 4.

Currently, we’re expecting 12% to 15% lower production in 2024 versus 2023 on a full year basis. This reduction reflects our 2024 market forecasts, market share growth assumptions and targeted reductions to dealer inventory.

Relative to historical demand patterns, orders for our products remain solid. In Europe, tractors had 5 months of order coverage. That’s a healthy level compared to the 2 to 3 months we are accustomed to pre-COVID.

Dealer inventories of approximately 4 months of supply are in line with our targeted levels with certain products like Fendt high horsepower tractors still below the optimal levels in certain areas as we continue to grow share in the region.

In South America, we have order coverage through June of 2024 where we continue to limit our orders to 1 quarter in advance due to inflationary pressures. We now have 4 months of dealer inventory across all products, while our target level is around 3 months. We cut production by more than 30% in the region in both quarter 4 2023 and quarter 1 2024. And our goal is to be between 3 and 4 months by year-end.

In North America, we currently have between 4 and 5 months of order coverage, while our dealer inventory is just over 6 months of supply. Our North America target for dealer inventory range from 4 to 6 months depending on the product. We continue to focus on underproducing retail demand coupled with retail market share execution to bring dealer inventories down to our targeted range by year-end.

Moving to Slide 6, where you’ll see our 3 high-margin growth levers aimed at improving our mid-cycle operating margins to 12% and outgrowing the industry by 4% to 5% annually. To reiterate, these 3 growth levers are the globalization and full-line product rollout of our Fendt brand, focusing on accelerating our global parts business and increasing the market share of genuine AGCO parts and growing our precision ag business, which supports not only factory-fit technology but also significantly focuses on mixed fleet retrofit solutions for farmers and OEMs.

You will notice new logos on this slide, which represent the precision ag portfolio of our newest leading brand, PTx as well as PTx Trimble. I wanted to take a moment to elaborate on the combination of our multiple brands and how we have unified them under PTx.

Slide 7 shows the new PTx branding and how the name PTx is rooted in our heritage. This PTx portfolio will provide seamlessly compatible, powerfully simple precision ag solutions. Part of that portfolio is PTx Trimble, which we formed with the closure of our transformative joint venture with Trimble on April 1.

We are tremendously excited to have Trimble ag technology offerings as part of our AGCO family. This deal significantly enhances AGCO’s technology stack with disruptive technologies that cover every aspect of the crop cycle, which ultimately helps us better serve farmers no matter what brand they use.

PTx will serve farmers around the world through 3 go-to-market approaches. Specialized precision ag dealers will help farmers retrofit almost any make or vintage of equipment they already own with the latest technologies.

PTx will also expand its relationships with more than 100 OEM partners that can integrate products from the PTx portfolio directly at the factory. Similarly, new machines from AGCO’s leading brands, Fendt, Massey Ferguson and Valtra, will also offer factory-fit technology from the PTx portfolio.

The JV will be positioned to drive outsized growth and better provide next-generation technologies to even more farmers around the world. In addition to presenting a unified offering to the market, we are also evolving the visual identity of Precision Planting as part of the new PTx brand portfolio.

Taken all together, the P represents precision agriculture. The T represents advanced technologies. And the X represents the fact that we’re multiplying and increasing the impact we create by bringing our technologies and solutions together in seamless, intelligent and farmer-centric ways.

On Slide 8, you can see how we plan to build equity in PTx, simplify our offerings to farmers and present a streamlined portfolio. We will consolidate AGCO’s precision ag brands to create the critical mass needed for a market-leading precision ag brand. Together, these teams represent the best precision ag tech talent in the industry.

We will form one cohesive team who will collaborate on product development, go-to-market channels and how to best serve both farmers and OEMs. We will innovate, solve problems, complement each other’s strengths and grow together, bringing mixed fleet precision ag solutions to the market faster than anyone else.

PTx Trimble includes JCA Technologies, Trimble Agriculture, Bilberry and Muller Elektronik. Precision Planting will bring Headsight and IntelligentAg under its brand.

Slide 9 summarizes our Precision Ag business. As we highlighted before, we are focused on expanding our addressable market from just traditional agriculture machinery spend, which stays in the low to mid-teens as a percentage of total farmer spend.

With our precision ag portfolio, our sights are set to impact around 70% or effectively all nonland areas. We believe that the investment in precision ag positions both AGCO and our customers well as it will play a major role in achieving our global sustainability targets currently being established, while simultaneously helping our farmers improve their profitability. Now that we have closed on the joint venture to form PTx Trimble, we remain committed to our goal of achieving $2 billion in annual precision ag sales by 2028.

With that, I’ll hand it over to Damon.

Damon Audia: Thank you, Eric. Slide 10 provides an overview of the regional net sales performance for the first quarter. Net sales were down approximately 13% in the quarter compared to the first quarter of 2023 when excluding the positive effect of currency translation. Pricing in the quarter, which was around 1%, contributed to higher sales.

By region, the Europe/Middle East segment reported flat sales in the first quarter of 2024 compared to the same period in 2023, excluding the impact of favorable currency translation. Growth in Germany and France was offset by lower sales across nearly all other European markets. Positive pricing and increased sales of high horsepower tractors, especially Fendt products, was offset by declines in other products.

South American net sales decreased approximately 42% in the first 3 months of 2024 compared to the same period of 2023, excluding the impact of favorable currency translation. Significantly softer industry sales drove lower sales of tractors and combines, which accounted for most of the decline. The substantial sales decrease in Brazil was slightly offset by modestly higher sales in Argentina.

Net sales in the North American region decreased approximately 21% in the first quarter of 2024 compared to the same period of 2023, excluding the impact of favorable currency translation. Softer industry sales were partially offset by positive pricing. The most significant sales declines occurred in the hay equipment, midrange tractors as well as combines.

Net sales in Asia Pacific/Africa decreased 16%, excluding negative currency translation impacts in the first 3 months of 2024 compared to the same period in 2023 due to weaker end market demand. Lower sales in China and Australia drove most of the decline.

Finally, consolidated replacement part sales were approximately $434 million for the first quarter, down approximately 5% year-over-year or 6% excluding the effect of positive currency translation.

Turning to Slide 11. The first quarter adjusted operating margin declined by 210 basis points versus a strong first quarter of 2023. Margins in the quarter were mainly affected by the significant decline in production, reflective of the weak industry conditions, higher discounts and higher SG&A and increased engineering expenses. These items were partially offset by positive net pricing.

By region, the Europe/Middle East segment income from operations increased $43.5 million, and operating margins improved by 230 basis points in the first 3 months of 2024. The improvement was driven by positive net pricing and mix, partially offset by higher SG&A expenses and engineering expenses.

North American income from operations for the first 3 months of 2024 decreased $59.7 million compared to the same period in 2023, and operating margins were 5.8%. The decrease resulted from lower sales and production as well as increased SG&A and engineering expenses.

Operating margins in South America in the first 3 months of 2024 decreased by approximately $83 million compared to the same period in 2023. This decrease was primarily a result of lower sales and significantly lower production volumes as well as negative pricing. The quarter was positively affected by the reversal of a dealer termination accrual, which improved margins by approximately 4% this quarter.

Finally, in our Asia Pacific/Africa segment, income from operations decreased by $10 million in the first 3 months of 2024 compared to the same period in 2023 due to lower sales volume.

Slide 12 details our year-to-date free cash flow for 2023 and 2024. As a reminder, free cash flow represents cash used in or provided by operating activities less purchases of property, plant and equipment. And free cash flow conversion is defined as free cash flow divided by adjusted net income.

We used $465 million of cash in the first quarter of 2024, approximately $217 million or 32% less than the first quarter of 2023 primarily related to improved working capital and lower capital expenditures. For the full year, we anticipate our free cash flow to be in the upper half of our long-term target range of 75% to 100% of adjusted net income.

We remain focused on direct returns to investors in 2024. In addition to the regular quarterly dividend of $0.29 per share, we also declared a special variable dividend of $2.50 per share in the second quarter. This is now the fourth consecutive year of us paying the special variable dividend.

Even with the closing of the PTX-Trimble joint venture, the special variable dividend is another sign of our confidence in how we have transformed our long-term profitability and remain focused on deploying capital in the most effective ways possible for our shareholders.

Slide 13 highlights our 2024 retail market forecast for our 3 major regions. For North America, we continue to expect demand to be 10% lower compared to the levels in 2023. The high horsepower row crop equipment segment is expected to decrease after several years of strong growth that was fueled by high levels of farm income. The small tractor segment is also expected to decrease in 2024, although the rate of decline is slowing compared to the prior years.

For Western Europe, we continue to expect the industry to be down 5% to 10% compared to 2023. Farm income is nearing the long-term average for the region due to reduced commodity prices and higher input costs.

In South America, we are updating our guidance to reflect industry sales down approximately 20% in 2024 compared to our previous estimate of a 10% reduction. The industry for tractors greater than 340 horsepower, combines and planters have deteriorated even more than we had anticipated. Farmers are holding on to grain longer in the region, awaiting higher prices. And shortfalls in the subsidized financing programs are causing farmers to postpone purchases. Although this may affect demand in the short term, this region remains one of the most long-term attractive end markets, especially in Brazil, where the farm footprint is increasing.

While farm income is expected to decline from elevated levels in 2023, we generally expect farmers to remain profitable in 2024. And AGCO’s brand-agnostic retrofit approach to precision ag and our strong parts business should help dampen the cycle, making our margins less volatile.