AGCO Corp (AGCO) 2018 Q2 法說會逐字稿

Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the AGCO 2018 Second Quarter Earnings Release Conference Call. (Operator Instructions)

I would now like to turn the conference over to Greg Peterson, Head of Investor Relations. Sir, you may begin.

Thanks, Regina, and good morning. Welcome to those of you joining us for AGCO's Second Quarter 2018 Earnings Call. This morning, we will refer to a slide presentation that we've posted on our website at www.agcocorp.com. The non-GAAP measures that we've used in this slide presentation are reconciled to GAAP metrics in the appendix of those slides.

We will make forward-looking statements this morning, including demand, product development and capital expenditure plans and the timing of those plans; acquisition, expansion and modernization plans and our expectations with respect to the costs and benefits of those plans and timing of those benefits. We'll also discuss production levels, share repurchases, dividend rates and our future revenue, price levels, earnings, cash flow predictions and actual events -- I'd like to caution you that actual events may differ materially from those statements.

We refer you to the periodic reports that we file from time to time with the Securities and Exchange Commission, including the company's Form 10-K for the year ended December 31, 2017. This document discusses important factors that could cause the actual results to differ materially from those contained in our forward-looking statements. We disclaim any obligation to update any forward-looking statements, except as required by law. A replay of this call will be available on our corporate website later today. On the call with me this morning is Martin Richenhagen, our Chairman, President and Chief Executive Officer; and Andy Beck, our Senior Vice President and Chief Financial Officer.

With that, Martin, please go ahead.

Thank you, Greg, and good morning. We appreciate everyone joining us on the call today. I'll begin my remarks on Slide 3, where you will find a summary of our second quarter and year-to-date results.

Our second quarter sales and adjusted earnings per share grew double digits compared to the second quarter of 2017 with higher sales across all regions, except Asia Pacific and Africa. AGCO capitalized on healthy industry conditions in Western Europe and improved industry demand in North America, delivering sales and margin improvement in those markets and better-than-expected sales and earnings growth for the company.

Our weak results in South America reflected challenging industry environment, including the impacts of the national trucking strike, low levels of production as well as the transition cost associated with localizing newer product technology into our Brazilian factories. We expect our results in South America to improve substantially throughout the remainder of the year. I'm pleased to tell you we are continuing to invest in initiatives that will drive long-term benefits and raise the efficiencies of our factories, improve our service levels and strengthen our product offering.

Slide 4 details industry unit retail sales results by region for the first half of 2018. Global crop conditions are mixed throughout the first half of 2018. Crop production estimates in the U.S. have recovered following a cold wet spring and forecasts are now calling for another solid harvest.

The lack of spring rain across much of Eastern Europe and parts of Western Europe is negatively impacting crop development. The dry weather pattern across Argentina and southern Brazil has also resulted in decreased 2018 crop production expectations.

Global industry sales of farm equipment in the first half of 2018 were also mixed across AGCO's key markets with future demand dependent on factors such as crop conditions, commodity price development and government trade and farm support policy.

In North America, all crop farmers are beginning to replace their equipment after years of weaker demand. North American industry retail sales were up in the first 6 months of 2018 compared to the same period in 2017.

Industry retail sales in Western Europe increased slightly in the first half of 2018 following a year of improved profitability by the arable farming segment as well as healthy economics for dairy producers. Industry sales growth in the U.K. and Italy was partially offset by declines in France.

Industry retail sales in South America decreased during the first 6 months of 2018. Industry demand in Brazil softened in advance of improvement in the government financing program, which started on July 1 and in addition, the industry sales declined in Argentina due to weak first harvest.

AGCO's 2008 (sic) [2018] schedule for factory production hours is shown on Slide 5. Total company production was approximately 1% up for the second quarter versus the same period of 2017. Production increased in North America and Europe in response to increased demand in those markets.

We expect to underproduce retail demand in North America during the balance of the year in order to have reduced dealer inventories. South American production was lower in the second quarter compared to the second quarter of 2017, as a result of weaker market conditions. For 2018, we are targeting an increase of about -- of approximately 6% in AGCO's total production.

Globally, our order board for tractors was up at the end of June 2018 compared to the end of June 2017. Orders were higher in North and South America and approximately flat in Europe.

I will now turn the call over to Andy Beck, who will provide you more information about our second quarter results.

Thank you, Martin, and good morning to everyone. I will start on Slide 6, which looks at ACGO's regional net sales performance for the second quarter and first 6 months of 2018.

AGCO's sales increased approximately 14% compared to the second quarter of 2017, excluding positive impact of currency translation, which benefited sales by approximately 3%. Acquisitions positively impacted sales by approximately 4% in the second quarter of 2018 compared to the second quarter of 2017. The Europe/Middle East segment reported an increase in net sales of approximately 14%, excluding the positive impact of currency translation compared to the second quarter of 2017. Excluding acquisition-related sales, Europe/Middle East sales were up about 10.5%.

Sales growth was the strongest in Germany, France and Scandinavia. Sales in North America increased approximately 25%, excluding favorable impact of currency translation compared to the levels experienced in the second quarter of 2017. Precision Planting, which was acquired in the third quarter of 2017 contributed about 5% of the sales growth in its seasonally strong second quarter.

Increased sales of sprayers, high horsepower tractors and grain storage and handling equipment provided most of the organic growth. AGCO's second quarter 2018 net sales in South America increased approximately 1% compared to the second quarter of 2017, excluding negative currency translation impacts. Including acquisitions, sales in South America were slightly down compared to last year. Net sales in our Asia Pacific/Africa segment decreased about 2% in the second quarter of 2018 compared to 2017, excluding positive impact of currency translation and the benefit of acquisitions. Lower sales across most of the Asian markets was responsible for -- was mostly offset by growth in Australia.

Part sales were approximately $388 million for the second quarter of 2018 and were up about 6% compared to the same period in 2017, excluding the positive impact of currency translation.

Slide 7 examines AGCO's sales and margin performance. And second quarter results were highlighted by improved operating margin performance in North America and Europe/Middle East regions compared to the same period in 2017. Additional labor costs associated with supplier constraints and the transactional impact of currency movement both negatively impacted margins during the second quarter.

The Europe/Middle East segment reported an increase of about $38.2 million in operating income from the second quarter 2017. The benefit of higher sales and production more than offset higher engineering expenses. Sales and production growth as well as cost-reduction efforts contributed to operating income improvement of approximately $14 million in North America in the second quarter of 2018 compared to the same period last year.

Operating income declined about $19.5 million in our South America region in the second quarter of 2018. Our results were negatively impacted by lower production, material cost inflation, the impact of the national trucking strike and costs associated with transitioning to the new Tier 3 emissions technology.

Sales and operating income in our Asia Pacific/Africa region were relatively flat compared to the second quarter of 2017.

Slide 8 details GSI sales by region and product. GSI sales decreased about 1%, excluding currency impacts, in the first 6 months of 2018 compared to the same period of '17. Globally, protein production sales declined approximately 9%, while grain and seed sales grew approximately 6% on a constant currency basis. The largest decline in sales of protein production equipment occurred in North America and our Asia Pacific/Africa region. No significant growth in grain and seed equipment occurred in North America.

The global trends towards population -- growing population and increased protein consumption should make our GSI business an attractive source of profitable growth for AGCO in the years ahead.

Slide 9 looks at investments through both capital expenditures and research and development. We are continuing to make strategic investments to refresh and expand our product lines, upgrade system capabilities and improve our factory productivity. We intend to increase the level of investment in 2018 to execute our product development plans and meet new emissions requirements in both Brazil and Europe. Our spending plan in 2018 is needed to maintain our competitiveness and to support the long-term growth of our business.

Slide 10 addresses AGCO's free cash flow, which represents cash used in operating activities less capital expenditures. Our seasonal requirements for working capital are greater in the first half of the year and, thereby, resulted in negative free cash flow in the first 6 months of 2017 and '18.

Second quarter inventory levels were elevated due to continued supplier constraints impacting our production. After covering spending on our strategic investments and regulatory changes, we are targeting another strong free cash flow year for 2018. At the end of June 2018, our North America company and dealer inventories were lower than last year.

The dealer month supply on a trailing 12-month basis was improved for tractors, hay equipment and combines. Losses on sales of receivables associated with our receivable financing facilities, which are included in other expense net, were approximately $9.7 million during the second quarter of 2018 compared to $8.9 million in the same period of 2017. Other expense net also included unusually high foreign exchange losses due to the significant devaluation of the Argentine peso during the second quarter. The impact of the peso devaluation accounted for most of the year-over-year increase in other expense.

As we focus on returns for shareholders, we expect to make cash distributions an important part of our long-term capital allocation plan. Over the past 4 years, we've executed share repurchases of over $1 billion, which has had the effect of reducing our share count by nearly 20%. We have an existing $300 million program currently authorized. During -- through June 30 this year, we have completed about $34 million in share repurchases and retired over 500,000 shares. We are also committed to responsibly growing our dividend in the coming years as we demonstrated with the increase in the first quarter of this year. We expect to continue our share repurchases in the second half of the year to coincide with our seasonal cash generation.

During the second quarter, approximately $186 million of our $300 million 5.875% senior notes were retired in advance of their 2021 maturity date. The retirement of these notes is part of our plan to move interest expense out of the U.S. in order to take advantage of the U.S. tax reform provisions.

We recorded a net loss of $12.7 million in the second quarter as a result of this retirement.

Our 2018 outlook for the 3 major regional markets is captured on Slide 12. In North America, the farm equipment fleet has begun to age and row crop farmers are now starting to look at replacement. Our projection for North America industry tractor sales is to be up modestly compared to 2017 with larger equipment driving the increase. Industry retail sales in Western Europe improved in the first half of 2018, but remained below historic levels. Demand in Western Europe is expected to be relatively flat for the full year of 2018 compared to 2017. Industry retail sales in South America were under pressure in the first half of 2018. Industry demand is expected to improve in the second half of the year and be relatively flat for the full year compared to 2017.

Higher retail sales in Brazil are expected to be offset by lower sales in Argentina due to the impact of lower crop production on farm income.

Slide 13 highlights the assumptions underlying our 2018 outlook. While we are optimistic about the long-term growth opportunities for our industry and our business, the priority for 2018 continues to be managing our costs and also investing in our products and business improvement opportunities. Our 2018 forecast assumes relatively stable industry demand across our all region, our plan includes market share improvement with price increases ranging from 1.5% to 1.75% on a consolidated basis.

At current exchange rates, we're expecting currency translation to positively impact sales by about 1.5%. Acquisitions are expected to increase sales by 2.5%.

In 2018, engineering expenses are expected to run about 4% of our sales, which amounts to an increase of approximately $40 million compared to 2017. Operating margins are expected to improve by about 50 basis points due to higher sales levels and the benefit of our productivity and purchasing initiatives, partially offset by the investments we are making in long-term initiatives. We are targeting an effective tax rate of between 36% and 37% for 2018. Consistent with last year, the tax rate is not uniform across the quarters.

Slide 14 lists our view of selected 2018 financial goals. We are projecting 2018 sales to be in the $9.3 billion range. We expect gross and operating margins to be improved from 2017, reflecting the positive impact of higher sales volumes and cost-reduction efforts, partially offset by investments in our strategic initiatives. Based on these assumptions, our 2018 adjusted earnings per share target is approximately $3.70 per share. We expect capital expenditures to increase approximately $50 million compared to 2017 levels and free cash flow to be in the $225 million range after covering inventory builds associated with new emissions regulations in Europe and in Brazil.

And finally, we expect our third quarter earnings per share to range from $0.75 to $0.80 per share.

And with that, operator, we're ready to take questions.

Regina, before we open the call for questions, (Operator Instructions) Thank you.

(Operator Instructions) Our first question will come from the line of Jerry Revich with Goldman Sachs.

This is Corinne Jenkins on for Jerry Revich. I was hoping you could talk a little bit about the production plan you have for the rest of the year. It looks like you've increased that outlook, and I was wondering where you're seeing the opportunity to increase production.

Yes. We have increased our production for the second half of the year, and it is up in that -- mainly in our North American and our European factories. We've also increased some production requirements in South America as we are -- as we talked before, we're transitioning to Tier 3 models for all our products in South America and we're building some transition inventory to carry us through 2019 with some of those models. And for that reason, there's been some inventory -- I mean, some production increases there as well.

And then, can you just talk a little bit about where we stand with used equipment inventories and your order board, especially in North America?

Right. So as we've discussed before, Corinne, it was in North America where we saw the industry slow considerably over the last 4, 5 years and our dealers saw build up in both new and used equipment. And if you look at where our inventories now have progressed to at the end of the second quarter, they're down about half compared to where they were at the peak. We've come into the year with stabilizing used equipment prices, which is very positive in terms of both new and used equipment sales. So we're getting -- we're heading towards our goal of being rightsized. We still plan, as Andy mentioned, to be underproducing somewhere around 8% or 10% this year. We've seen our used equipment, as I said, come down, and we're probably still 3 or 4 weeks of excess, both on the new and used side.

Your next question will come from the line of Jamie Cook with Crédit Suisse.

This is actually Themis on for Jamie. Just going back to your order book, I think last time you noted orders being up in the double-digit range in Europe and this time, I think, you noted it as flat. So curious as to what drove that. And any other numbers you could put around your order book by region, that would be helpful.

Yes, our order book is, as we said, is up double digit. The largest increases are in North America, in South America and, as we've mentioned before, our South -- European order board is relatively flat. I think we had some very high order board at the end of this period last year because of some new product introductions, which impacted it as well as when you look at our months of orders, I think it's pretty stable year-over-year for our European business. So we still have a very strong order board, I would say, in all our markets at this point in time.

Okay. That's helpful. And then maybe just a question on your South America margins. Are you still confident in being able to get to sort of mid-single-digit margins in the second half of the year?

We look for improvement in our margins in the second half of the year. I think in the third quarter, I would say, our margins should be fairly similar to -- our target is for them to be fairly similar to what we saw in 2017 in South America and then see further improvement in the fourth quarter from there. So there is a big increase in production that we have planned in the third and fourth quarter and that should help us. We also have some price increases that will be blending in to our results in the second half that should also impact our margins as well. And then, we should eliminate some of these onetime or transition costs that we incurred in the first half and that should help our results as well.

Your next question will come from the line of Larry De Maria with William Blair.

First question, just to clarify, I believe you're seeing now down 8% to 10% or underproduced by 8% to 10% in North America. I think before it was 10%. But just to clarify, are we going to have that cleared up, so you can produce to retail demand next year?

Yes, I think that would be our plan. I think assuming we hit our retails and looking over the demand is for next year, we should be in pretty good shape and feel comfortable with our inventory levels at the end of the year.

Okay. Great. And then secondly, I know for Martin, obviously, you're given a bonus for staying on for this new transition for the next CEO. Can you maybe let us know where that stands? And what's the plan going forward? And are there incentives like hitting the 10% margin target for you? And is that what your goal would be before you leave?

I didn't get the first part of the question. But was it...

Just we know you are staying on for a few years. You're given incentives to stay. So curious...

Yes, the reason for that is that I recently did get some very attractive offer from a big blue chip company. And so the board wanted me to finish my job here, which I promised to do and that is the basis for the incentive. And yes, the -- we talk about the margin situation when we basically are (inaudible) in December, but my, let's say, if you could call it, masterpiece would be to get there by the end of 2020.

Our next question will come from the line of Seth Weber with RBC Capital Markets.

This is Emily McLaughlin on for Seth. Just wondering if you can talk about price cost during the quarter, growth versus net realization, perhaps?

Sure. On our -- our pricing in the second quarter was between 1% and 1.5% and our net pricing, when you take out what our material cost increases are, were below 0.5%. So we had some increases in material cost in the second quarter, which impacted our margins. As we look forward for the balance of the year, we've had more pricing that again will blend into our results in all markets to try to offset some material cost inflation that we see coming. Our target for the full year, we've said before, was net pricing of about 50 to 70 basis points. We are still looking in that range, but it will likely be on that -- more on the bottom end of that range. And that will be offset by the higher production that we've already talked about in terms of our margins. So our margins should be consistent with what we guided previously.

Got it. And then just any sentiment change related to the tariff situation? Are you seeing any customer or dealer angst?

I would say that from a dealer standpoint, there has been concern because of where the crop prices went and all the talk and consideration regarding tariffs. The farm aid program, I think, provides some offset to that as well as some recovery in the prices that we've seen in the last few weeks. But I would say that our customers certainly would rather see free trade than farm aid. And so it's not a solution, but it does, I think, alleviate some of the near-term concerns they had.

Our next question will come from the line of Andy Casey with Wells Fargo.

This is Jorge Pica on for Andy Casey. I just want to confirm really quickly. So all other regions, no required inventory reductions and Europe everything rightsized. Can you provide some comments on that?

We have inventory issues in the factories and in incoming goods, which have to be addressed and we have projects in place accordingly.

So no planned inventory reduction that you were...

Dealer level, as we talked about, we want our North America inventories to continue to go down and we have targets to do that this year. Our European inventories are still in good shape and in South America, our dealer inventories are down year-over-year, and they're in reasonable shape as well. So no plans in other markets to reduce dealer inventories.

Okay. And then, I guess, can you just confirm then are all of the restructuring supply chain-related activities going to be completed in 2018 for Brazil?

Yes, I would say so. We're -- so all of the activities we have with additional resources we brought in to help improve our results and work through this heavy workload of the new products that we are bringing in should be completed, for the most part, by the end of this year. The improved results, obviously, will take -- we're working through quarter-over-quarter continued improvement in our results in that market.

Your next question comes from the line of Michael Feniger with Bank of America.

Just -- the first question just on the grain storages in GSI business. What's the outlook for that business in light of the tariffs on poultry and livestock?

We in -- GSI, as you point out, has 2 separate businesses. One is relating to grain storage and material handling the grain and -- as well and the second part is the protein production equipment that a producer of poultry or swine would utilize. And so those 2 businesses typically are countercyclical to each other, and we've been observing that. And this year, as we pointed out, the grain side of the business is starting to come back a little where our sales are up in the grain and material handling sector of the business and that's similar to what we are seeing, as we talked about, with high horsepower tractors. So it's kind of -- it goes with that side of the business. The protein production equipment has been very good over the last few years and starting to see that kind of pull back. There is some concern among some of our customers about some of these tariffs and where some of their exports can go. We're assuming -- right now, we haven't seen too much impact of that, but it's something that we're keeping our eye on.

Okay. That's helpful. And just my follow-up question. European margins continued to be strong and outperforming. I was just hoping you could give us an update on what you're kind of expecting there on the -- in the second half on the back half of the year?

But I think we will go on into the same direction also for the second half of the year.

With a little more specificity, third quarter is going to be pretty similar to last year and then we think we'll have some year-over-year improvement in the fourth quarter. So for the full year, we're looking probably up 50 basis points or so, even with, as we've talked about, some increased investment in engineering expense. So all in all, a pretty steady outlook for Europe.

(Operator Instructions) Our next question will come from the line of Mike Shlisky with Seaport Global.

Martin, AGCO was always blue chip to me.

Yes, for me as well.

Exactly. So wanted to start off by asking about your slide which combines -- which compares the tractor and combines sales for the first 6 months of the year for the 3 major regions. I'm curious as to why you think combines are outperforming tractors so much so far this year? And perhaps related, is anyone trying to get in front of a next mile year price increase at all?

Yes, Mike, I would -- maybe the easy high-level answer is that the tractor numbers are somewhat skewed by smaller tractors that aren't tied to the row crop segment. So some of the smaller and mid-sized tractors are general economy and kind of dairy livestock, which has -- and the dairy livestock piece hasn't been nearly as resilient so far this year anyway or in terms of year-over-year growth as the row crop segment has, and the combines, obviously, are sold into the row crop segment. So I think that's probably the biggest reason as you look, especially in North America.

Okay. Great. And then secondly, at this point, we are well into the heavy tractor delivery season by end of July here. So kind of curious, what's your kind of sense on the performance of the Challenger 1000 so far this year in North America? Do you think that has gained any additional share after last year's fairly successful launch?

What we hear from our dealers and customers is really excellent and better than expected. If we were to have more capacity, maybe we could even sell more. But I think this is a product which supports our growth strategy in the U.S. We will add to this the new IDEAL range of combine harvesters, which come in as well under the Fendt brand and then we also will add certain smaller tractors, not really small, but below the 1000 in the area of 900, 800, 700, and so on. So that means we want to gain this market from the top and this seems to work very well.

Our next question will come from the line of Joel Tiss with BMO Capital Markets.

This is Elliott Simon on for Joel Tiss. It looks like Asia Pacific/Africa organic growth turned negative in the quarter from almost 10% last quarter. Can you just give us a little more detail on that? And what's shaking out in the region? And what we kind of can expect for the back half of the year?

Yes, that was more relating to the timing of shipments. There is a lot of markets involved there. I think the sales were up in Australia. So that market is going well. Our sales were down more in Asia. And I think a little down in Africa as well. Some of these supplier constraints we talked about are impacting the flow of product into some of those markets, and so we do expect that the sales will be up in the second half of the year in Asia Pacific/Africa.

Got you. And then also just on the interest expense. With the debt extinguishment, what should we sort of expect as your run rate for quarterly interest expense for the reminder of the year?

Yes. Net interest expense should be around $9 million or $10 million a quarter.

That was our final question for today. I will now turn the conference back over to Mr. Peterson for any closing remarks.

Thanks, Regina. I would just like to thank the participants today and remind them that we're available to handle calls for the remainder of the day. Thanks, and enjoy the day.

Ladies and gentlemen, this concludes today's call. Thank you all for joining, and you may now disconnect.