AGCO Corp (AGCO) 2024 Q2 法說會逐字稿

Good day and welcome to the AGCO second quarter 2024 earnings call. (operator instructions) Please note 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.

Thanks and good morning. Welcome to those of you joining us for AGCO second quarter 2024 earnings call. This morning will refer to a slide presentation that's posted on our website at www.agcocorp.com. The non-GAAP measures used in that slide presentation are reconciled to GAAP measures in the appendix of the presentation.

We'll also make forward-looking statements this morning about our strategic plans and initiatives as well as their financial impact. 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 future revenue, crop production and farm income will also be discussed. As well as production levels, price levels, margins, earnings, operating income, cash flow, engineering expense, tax rates and other financial metrics.

Our expectation with respect to the sale of our grain and protein business will be discussed. All of these are subject to risks that could cause the actual results to differ materially from those suggested by those statements.

These 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, including premium technology and smart farming solutions within budget and with the expected performance and price benefits.

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

Introduction of new or improved products by our competitors and reductions in pricing by then. The war in the Ukraine, difficulties in integrating acquired businesses and in completing expansion and modernization plans on time and in a manner that produces, the expected financial results.

The need to fulfil closing conditions, including obtaining required governmental approvals in connection with the sale of our grain and protein business and adverse changes in the financial and foreign exchange markets.

Actual results could differ materially from those suggested in these statements. Further information concerning these and other risks is included in AGCO's filings with the SEC including its 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 will make a replay of this call available on our corporate website. On the call with me this morning is Eric Hansotia, our Chairman, President and Chief Executive Officer, and Damon Audia, Senior Vice President and Chief Financial. With that, Eric, please go ahead.

Thanks, Greg, and good morning. Before I go into the quarterly details and the exciting things happening in AGCO, I wanted to take a moment to reflect on how I'm feeling about the industry and the things that we are doing to position AGCO for success. As in prior cycle downturns, there's always a big correction year, where the industry slows rapidly as farmers reduce their spend on new equipment.

We've known 2024 was going to be that big transitional year, after the transitional year, industry demand tends to float around trough levels for a period of time before ramping back up. The duration and the severity of the decline are influenced by many things like commodity prices, weather and stock-to-use ratios, which will make every downturn a little different.

For AGCO, we understand the industry dynamics and are working aggressively to address the challenges and position ourselves for success. We are rapidly cutting production this year, faster than in the past, to right-size dealer inventory levels this year in hopes that production and retail demand are more balanced in 2025.

We have been actively addressing costs for several quarters. In the second quarter, we made the decision to further restructure our workforce due to weakening market demand. We also challenged our teams to think differently with technologies and other sustainable, lower cost operating alternatives.

Much of these savings are still to come in 2025 and beyond, helping to further improve our ability to deliver higher operating margins throughout the cycle. In addition, we are doubling down on being the most farmer focused company in the industry. With our continued role at our farmer core, we are helping better serve farmers how they want to be served. In addition, to our unique mixed fleet retrofit mindset, we are helping farmers improve their productivity and profitability despite the industry backdrop.

With this mindset and focus, we are a different company that is more pharma focused, more resilient and more profitable. Damon will cover the financials and the outlook later. But even in a big correction year where we are dropping well below mid-cycle, we are still planning on delivering one of the best operating margins in our history and well above historical levels at these industry levels.

With that as a backdrop, let's jump into the second quarter slide 3. Where you can see that AGCO's sales were down approximately 15%. Our results reflect the impacts from both softer industry-wide demand and our resulting production cuts. Our team is analyzing all aspects of the business to identify cost savings and better align our operations with the current market environment. We are balancing the need for cost reduction with our commitment to farmer focused customer support and innovation, as well as our desire to continue our market share growth ambitions.

Last week, we announced a definitive agreement to divest the grain and protein business. The divestiture of this business supports our strategic transformation recently accelerated by the PTx Trimble joint venture and is an inflection point for AGCO. Divesting this business allows us to streamline and sharpen our focus on AGCO's portfolio of award-winning agricultural machinery and precision ag technology products.

We believe this sale will better position us for the long term growth in our higher margin and higher free cash flow-generating businesses. Simultaneously, it will raise our profitability through the cycle, as grain and protein has historically been a below average margin business.

I do want to take a moment to thank the green and protein teams around the world, who have done an excellent job. Staying focused on serving the customers and delivering on their commitments, while we work through the strategic review of the business.

Now, getting back to our second quarter results. Consolidated operating margin was 10.3% on an adjusted basis. Lower sales production cuts and operating leverage were the major factors in our reduced margins.

South America remains our most challenged region, as the industry continues to contract. In that region, we saw operating margins of approximately 3.6% in the second quarter of 2024, compared to more than 20% in the second quarter of 2023.

Due to falling demand, we cut production by around 57% in the second quarter, compared to the second quarter of 2023, with additional cuts planned for the balance of 2024. We remain confident, that long term agricultural fundamentals remain positive, despite the downturn in commodity markets. Our optimism for the long-term demand for our products is driving continued investment 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 half of 2024. Global industry retail sales of farm equipment in the second quarter, were lower in all of AGCO 's key markets. North American industry retail sales decreased 8% for the first six months of 2024, compared to the first six months of 2023.

Sales declines in smaller equipment were more significant than most of the larger equipment categories. In Western Europe, industry retail sales dropped 5% during the first six months of 2024. South American industry tractor retail sales decreased 14%, during the first six months of 2024, compared to the same period of 2023.

Strong declines were consistent across Brazil, Argentina and the smaller South American markets. The weakening demand in Brazil was negatively magnified by the floods in Rio Grande do Sul, while also continuing to be affected by funding shortfalls of the government subsidized loan program and a challenging first half harvest in the Cerrado region.

Similar to tractors, the combined interest -- industry was down significantly, in all regions through the first six months 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 long-term industry demand.

Population growth and the increasing middle-class will drive the need for additional grain. Stocks-to-use levels are higher than the recent lows, but are still below prior downturn 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 demand for our farmers that will further support commodity prices. Also, input costs, such as fertilizer and fuel, are down from their peaks in 2022, which has helped dampen the effect of lower commodity prices are having on farmers' profitability.

AGCO's 2024, factory production hours are shown on slide 5. Our production decreased in the second quarter by approximately 23%. Significant reductions were made in all regions, with the biggest reductions being in South America and Asia Pacific.

During company Inventory management remains a key priority for us. As the market continues to soften and we push to rightsize inventory levels this year. As a result, we expect further production cuts through 2024 with all regions targeting to align to retail demand for 2025.

Currently, we are expecting 20% to 25% lower production in 2024 versus 2023, on a full year basis. Which is a more significant reduction than our prior outlook, given our current 2024 market forecasts, market share growth assumptions and targeted reductions to dealer inventory.

In general, our order Board is in good position, and relatively consistent with last quarter. However, there are pockets of dealer inventory that will need to focus on rightsizing in the balance of the year. In Europe, tractors between four to five months of orders, dealer inventories of approximately four months of supply are in line with our targeted levels.

Massey Ferguson and Valtra dealer inventories are a bit higher and tend to be lower than the average, in part due to strong share gains unsent. In South America, we have order coverage through September 2024, where we continue to limit our orders to one quarter in advance due to inflationary pressure. Despite our aggressive production cuts, we still have approximately four months of dealer inventory across all products. As the industry conditions continue to weaken, our goal is to further reduce it by year end.

In North America, we currently have approximately four months of order coverage, depending on the product, smaller rural lifestyle equipment has the lowest order coverage. While bigger equipment is higher. Our dealer inventory increased by just over one month compared to last quarter, as industry conditions weaken further and is now approximately eight months of supply.

Our North America targets for dealer inventory ranged from four to six months depending on the product. We will continue to focus on underproducing retail demand, coupled with retail market share execution to bring dealer inventories in line with our targeted range.

Moving to Slide 6. Where you'll see our three high margin growth levers aimed at improving our mid-cycle operating margins to 12%, and outgrowing the industry by 4% to 5% annually.

Now to reiterate these three 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 equal parts. And growing our precision ag business. Our precision ag business is where we are focused today, we recently held our 2024 technology days in Westminster, Colorado and near Salina, Kansas.

Our growing technology stack and precision ag -- products were on full display to those in the tenants.

Slide 7, recaps some of the key messages from that event. And how AGCO is committed to differentiated pharma focused solutions for the mixed fleet. In Westminster, the home of our PTx Trimble joint venture. We discussed our go-to-market strategy for our aftermarket and retrofit side of the business and our PTx OEM solutions side of the business.

Our aftermarket and retrofit dealers focus on adding new capabilities to existing machines of almost any make and vintage. Our PTx OEM solutions provide technology and services to over 100 OEMs from the factory. In addition to AGCO's Fendt, Massey Ferguson and Walter brands.

AGCO's unique as the only major OEM in the world, with a separate independent retrofit dealer channel. We can take on-farm approach to sales and act as consultants for farmers, recommending the best PTx products for their specific use cases. These retrofit dealers are primarily focused on selling incremental solutions to address farmer pain points, to improve productivity and profitability leveraging the farmers existing machines.

This is in contrast with a traditional dealer whose focus will tend to be on selling a completely new more expensive piece of equipment. Now, both types of dealers are critical to ensuring farmer satisfaction. Because AGCO has both, it allows us to be the most farmer focused company in the industry, and the farmers most trusted partner for industry leading smart farming solutions.

As I touched on in my opening comments, we also discussed how we're bringing the dealer to the farmer through our farmer core initiative. This revolutionary approach in our industry blends a brick and mortar presence with mobile trucks capable of performing most services right on the farm.

This mobile model will help us further grow our parts penetration by utilizing the telemetry data coming off the machines and proactively performing maintenance before it becomes a problem. Just like the shift to e-commerce in people's daily lives, we strongly believe that farmer core will help improve the AGCO customer experience by taking business to the farm where many of them want to be served.

Lastly, we saw product demonstrations from across the PTx portfolio, that illustrated how our technology stack has taken a big leap forward, with our new PTx Trimble joint venture. We showed how AGCO is able to optimize farms better than ever, with the advanced products like guidance, water management, the connected carbon exchange platform and precision planting radical agronomic soil testing solution. All these solutions help make the farmer more productive and profitable.

Slide 8, covers some of the key milestones AGCO's committed to, in terms of smart solutions. Targeted spring will launch later in 2024, on a retrofit basis, with an OEM solution in 2026. Also in 2024, we will be launching our autonomous retrofit solutions for green card applications, with more autonomy across the crop cycle to come.

We anticipate having autonomous solutions for all parts of the crop cycle by 2030. We also showed our advancements in connectivity and cloud data management, allowing farmers more actionable insights and control over their operations.

Our Farm office highlighted the agronomic and machine data management benefits at the farm level. Across numerous makes and models of machinery, utilizing AgTech requires data, AGCO solutions allow farmers to manage, collect and make data available to maximize their investments in precision ag technologies. We aim to deliver the most agnostic data platform across the crop cycle and for mixed fleets. Furthermore, our technology stack will allow customers to participate in almost any sustainability program, like the PTx connected carbon exchange.

We highlighted the next evolution of our autonomous green card, which now enables to green cards to partner with one combine, to ensure maximum output and the utilization of the combine. In autonomous green card helps farmers get their crop harvested earlier, preserving sustained -- substantial yields.

Additionally, can enable the flexible deployment of labor by freeing up a driver from the green card, that easily installed retrofit autonomy kit was shown in two different brands of equipment, highlighting our farmer focused mindset and the ease of adaptability across the mixed fleet of brands.

Autonomous tillage is the next phase of the crop cycle, we are tackling. Autonomous tillage enhances productivity across diverse farm sizes and locations by ensuring timely crop planting within ideal windows. Extending operational hours for increased throughput and boosting operational efficiency through flexible labor management.

A major benefit of AGCO's retrofit kit, is that the same hardware and sensors can be used as we enable more phases of autonomy across the crop cycle, making it more convenient and less costly for farmers. Our automated planter and fertilizer options were also shown on a momentum planter.

Controlling fertilizer usage is a big opportunity for precision ag. And fertilizer placement and timing has an impact on farmers profitability. Momentum is drive fertilizer system offers farmers flexibility and accuracy. Momentums agronomic features also solve compaction problems and offer accurate seed placement leading to more dollars in the pockets of farmers.

Lastly, we showed our targeted spreads solutions. PTx Trimble offers weed secret to. This is a proven retrofit solution already in the market today, which detects weeds with infrared sensors and applies herbicide only where needed.

We also showed our precision planting symphony vision system, which utilizes cameras to detect and spray only weeds and allows scouting of farmers' fields to identify where weed pressure is the highest. There's never been a more exciting time to be in the ag space.

With these and several other technologies, we remain committed to our goal of achieving $2 billion in annual precision ag sales by 2028. For those of you that were with us, we want to thank you for your attendance at the event and your interest in AGCO. We hope that you saw how we are driving innovative solutions that are focused on helping improve farmers' profitability. For those of you who did not attend, we hope we piqued your interest and your attendant our future events.

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

Thank you, Eric. And good morning, everyone.

Slide 9, provides an overview of regional net sales performance for the second quarter. Net sales were down approximately 16% in the second quarter, compared to the second quarter of 2023. When excluding the negative effect of currency translation and the positive impact of acquisitions. By region, the Europe Middle East segment reported sales down roughly 5% in the quarter, compared to the same period of 2023.

Excluding the impact of unfavorable currency translation and favorable impact of acquisitions. Growth in Germany, France and Spain, was offset by lower sales across nearly all other European markets. Increased sales of high horsepower tractors, especially Fendt products, was offset by declines in other products.

South American net sales, decreased approximately 40% in the quarter, excluding the impact of unfavorable currency translation and favorable impact of acquisitions. Significantly softer industry sales and underproduction of retail demand drove most of the decrease.

Lower sales of tractors and combines accounted for most of the decline. The substantial sales decrease in Brazil was slightly offset by modestly higher sales in Argentina and other South American markets. Net sales in North American region decreased approximately 18% in the quarter, excluding the impact of unfavorable currency translation and favorable impact of acquisitions.

Softer industry sales and lower end market demand all contributed to lower sales. The most significant sales declines occurred in the high horsepower and midrange tractor categories. Net sales in the second quarter in Asia Pacific, Africa decreased 35%, excluding the negative currency translation impacts and favorable impacts of acquisitions, due to weaker end market demand and lower production volumes. Lower sales in China and Australia drove most of that decline.

Finally, consolidated replacement part sales were approximately $488 million for the second quarter, down approximately 1% year-over-year or flat excluding the effects of negative currency translation.

Turning to slide 10, the second quarter, adjusted operating margin declined by 280 basis points versus a very strong second quarter of 2023. Margins in the quarter were mainly affected by the significant decline in production, reflective of the increasingly weak industry conditions, along with higher discounts.

By region, Europe, Middle East segment income from operations decreased just under $7 million, while operating margins improved 40 basis points in the quarter, compared to the same period of 2023. The improvement in margin was driven by favorable product mix related primarily to the sales of Fendt high horsepower tractors.

North American Income from operations for Q2 of 2024, decreased approximately $60 million year-over -year, and operating margins were 9.2%. The decrease resulted from lower sales and production, as well as increased warranty expenses.

Operating margins in South America, decreased by approximately $109 million in Q2 versus the prior year. The decrease was primarily a result of lower sales and significantly lower production volumes as well as increased discounts year-over-year.

Finally, in our Asia Pacific, Africa segment, income from operations decreased by $8.5 million in Q2 of 2024 due to lower sales and production volumes.

Slide 11, details our June 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 $328 million of cash through June of 2024, approximately 45% less than the same period of 2023, primarily related to improved working capital and lower capital expenditures. For the full year, we continue to expect our free cash flow to be in the upper half of our long-term targeted range of 75% to 100% of adjusted net income.

We also remain focused on rewarding investors with direct returns. In addition to the regular quarterly dividend of $0.29 per share, we also paid 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 increased debt associated 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 for our shareholders.

Slide 12, highlights our 2024 market forecast for three major regions. For North America, the market has continued to weaken and we now expect demand to be 10% to 15% 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 smaller tractor segment is also expected to decrease in 2024, although the rate of decline is slowing compared to prior years.

For Western Europe, we continue to expect the industry to be down 5% to 10% compared to 2023. Farmer sentiment and other indices have been hovering near trough levels for a few months now due to reduced commodity prices and higher input costs. We are updating our guidance for South America to reflect the increasing weakness and now expect industry sales down approximately 25% to 30% in 2024, compared to our previous estimate of a 20% reduction.

The industry for tractors greater than 340 horsepower combines and planters continue to deteriorate even more than we had anticipated. Farmers are holding onto the green longer in the region, awaiting higher prices and shortfalls in the subsidized financing program caused farmers to postpone purchases. Flooding in Rio Grande do Sul have also weighed on sentiment.

Although this may affect demand in the short term, South America remains one of the more 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, AGCO's brand agnostic retrofit approach to precision ag and our strong parts business should help dampen the cycle, making our margins less volatile.

Slide 13, highlights a few key assumptions underlying our 2024 outlook, which is still inclusive of the grain and protein business and also includes the consolidated results of the PTx Trimble joint venture.

Despite the weakening market conditions, our sales plan include market share gains. In addition, full year pricing is now expected to be effectively 0% year-on-year. As our raw material costs have stabilized and we pursue further cost savings actions, we still expect this level of pricing will allow us to be approximately breakeven on a net pricing basis.

We expect currency translation to have a 1% adverse effect year-over-year, primarily due to a weakening of the Europe. Engineering expenses are expected to be flat in 2024 compared to 2023, including PTx Trimble. Excluding PTx Trimble, engineering expense would have been down around 7% as we look to moderate some investments given the softening industry outlook.

With expectations of our industry declining around 15% from approximately 105% of mid-cycle in 2023 to near 90% in 2024, we would expect our adjusted operating margins to come down from the record 12% in 2023 to around 9% in 2024.

Given the significant levels of under-absorption reflected in our financials as we cut production, coupled with the operating margins enhancements associated with the pending sale of the grain and protein business. In the additional run rate savings associated with our restructuring announcements, we believe the current forecast 9% adjusted operating margin should be near our trough margin assuming traditional downturn patterns, which demonstrate the significant improvements we have made to our business over the last several years.

We'll provide an updated long-term mid-cycle operating margin target at our December 2024 analyst meeting, to account for the performance of PTx Trimble and announced divestiture of our grain and protein business.

Our effective tax rate is now anticipated to be approximately 30% for 2024, which is roughly 1.5 percentage points higher than our previous guidance. The reason for the increase is due to a higher proportion of income in higher tax jurisdictions.

On Slide 14, we highlight a few details in terms of the restructuring plan we announced in late June, along with the details of the recently signed agreement to divest our grain and protein business. Our restructuring plans announced in response to continued weakening demand in the agriculture industry, in long term efforts to structurally change AGCO's operations.

The objective of the program is to reduce structural costs, streamline our workforce and enhance global efficiencies by better leveraging technology and global centers of excellence. As part of the plan, we announced a planned reduction of approximately 6% of our salaried workforce.

As a result of the restructuring actions, we will incur between $150 million and $200 million in expenses, mainly related to one-time termination benefits. This expenses anticipated to be incurred in 2024 in the first half of 2025, with $28 million recorded in the second quarter. More importantly, the program will result in between $100 million to $125 million in annual run rate savings, the majority of which will start in 2025, which will help year-over-year profitability.

As mentioned earlier, we've entered into a definitive agreement to sell our grain and protein business. As of June 30, 2024, the business met the criteria to be classified as held for sale. The company determined, the intended sale of the grain and protein business does not represent a strategic shift that will have a major effect on the consolidated results of operations.

And therefore, results of this business were not classified as discontinued operations. The results of the grain and protein business are included within our regional reporting segments. We expect to receive proceeds of approximately $700 million from the sale, subject to customary working capital and other adjustments, upon the classification of held for sale, the company recognized the projected loss of approximately $495 million in the company's consolidated statement of operations based on the current estimate that will be adjusted at the time of closing. The closing of the transaction is subject to regulatory approvals and customary closing conditions and is expected to be completed before the end of the year.

Turning to slide 15, for our 2024 outlook. Our full year net sales outlook is $12.5 billion, down from the record levels seen in '23 and down from our previous outlook. Adjusted earnings per share, forecast is now approximately $8. We continue to expect capital expenditures to be approximately $475 million, slightly lower than what we spent in 2023.

Our free cash flow conversion should be at the upper end of our range of 75% to 100% of adjusted net income, consistent with our long-term target. With continued underproduction relative to retail demand in the third quarter, we project sales in the $2.9 billion range, adjusted operating margins of approximately 7% and adjusted earnings per share of about $1.05

With that, I'll turn the back over to the operator for Q&A.

(operator instructions)

Jerry Revich, Goldman Sachs.

Hi, Good morning, everyone. I wonder if you could just -- I am wondering if you could just talk about the decremental margin outlook that's implied for the back half of the year. What's the impact to that of the inventory reduction? That you folks are delivering on prior cycles, decremental margins for you folks have been closer to 20%. So I'm wondering as we think about '25 after company inventories have come down, should we be thinking about decremental margins in the first half of '25 being closer to the low 20s that you folks have posted historically?

Yeah, I think, Jerry. As you saw with the production cuts here in the back half of 2024, doing a significant level of reduction, again, the 20% to 25% reductions this year. The highest level we've cut in over a decade, really trying to rightsize dealer inventories as we go through this year.

So as we think about 2025 and you listen to Eric's comments about the industry likely floating at this trough level, we would expect assuming not a significant reduction, but we would expect that our decrementals next year should be closer to that mid to high 20s, that you would have seen. And again, I think if you factor in the of that the pricing is having here in the back half of the year, you would see that the decrementals from an operational standpoint are in that high 20%, 30% range as well as just being magnified because of the decrease in pricing as well.

Got it. That is clear. And then can I ask on your precision ag business here? Can you talk about developments that you're seeing in the market? How is the aftermarket precision ag business performing in the back half of the year versus what you're seeing on the whole goods side? Can you just double-click on the near-term performance, if you don't mind.

I'll take that one. So what we call that our business now is PTx, Precision Technologies multiplied. That's the combination of PTx Trimble, the JV we created and Precision Planting. Both of them have a mix of OEM sales and retrofit sales. The OEM sales are down much like the industry, maybe even a little bit more because there's some channel destocking with some of the key OEMs, but we haven't lost any OEM customers. It's just they're moving with the industry.

Retrofit has been up, but it's cooling and so we're seeing areas now or even some of the retrofit is going down. But again, we've got our AGCO ramp-up right on track, maybe a little bit ahead of plan the C&H dealers sign-ups are on track, maybe a little bit ahead of plan, and we've not lost any OEM customers not lost any talent from our organization, in terms of engineers and things like that. So the business is performing like we would expect it's just being hit by the industry movements.

Thank you.

You're welcome.

Tami Zakaria, JPMorgan.

Hey, good morning, thank you so much. So I was hoping you could help me with some numbers. So the implied back half production outlook. How much is that versus your expectation of retail sales? I'm trying to understand production versus retail sales growth expectation as they exit this year.

So Tammy. The production in the back half is going to be down, call it 20 -- mid upper 20s -- mid 20s. More pronounced here in the third quarter. I would say, on a quarterly basis, a little bit above the annual guidance. And then in the fourth quarter, sort of I'd say in the range of that $0.20 to $0.25, 20% to 25%, mainly because we're lapping the easier comp in South America in the fourth quarter. So you're going to be seeing production levels in the down in the sort of low to mid 20s here in Q3 and Q4 as we go into 2025.

Got it. Okay. So then, as you exit this year, how much is their production going to be versus your expectation of the mid-cycle volume?

So I would guess the way we look at the mid-cycle volume, Tammy, last year we were at about 105% of midcycle. If you remember last year, there was also a fairly strong channel replacement or filling of that channel as we started 2023 with a very low dealer inventory level.

So you would sort of view that at 105% plus some incremental production -- little bit of incremental production for that dealer fill. Now coming down to an industry of around 90%. So you can see that we're sort of production levels are down their team cost percent to get back to sort of I would say this mid-cycle, when you factor in the overproduction, so call it 10% to 15% is probably the range to think about the delta between where we are and getting back to mid-cycle.

Steven Fisher, UBS.

Thanks for taking the question. The pricing down to 0%, what drove that? Was that higher incentives to make trades happen? Was it reductions in actual pricing? And how do we think about sort of the regional spread of where that change happened from the prior pricing expectations for the year?

Yeah, Steve. I think, generally speaking, the incremental price or the reduction in our outlook is reflective of the incremental discounts, really trying to spur more retail sales as we've seen the industries we can here, South America, North America, and even to a certain degree in the non branded products in Europe, we've definitely seen the incentives picking up. I think, relative to our prior outlook, I would say, that the declines or the change has really been focused South America, Europe and to a lesser degree North America. But I would say Europe and South America were probably the two biggest changes that we saw relative to the last quarter.

Great. And then you're undertaking this restructuring. I'm curious kind of where you think that will leave you relative to the ideal manufacturing structure that you see for the future of the business. Do you think this will get you there? Or are there still other steps that you think you might be taking over the next couple of years to kind of put the business and the manufacturing structure in place for the next 10 years?

Yes. So maybe I'll start and then Eric may want to add a few more comments longer term. But the restructuring activities that we alluded to, I would say were more our SG&A back office orientated to that 6% reduction in the workforce. We've talked about is really reflective of the industry cooling and us trying to shrink our our overall cost here. But at the same time, as I may have mentioned, during the technology day. This is really challenging our teams to look deeper at leveraging technologies, generative AI and trying to do things in a much more efficient manner.

And at the same time, trying to commonize things where we can centralize them potentially in lower cost areas or have centers of excellence versus how AGCO they've been built up in the history of a group of acquisitions, we're really not creating that common skeleton.

So as we looked at the industry sort of gave us that opportunity to shrink the workforce to say -- to stay where we need to be, but at the same time, take down further reduce it through simplicity. So again, I think there's probably opportunities that we looked as we learn more about our operations, learn more about technology. But if you look at what we're talking about that $100 million to 125 million, as Eric alluded to, and I alluded to that run rate savings, that's not reflected in these numbers that we'll start to see that build in '25 and hopefully more to come as we better leverage technology. But I think on the footprint, Eric, anything else you want to add?

That's exactly right. We're taking fast action on getting ourselves right-sized for the industry that we're seeing. The 6% is a net number. So we're actually cutting deeper in some of our high-cost countries, hiring back in some low cost countries, but that's really about rightsizing and reflecting the demand which we are facing.

And there's a chapter two, about thinking differently about how we run the business. And Damon already covered that, so I don't need to repeat. But it's largely using artificial intelligence and automating much of the routine tasks that we have and higher leverage of lower cost locations.

Mircea Dobre, R.W. Baird.

Thank you. Good morning. I want to go back to the discussion on production and dealer inventories. I just want to make sure that I properly understand that. So you've talked about your industry forecast being down 15% for this year and production for the full year down 20% to 25%. Is it fair to understand the gap between the two is the amount of underproduction or destocking that that is happening in the channel?

And if so, can you give us a sense from a unit perspective, where you think your channel, your dealer inventories are going to be relative to where they exited in 2022. So before we had that kind of like stocking dynamics, but last year.

Yes, so maybe we'll have to go back and look at the 2022. So I don't think we have that handy right now, but maybe on a follow-up, I can give you that. But I think, your comment about the industry decline versus a production decline that's spot on that. That's the destocking that we're talking about here, trying to better rightsize the inventory.

And again, I think as we said on some of my comments, there is still more work to do here in North America. We do want to take that inventory levels down right now we're sitting at around eight months of inventories. We want to get that down a couple of more months, and that's part of the large production cuts. We have planned in the back half of the year.

Europe is been staying flat the last couple of quarters at around four months of inventory. And again, we probably have a little bit of excess in our more volume oriented brands of Massey and Valtra. [France] is doing quite well from a share capture standpoint, which is keeping the dealer inventory levels at probably the optimal level.

And then South America, as that industry continues to decline despite production cuts we're taking in last quarter, in the second quarter, we cut production in South America, 57%. And so a significant cut there as we see that industry core dealer inventory though stayed relatively flat. So again, we now have more production cuts in the back half of the year, trying to get that four months down to probably more around three months by the end of the year as we hopefully see some improvement going into 2025, in that market.

Okay.

As we said in our comments, this is the big correction year and most cycles, they go through one big year where there's a big correction and this one's gone from 1[05 down to 90], and we're being very aggressive, much more aggressive than we would have another in historical cycles to cut production, get it out of the system, so that we can be much closer to retail demand '25.

My follow-up is on that mid-cycle comment that you had. Maybe a reminder here in terms of how you guys frame mid-cycle. I guess I'm wondering, given the fact that machine to have become so much more productive, could that actually have an impact on where mid-cycle demand from a volume standpoint truly is these days. Thank you.

Well, it's a 10-year average and we watch for trends in certain markets like, for example, Brazil is an increasing marketplace. It still has cyclicality to it, but a long-term trend is increasing because of putting more acres into production. So we watch overall trends, we've got that factored into our model. And the intention is that 100% is the average industry that we should expect through the business cycle, on a global basis.

The numbers we're talking about are global perspective. And so we're believing we're about 90%. We believe this is the big correction year. And like I said earlier, oftentimes, there's one big correction year, then the industry hovers around that for a little while, but doesn't move so dramatically like it did this year. And then start working its way back up again, that's what we expect to happen.

[Kyle Mangas], Citigroup.

Thank you. I'd love to follow up on last question and just dive deeper into mid-cycle. So if you're at 90% of mid-cycle. Could you kind of parse out where you think you are, as a percent of mid-cycle by region like North America, is that actually closer to 100%. And then maybe South America and Europe are more in the 80% range.

So kind of the way I would look at it, Europe tends to be the least volatile of our major regions usually fluctuates in the 105% to 95% range, given the level of subsidies that the EU provides for the farmers. So I would tell you it's probably a little bit below the I'll call it in the high 90s. And then as you move further down, North America is coming closer to the mid to the 90%-ish range that we're talking about.

And then right now, with the steep correction in South America, I'd put it a little bit below that but again, remember South America's corrections, it's coming off of what were some exceptionally strong years and go back to '22.

I think it was about 130% of midcycle. And so you're again, percent-wise, the change over the last couple of years is quite significant. But I would put Europe sort of point below 100% Europe or North America around the 90% in South America, maybe a little bit below that right now.

And interesting, we're starting to see some early signs of recovery already in our Australian New Zealand market. They are the first ones to go down. We're starting to see them finding bottom and maybe even recovering a little bit. So each region has its own different place based on where they've come from and the farmer dynamics there. But they're all behaving like we would normally see in prior cycles.

Got you. That's really helpful. And then I was curious, could you talk a little bit about the Trimble margin performance in the quarter? And is there any change to that full-year outlook for Trimble margins in the high 20s?

YeaH, the Trimble Martin --Trimble sales in the quarter were a little bit more challenged. Again, I think what you're seeing with Trimble is a reflection of the overall industry Kyle, as our industry levels are dropping. As we've talked in the past, there was a significant amount of purchases pre acquisition from us, putting a lot of inventory in the channels as the inventory -- as the industry has slowed. Obviously, that inventory in the channel is now moving out slower than maybe what we had thought a quarter ago, and you're seeing that reflected in our industry outlooks.

And so the sales were a little bit below our expectations. Obviously, that translates to the a margin issue given the high margin of that business. Our outlook when we gave you last quarter was the PTx Trimble business was going to be $300 million plus. As I think about the lower OE sales, a little bit lower industry outlook right now, I would tell you that's probably a little bit below $300 million, so down a little bit, not materially different.

So instead of $300 million plus maybe trended negative would be the way to look at that. But again, it's more a reflection of the industry levels dropping and what was in the channel moving out slower as the industry has slowed. But I think what we would tell you is, all of the operational aspects of PTx Trimble signing up the CNH dealers connecting with the customers themselves about the value proposition.

All of that is in line with our plan, feeling very good about the growth prospects, just working through this industry decline and leading this churn, which we knew 2024 was going to be a churn coming off of what CNH was selling to their dealers moving from Trimble into the ADCO family. All of that was going to create churn in 2024. So again, nothing's changing in the long-term prospects. It's just sort of working itself out quarter-to-quarter here.

Kristen Owen, Oppenheimer.

Good morning, thank you for taking the question. I wanted to ask about the assumption for market share gains. I mean that's something that you've consistently held through the last three guidance cycles. You talked a little bit about scent in Europe. But just wanted to see if you could unpack the market share assumptions maybe by product line or by geography, help us understand where that share gain is coming from?

Yes, I think, Kristin, I mean not going into a lot of specifics. But as we've said for the last couple of quarters, scent has been doing exceptionally well in Europe, whether that's as a result of the new, the new 600 we've launched the new the Gen seven -- 700. All of those are driving great market share performance scent as an overall product portfolio. Just to put that in perspective, is actually up year=-to-date. So when you look at them globally and despite this market environment, the sales are actually up 1% or so give or take.

So strong performance driven by Europe. If I think about some of the other regions, we are seeing share growth in South America, not to the extent that we were hoping as part of our original plan, given the competitive environment there, but we are seeing some share growth there. And then again, depending on the pockets, whether you're looking at the combines or different horsepower, we're seeing some share growth and in other markets, but it's more selective in areas, again, like lower horsepower, for example, here in North America, the team's doing quite well. So it's a little bit of a mix-and-match beyond those two South America and Europe that I touched on.

Thank you for that. My follow-up is a little bit longer term. I recall during the upcycle, your goal of getting to a more balanced margin portfolio across the regions. Some of those efforts were kind of prolonged in South America, just given how strong the upcycle was there. Now, that we are in this environment of resetting production, particularly in Brazil? Are there things that you can do during this downtime to sustainably support the margin improvement in that region?

So I think there's a couple of things that you're seeing here, Krist. I mean, again, I wouldn't lose too much sleep. South American production was down 57% in the quarter. That has a tremendous burden on the P&L here. But if you think about South America, when you think about those professional growers in the Cerrado region that caters to defense portfolio.

And so sense still relatively low share there. We've opened up several stores growing share there. Hopefully, those professional growers are more consistent with their buying behaviors versus some of the smaller growers who are going to be more influenced by the subsidized funding.

So that should hopefully help as we grow scent market share. The second one is the precision, the PTx businesses in total. And again, that's both the Precision Planting business, which as you know, is growing in South America, still a relatively small footprint there, but we see that growing when you layer on PTx Trimble, which again had a good business there with significant growth potential in that market.

So we see those being more stable, high-margin, higher-growth businesses. And then as that grows and penetration coupled with masking and Valtra downer, the parts business, again, we've increased the penetration and the fill rate down there. And again, it's that specialty spend grows the amount of parts business growing there, hopefully will again stabilize and bolster the underlying margins and improving the bottom in margins in South America over the next several years.

And just a couple of comments. Everything is a themselves were spot on. We moved from a company that was focused on small low-tech tractors in the south of Brazil to one that's got a full crop cycle set of solutions of industry leading products, that focused on the whole region. We probably had more channel change in South America than any other region in terms of improving our dealer capability. So that's a big shift in product mix shift in channel. Both of those we think are good for the long-term prospects and health of that business.

Stephen Volkmann, Jefferies.

Great. Thank you, guys for fitting me in. Most of my questions have been answered, but I wanted to ask about the cadence of the cost cutting program that you've done. The $125 million, I think, it was -- do we get sort of the full $125 million in '25? Is that the right way to think about it? Or does it sort of end the year at that run rate and we maybe don't get the full amount?

Yeah, Steve, we won't likely get the full amount, as you know, given our large European footprint, we will go into consultation with workers' councils. In Europe, that will take some time. I don't know exactly when we'll be able to wrap that up. But I would like to thank again, I can't predict the exact timing, but hopefully in the first half of the year, first quarter, maybe first half, we work through those consultations and sort of the second half. If all goes well, we'll start to see that run rates and maybe a little bit sooner. But I would sort of assume the exit is in that $100 million, $125 million, but definitely getting I think some of it through the as it moves through the course of the year.

But some of those actions have already been taken. In the non-works councils various some of those actions have already been taken. So it's a it's a mixture.

Thank you Eric. And what about on the direct labor side? What are you doing there? How should we think about what sort of benefits might come that's side?

Yeak, Steve. We've been reducing our direct labor as a result of the overall industry environment. And I think year-to-date, we've taken out probably around 3,000 direct labor associates or corresponding hours overtime, flex time, things of that nature. And I mean, let me use that as a base when we talk about 2024, in rightsizing inventory levels, taking the production down, trying to position ourselves for '25 and I think you heard Eric and I both talk about generally feeling this 9% is near the trough level. And again, for us to look into 2025, there are several catalysts that we see should be more positive for us as we go into 2025.

You touched on that restructuring, right, $100 million to $125 million of run rate savings. That's not embedded in my numbers. My production is coming down somewhere in the range of 20% to 25%. We looked back over the last decade, 25% will be more than we've ever cut in the last decade plus.

In any time that we have cut in a big production down year, the subsequent years have been significantly less. And so if, again, if you think about that retail versus the absorption this year, that should be a positive next year if the industry policy reserves that sort of trending in a similar area. So I have better restructuring savings, better retail versus production absorption. PTx Trimble, again, we said this is a year of churn. We know, it's not at the margins. We want it to be as it works through the dealer inventories. We expect to see that margin accretive in 2025.

And then you layer on the grain and protein business, which has been margin dilutive this year. If we eliminate that or sell that business, that should be margin accretive next year as well. So if the industry does our historical patterns, we feel very good that there's enough opportunity that the margins next year could be higher than they were this year, even if we don't see a significant uplift or material change in the industry.

And our last time, our trough margins were more in the 4% to 5% range. This time we're right now we're reporting 9% for this period. So we've got a lot of structural changes have been embedded into the company, not even hitting the upcoming ones that Damon, just mentioned.

Chad Dillard, Bernstein.

Hey, good morning, guys. So my question's on price cost. Just trying to understand, what that data point look like in the first half of the year? And then what are you embedding for the second half of '24?

So for the full year, net zero, Chad, price versus cost was slightly positive. Price was slightly positive here in the first half of the year. be pro when you include all the discounts, it will be so maybe a little bit on the zero to slightly negative to net. The material costs are coming down as well in the back half of the year, sort of what closes the gap to keep us sort of at a net neutral here.

Got you. That's helpful. And then just a second question is about South America. So given, you guys are down plus 50% in terms of production in the second quarter. Where are that compare versus prior production trough? And then, I guess, the second part is just thinking about, if we do get to that, I guess absolute trough in terms of production. How should we think about like the operating margins of the business? Do you think you can actually maintain a positive operating margins there?

Yeah, I think, again, Chad for us, what the pull that historical on production levels. But I think, if you again look at the numbers of South America, that were -- we cut production 57% in the quarter and still delivered positive operating margin. I think as Eric alluded to, the structural changes to that business of moving from what were low to medium horsepower tractors into expanding around the growth around the crop cycle here with the ideal combine with the Momentum planter with the Fendt tractors, bringing in our PTx Trimble group now, on top of the Precision Planting business there, we have structurally changed the business there.

Ideally, we would expect that to be a double digit margin business. Again, this this year happens to have two two factors going against us. One is the speed at which we're cutting that production and second remember, we've been trying to communicate this now for a year the pricing that South America was delivering a year ago, we knew was unsustainable. And so we weren't giving really any discounts given the strength of that market. And so we knew that was coming down. So when you put that discounting on top of the absorption was really driving the margins down putting the team on a challenged situation. And despite that, what they are delivering is still good margins, positive margins here, which again was a sentiment or a statement of really that we've structurally changed the business long term.

This concludes our question and answer session. I would like to turn the conference back over to Eric Hansotia for any closing remarks.

Thank you. I'll close today by just saying in the short term, we're focused on executing our plan to reduce inventory and aggressively control costs to better align our operations with the current weak market environment.

The key to our long-term success is the continued execution of our farmer first strategy. Our focus is on growing our margin-rich businesses like Fendt and parts and service and our precision ag business, which we've been investing in heavily over the last few years to become an innovation leader.

The strategic actions we've taken in the last six months, like launching farmer core, forming the PTx Trimble joint venture, and divesting the grain and protein business should enhance and accelerate the benefits of our farmer first strategy.

Over the last few quarters, we've touched on many factors supporting our markets, including growing populations, changing diets, low stocks to use levels, increased demand for biofuels and relatively healthy commodity prices. All these trends give us confidence in the long-term health of our industry. And while cycles are typical in the ag industry, how we react and whether them will illustrate how we are structurally changing AGCO to be a better high performing business regardless of market conditions.

And we recognize that we're surely closer to the bottom of the cycle than we are the top of the cycle. We look forward to seeing you at our upcoming meeting at Farm Progress Show late in August. And thanks for your participation today.

Thank you for joining the AGCO's second quarter 2024 earnings call. The call has now concluded. Have a nice day.