Q2 2020 AGCO Corp Earnings Call
[noise]. Good morning, My name is the a and I won't be the conference operator today at this time I would like to welcome everyone to the ACO Twentytwenty second quarter earnings release Conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If he would like.
To ask a question during this time simply put star and the number one on your telephone keypad to withdraw the question press the pound key. Thank you at this time I would like to turn the conference over to Greg Peterson head of Investor Relations. Please go ahead Sir.
Thanks, the a and good morning, welcome to those of you joining us for Ico second quarter 2020 earnings Conference call. This morning, we will refer to a slide presentation. That's posted on our website at www Dot and Kumar I suppose.
[laughter] the non-GAAP measures used in this slide presentation are reconciled to GAAP measures in the appendix of the presentation.
We will make forward looking statements this morning, including demand product development and capital expenditure plans and timing of those plans acquisition expansion in modernization plans and our expectations with respect to the costs and benefits of those plans and the timing of those benefits will also discuss production over.
I will share repurchases dividend rates and our future revenue price levels earnings cash flow attach rates and other financial metrics. We do wish to caution you that these statements are predictions and actual results may differ materially.
We refer you to the periodic reports that we filed from time to time with the Securities and Exchange Commission, including the form the company's form 10-K for the year ended December 30, Onest 2019, and the company's form 10-Q for the quarter ended March 30, Onest 2020.
These documents discussion important factors that could cause <unk> actual results to differ materially from those contained in our forward looking statements.
These factors include but are not limited to adverse developments in the agricultural industry, including those resulting from code at night chain, including plant closings workforce availabilities supply chain disruption in product demand.
We'll also.
Include weather commodity prices changes.
In in product demand. So 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, our Martin your Shagun, our chairman President and Chief Executive Officer, Eric and show, the our Chief operating Officer, and Andy Beck, Our Chief Financial Officer, and with that Martin. Please go ahead. Good morning, everybody and I hope that everybody is safe and healthy. Thank you, Greg I need to.
We'll pay that can make one remark when it comes to wet weather Echo.
It's not allowed to be used in order to defend the variance in the budget. So that means and the weather is different people need to me to find solutions. The appreciate your interest in Echo and your participation on the call today I want to stop this morning by thinking.
Echoes 21000 employees.
Coverage about 10000 clubs had been created during my time for their hard work. That's he's out did in our world class It bought fall far more customized throughout this pandemic.
I couldn't be more proud off the efforts and off the F., Eric and his team that enabled equal to do our pops to support the global food supply chain, while keeping our facilities and co workers safe.
As we discussed on our first well I'll talk call the health and safety of our employees and the communities in which we operate is our first priority being produced taste, Oh blast safety protocol for our frontline workers, who keep our plans and Pops me out is operating to support our customers. In addition.
In our supply chain teams did an outstanding sending drop and enabling our factories and you'll have in South America to ramp up quickly after being closed for most of April lastly, our de doesn't along with our sales and marketing teams have been outstanding as they generate strong sales activities.
Echo products on a unique and tenant in conditions slightly provides our financials family. Our second quarter results demonstrated strong execution as we overcame cobbett 19th related production disruption in Europe, and South America in order to deliver solid profitable quarter margin improvement.
In our North American South American and Asia Pacific Africa region.
Hi did our quota.
Our focus on cash conservation was also very good that's one of our second quarter free cash flow exceeded the second caught off nastia.
Nearly 100 million and our balance sheet remains in excellent shape.
Slide four detest indicate to you wouldn't it be 10 cents by region for the six month, all first six month of Twentytwenty consumption of grain for food fuel and livestock feed is being negatively impacted by the economic constraints caused by the pandemic as a result soft commodity price.
Have trended lower in the first half of 2020.
Consequently, global industry demand for farm equipment is expected to be we'd gotten twentytwenty due to tenant in farm economics and uncertainty caused by the pandemic North American industry retail sales of Tech does increase in the first six months of Twentytwenty.
Compared to the same period in 29 team go both in the sales off at all or most of our tech us were partially offset by softer demand for high horsepower tractors and combines.
Well the need to be plays Alternatively age fleet into lot farm sector remains lower commodity prices and cautious farmer sentiment.
Influencing equipment demand.
So, especially called me 19, eight package for you as farmers and livestock producers could offset some of the impact of lower commodity prices industry retail sales invest on new up decrease in the first six months of Twentytwenty due to lobby production constraints market demand was the weakest in Spain UK and.
Fonts with high with across much of it started you are expected to negatively impact, we put backs and stronger grain export demand and supportive wheat prices are providing some offsets.
We'll be in dairy and livestock fundamentals have stabilized after a weakening earlier into year end.
Industry retail sales in South America decreased during the first six months off Twentytwenty with a decline in markets outside of Brazil and Argentina.
In Brazil, the benefit of a strong first quarter, it's not a favorite exchange rates are supporting relatively positive economics, however, promise not remaining cautious with regards to equipment purchases due to the current economic and political environment industry retail sales in Argentina increase significantly.
During the quarter with farmers are using investments in equipment as a hedge against the potential devaluation of the peso also the level of uncertainty is higher than normal BBD some markets to be stuff.
Oh relatively resilient and we continue to address if the support retail activity in our global markets before I turn the call to although to Eric I would just make one statement regarding.
Our that's a communication good day, one we talk about the industry, which is something not all our piece I'd doing and second to be also give guidance again.
Which is also different which means of cost that we want to be conservative. So you need to look at our guidance as a conservative.
Approach to the remained in mind off yeah. So Eric.
Now the details very good thank you Martin and good morning toll on the call.
As we communicated last quarter, our focus for 2020 has been to address the needs of all of our key stakeholders.
In our employees or dealers customers suppliers shareholders and our communities during this covert crisis.
This perspective as guided our actions since the outbreak.
First and foremost we established protocols for all of our facilities focusing on employee health and safety.
These activities have served us well and had been a critical factor and keeping our facilities operating.
Second as Martin said, we're proud of the way our employees are going above and beyond to keep farmers and dealers operating through these difficult circumstances.
Innovative approaches connecting with our dealers and customers through digital tools have been a positive by product that we can leverage when we return to normal.
Lastly in terms of business continuity, our focus has been on our supply chain manufacturing and parts distribution operations.
Since April we've been able to successfully ramp up our production in Europe, and South America by focusing on component availability and safe working conditions.
In addition, our focus on cost management was evident in the second quarter as a reduced our expenses well our operations were shut down.
Despite these reductions we're continuing to fund our most important projects as we look to strengthen that go for a long term.
Slide six details our production status for our four operating regions. Our teams are working hard leveraging both internal capabilities as well as the resources of our dealer partners and suppliers to support our customers under these unprecedented and unique circumstances.
As we discussed last quarter, our manufacturing operations have been significantly impacted by the crisis, particularly in Europe, and South America or.
Our supply chain and production teams have done a great job securing parts to allow us to restart production in our factories and we'll make a great effort to keep them running.
In the second quarter production was significantly reduced or suspended in most of the company's European and South America facilities, largely due to shortages and our supply chain.
After being close most of the month of April all of our factories are now operational.
The shutdown of our Valtra plant ensue Lucky, Finland extended through made due to a fire at our casting supplier factory, but it is returning to full operations in early June as planned.
Our recovery from the Covance shutdown has been much faster than expected our second quarter results were better than anticipated. Due this quick ramp up and we anticipate that our third quarter will be stronger than normal as we catch up with our order board built up during the first and second quarters.
The following slide shows Echo's 2020 schedule for factory production hours and that's shown on slide seven.
Total company production hours were down approximately 19% for the second quarter versus the same period in 2019.
Most of the decline was caused by factory shutdowns with the largest decline in Europe and South America.
We anticipate that our third quarter production will be higher than the prior year as recover from production losses in the second quarter and deliver against our current order board.
Our production levels in 2020 also factor in targeted reductions in both company and dealer inventories.
We've made good progress on both fronts, the first half of the year.
Company inventories are lower than June 2019, and dealer inventories are below their prior levels in all of our regions.
Turning to our order Board our June 2020 order board for tractors is higher in North America, Europe, and South America compared to a year ago was strong increases in both Europe and South America.
Ill now turn the call over to Andy Beck, who will provide you more information about our second quarter results.
Thank you Eric and good morning to everyone I'll start on slide eight eight with <unk>, which looks at AG 'cause regional net sales performance for the second quarter in first half of 2020, and 'cause net sales were down about 13% compared to the second quarter of 2019, excluding the negative impact of currency.
The Europe Middle East segment reported a decrease in net sales of approximately 20%, excluding the negative impact of currency compared to the second quarter 2019 sales declines were driven primarily by lost production caused by the impact from the Cobot 19 crisis and were experienced in virtually all markets net sales and.
North America decreased approximately 9%, excluding unfavorable impact of currency compared to the levels experienced in the second quarter 2019.
Lower sales of Grand protein equipment high horsepower tractors, and sprayers were partially offset by higher sales of hate tools and replacement parts.
And because second quarter net sales in South America increased approximately 21% compared to the second quarter 2019, excluding negative currency translation impacts large tractors momentum planners in grain in protein equipment produce most of the increase.
Growth in Brazil, and Argentina was partially offset by lower sales from the smaller South American markets.
Net sales in our Asia Pacific segment decreased about 4% in the second quarter 2020, compared to 2019, excluding the negative impact of currency sales were also impacted by product availability lower sales in Africa, partially offset by growth in China and Australia.
Consolidated replacement parts sales were approximately 399 million for the second quarter 2020, and we're up about 8% compared to the same period in 2019, excluding the impact of currency translation.
Slide Nine example, examines agco sales and margin performance and 'cause adjusted operating margins declined by about.
220 basis points in the second quarter 2020, compared to the same period last year margins were negatively impacted primarily by lower net sales and production cost control initiatives, including employee furloughs hiring freezes delayed married increases eliminated travel cost and reduced discretionary spending.
As well as favorable material costs helped offset some they impact to the factory closures experienced in the second quarter.
Europe Middle East segment reported a decrease of $117.8 million in operating income compared to the second quarter 2019, resulting primarily from lower net sales and production volumes as well as a weaker mix, partially offset by lower engineering and other operating expenses, despite lower sales North American.
Operating income increased approximately $13.3 million and the second quarter compared to second quarter of 2019 as operating margins reached 11.7% strong preorder program, along with higher parts sales produced a positive sales mix.
In addition, improve margins in the grain and protein business contributed to the margin expansion.
Or South America segment reported an operating profit in the second quarter, resulting in a 12.6 million dollar improvement from the same period in 2019 higher sales and improve sales mix, including strong seasonal plan or sales and reduced expenses all contributed to the improvement.
And our Asia Pacific segment operating margins expanded by over 500 basis points. Despite modestly lower sales a richer sales mix and expense control efforts contributed to the improvement.
Slide 10 detailed the grain and protein results by region and by product.
Great and protein business sales decreased about 15% excluding negative currency impacts in the first six months of 2020 compared to 2019 globally grain and seat equipment declined by approximately 23% with a Europe middle East and North America region, showing the largest Dick.
Clients.
Farmers and grain elevators in North America had been slow to invest given a week profitability outlook stemming from low crop prices and a significant decline in ethanol demand.
In Europe, we've had a number of projects deferred until 2021 due to economic conditions caused by the pandemic.
Protein production sales decreased approximately 3% in the first six months of 2020 due to declines in the North America European and Asia Pacific Africa regions, partially offset by growth in South America. The protein production segment has been significantly impacted by the pandemic, particularly in North America.
We're protein processing capacity has been challenged in China protein producers are beginning to recover from the Asian swine fever, and have started to rebuild the production capabilities. Our order flow for production equipment in Asia Pacific Africa region has improved throughout the last six months.
Slide 11 addresses and 'cause liquidity and free cash flow for the second quarter first half the 2020, starting with free cash flow, which represents cash used in operating activities less capital expenditures seasonal requirements for working capital are always greater in the first half of the year and thereby resulting in net.
Good free cash flow for the.
Both the first six months of 2019, and 2020, our cash and working capital usage stabilized in the second quarter 2020, and allowed us to generate nearly 100 million more free cash flow in the SEC in the second quarter compared to the second quarter of 2019.
As it relates to returning cash to shareholders, we plan to maintain payment of our quarterly dividend with regard to share repurchases we completed.
$55 million of share repurchases in the first quarter and suspended future repurchases during the second quarter given the uncertainty we will continue to evaluate market conditions to determine the proper time to reinstate our share repurchase program.
During the second quarter Agco completed a new term loan facility, which provided an additional $530 million of borrowing capacity, including the new facility Agco total available funds as of June Thirtyth 2020 was approximately $1.3 billion consisting of cash of approximately 400 million now.
Well borrowing capacity of $870 million, our net debt was about $125 million below June 2019 levels. We feel confident we have sufficient funding provided the link their severity. The pandemic on operations is not more significant and we currently estimate.
Other details for the quarter included the losses on sales receivables associated with our receivable financing facilities, which are included in other expense net were approximately $4.3 million during the second quarter 2020 compared to $11 million in the same period in 2019.
Our updated 2020 outlook for the three major regional markets has captured on slide 12, we currently expect lower retail industry demand across all of our three major regions compared to last year in North America. The U.S. EA is projecting 2020 farm income and you asked to remain challenged.
Due to low commodity prices, partly offset by additional subsidy payments, we project North American industry tractor sales to be down approximately 10% in 2020 compared to 2019.
He you farm income is expected to soften in 2020, driven primarily by lower milk prices and continued dry conditions, although industry demand is expected to be more stable than the second half of 2020. It will not provide an offset to the significant declines experienced in the first half of the year accordingly industry.
Demand in Western Europe is expected for the full year 2020 to be lower than 2019.
Following two years of supported farm income and lower levels of industry demand, we expect industry sales in Brazil, and Argentina to stabilize the smaller markets in South America are expected to be considerably weaker in total industry demand in South America is expected to decline modestly from 2019 levels.
Slide 13 highlights the assumptions underlying our 2020 outlook our priorities for 2020 continue to be maintaining a safe working environment for our employees and providing proactive support to our customers in dealers will also continue to manage our cost while preserving our investments in digital technology and so.
Mark farming product development, our 2020 forecast assumes softening of industry demand across all regions as this global markets recover from the pandemic. Our sales plan includes market share improvement price increases of one to one and a half.
And targeted dealer inventory reduction at current exchange rates, we expect currency translation negatively impact sales by about 3.5%.
It engineering expense is expected to be relatively flat compared to 2019 on a constant currency basis at about 4.1% of sales, implying a year over year growth in the back half of the year operating margins margins are expected to be slightly below 2019 levels with the negative impact of lower now.
Sales and production volumes offset by an improved product mix and favorable pricing net of material costs.
We are targeting an effective tax rate between 36, 38% for 2020 interest and other expense is expect to be approximately flat compared to 2019 level.
Slide 14 list our view a selected 2020 financial goals, we continue to operate an uncertain conditions and this outlook does not consider any further business through ups disruptions caused by the co that 19 pandemic.
We are projecting sales to be in the $8.3 billion to $8.4 billion range with 2020 earnings per share targeted in the range of $3 in 50 cents to $3.75. We expect capital expenditures to be approximately $225 million in free cash flow to be in the 202.
Hundred $50 million range in terms of our third and fourth quarter results. We project third quarter results to be modestly above 202019 levels due to a strong third quarter order board, we expect fourth quarter results to be modestly below the fourth quarter of 2019 as we experienced.
The impact of softer market conditions targeted reductions in dealer inventory levels and accelerated engineering expenses.
That concludes our remarks, so operator, we're ready to take questions.
At this time I would like to remind everyone that if he would like to ask your question to press Star one on your telephone keypad now we ask that you. Please limit yourself to one question. So that we can get to everyone in the queue. Please hold.
The first question will come from Jamie Cook with Credit Suisse. Please go ahead.
Hi, good morning, and nice quarter I.
I guess just the first question it sounds like the order book looks pretty good could you just provide color on how much is oppenheim must much of it is not just because you can.
Deliver tractors versus actual orders and then my second question.
I'm just trying to.
South America turned a profit in the quarter, I guess, which was nice to see that ahead of where are you thought.
And how do we think about margins in that business as we exit the year in going forward. Thank you.
Good morning, Jamie good equal to answer your question on.
Giving some color on weight Auto book, and then Andy will talk about South America. So our our order board is up significantly as we said, especially in Europe and South America.
And I think we'll leave it at significantly for today Jamie.
But thats you have any color today.
Hey form.
We have let me just say we have good visibility through the third quarter.
Okay and is it new owners and just you can deliver tractors like Im just trying to understand the fundamentals better.
Yes, so we've got in at we've got strong order activity in both regions and so there is a part of it that.
We were shut down for the entire month and couldn't produced we weren't able to make all of that backup. So there is it's a mixture of both but some of it is.
Strong retail activity.
Okay. Thank you and then just the color on South America. Please.
Jamie Second South America like we had.
A stronger second quarter than we had expected we had.
Much stronger mix of sales, there's some good seasonal products that we sold in the first half of the year, particularly our plan or business. We had very strong sales in Argentina, and the second quarter, which has helped our mix as well. So those are those the certainly helped us in the second quarter as we look into.
At the back half.
Our revenues are going to be higher than last year, excluding exchange, taking exchange out of them out of the mix and we'll expect to be significantly better in terms of profitability. Overall, we're looking for our profits in the second half to be roughly breakeven compared to come.
Fair to pretty sizable losses, a year ago. So we're making progress in South America, we're doing a number of things in terms of cutting cost were.
Localizing more of our products in order to reduce the material cost to one of the challenges that we're facing is the weakening of the real and so all are important content on our equipment is causing the cost to go up so we've added some additional pricing in the second half we also were.
Doubling our efforts to localize more of more of the content of the of the products. So.
We're also working very hard and selling.
Complimentary product search or Graham protein business is up and profitability is up there I mentioned, the planar business, that's growing quite well and we do well in precision planting as well down in South America. So lot of a good things that are helping improve our our results in South America.
Okay I appreciate the color. Thank you.
The next question will come from Stephen Volkmann with Jefferies. Please go ahead.
Hi, good morning, everybody.
Running Steven.
Im wondering if we can talk a little bit about your outlook on market share and you have various new programs products that are being launched I mean, just kind of update us on how that's working and how much market share your kind of expecting and in the second half.
We're very pleased with the first half already we're gaining market share in most of our primary markets and it's showing up in our new product investment areas. So.
Planters sales high horsepower tractor sales combined sales so as the as we become more of a full line offering as we focus more on precision agriculture.
Those are the areas, where we're making the biggest gains as both a product story as well as the strengthening of our distribution network and the confidence that the marketplace has in in the total experienced getting so so far we're very pleased with market should we expect that things news for the rest of the year.
And how about the sent rollout in North America.
Going well above expectation.
Going well.
We don't talk too much about it you know we want to be.
Successful, but we also don't one tool.
FDA too much attention.
Isn't planting and precision planting is doing well.
It continues to grow and so although that's not a traditional market share story. If you think about it in terms of market share of.
Planters being updated either through new or a retrofit we continue to grow that business strongly and it had a fantastic first half of the year.
In fact, it beat expectations.
Thank you.
The next question will come from Kwitny closeness with Morgan Stanley. Please go ahead.
Hi, guys.
Just.
Kevin low horsepower growth.
Offset by common in North America, just remind us.
On the horsepower is for you versus high horsepower and is this kind of a one quarter.
Non or have you seen those low course power trends.
Continue.
Yes through the quarter and into the third quarter.
Yes.
So low horsepower and large horsepower actually moving in opposite directions right now in North America. It's a it's a very large market 150 horsepower and up is what we consider large horsepower high horsepower and and that's the professional producers segment, largely then the lower spars a bit of a mix big farms, though by small tractors. So there's some of that.
Segment that goes to the large farms, but additionally, there are lots of other segments that.
By the low horsepower.
Landscapers hobby farmers.
Who have a job in the city, but they have a small operation going on horse farmers things like that.
And so what we've seen as during Covidien a lot of people are getting the idea that I've got a project or an idea or something like that and so we're seeing an uptick in demand it's actually stronger than we originally expected from these non professional producers and so that's been a pleasant surprise we expect.
With that it may moderate overtime that it's perhaps a more seasonal thing based on.
Situation, where everybody's more at home than they were in the past. So so we believe it's more of a short short term uptick.
Okay.
Yes.
Earlier.
But it seems like your outlook for Brazil is score.
Much more or I think how much is farmers are being much more cautious approach to equipment purchases. So.
Can you just kind of talk bar scene.
Drop off in order rates in Brazil relative to the strength you saw in the first and second quarter.
Basis.
And.
Maybe a little bit of a framework for how to think about margin.
Let's do surprise to the item.
It's just to make sure is clear what's happening and South America. If you look at retail activity in Brazil in the first half of the year actually the retail activity for the industry up it's up about five or 6%. So.
And it's actually getting getting better throughout the throughout the first half of the year.
I think the comment that we're making are still valid that.
Farmers are being fairly cautious because if you look relative to their income levels. There should be much more significant investment right now, but we're seeing a little bit of that turn and little more activity in Brazil.
The other factor that we always talk about look at is what's happening on the financing front and the phenomenally financing programs.
By the BFDS are now for the.
Your that runs June July one to June 30, and those programs are relatively modest I would say modestly improved over what we had a year ago. The interest rate on the subsidized financing is down about one one point and the availability of financing looks.
Pretty good so from that financing standpoint, it's relatively positive.
Farm farm incomes going well, so I think we're expecting to see things moderately trend up there and Argentina as we've talked about we saw significant.
Sales in the first half as farmers.
Tried to turn their their cash into hard assets and so we saw a significant investment there. We don't expect that to continue we think they're trying to get ahead of any peso devaluation that could occur and then the real declined in the market is in markets outside of Argentina, and Brazil. So.
Markets like Peru, Chile.
Third way all those markets are down about half that's about half of what it was a year ago. So and we don't expect much recovery in the second half. So most of the decline you see in the South America total numbers are about with as regard to these other south American markets, and we and we see the Brazilian market state.
Realizing and continuing to be no.
I think probably a little better than last year for the for the rest of the year.
Thank you.
The next question will come from Ross Gilardi with Bank of America. Please go ahead.
Yeah. Thanks, good morning, guys.
Okay.
I'm, sorry, I jumped on late non sorry, if you covered you this but the margin improvement that youre seeing in North America.
Could you talk about how GSI is or is not contributing to that and what are your margin expectations for.
Hi, going forward is obviously, they got hit pretty hard to last candidly areas and I'm just wondering if.
Youre seeing some.
Mean, reversion, there that might be helping out.
What we're seeing as as we mentioned on our comments, we're seeing the revenue be down in our grain in protein business is down in the second quarter, the about 15% down in the first quarter as well so.
Even with that our margins are up our margins were up significantly in the second quarter and Grand protein, we admittedly had a week margin quarter a year ago. So this was a kind of recovery back to what we expect.
To be more normal levels. So good work by our teams there to too.
Turn that back around for the for the rest of the year, we're really seeing a week weak revenue. So our revenue we down but we'll continue to improve on margins. So our focus with the granite protein business has been cost reduction we've done a number of a footprint.
Rationalizations that are that are ongoing.
And were Rightsizing, the business and really focusing on our most profitable areas of that business. So we expect to continue to improve profitability in the grand protein business.
This year and next year.
So when you think about.
Sort of what normalized margins are for.
You know all on site and I think when you bought that North America Greene story.
The margin remember correctly were somewhere in the mid teens and then it feels like they drop well into the single digits last few years.
Are there any reason you can't get back to.
Where are you were at least get back to like a low double digit level over the next several years or has something changed dramatically in the market that would.
Andrew you from doing that.
Yes, I think I think that's what we're targeting the due to get those margins back up we did.
That original purchase of GSI had those very high margins as you pointed out.
Some of the.
Other businesses that we have we put in that grain and protein sector like in the AG business. Some of our European business that we bought and the grain sector net didnt have that same level of margins, but theyre all relatively good margins above echoes average and so we believe that grain protein.
Should be an above average margin business.
It's really hurt the margins has been the reduction in the grain side of the business, particularly in North America, that's where most of that profitability was and really significantly high margins and that that part of the market has decline kind of in the same line with high horsepower tractors income.
Lines in North America, So we're seeing significant reduction in that that demand level and as that I think recovers, we'll get that mix back and the margins will recover. So you do you feel like what you will see in the future. Yeah, we're doing a lot of things structurally and strategically with that business.
And I think with some market recovery will get those margins Becca.
Okay got it and then can you comment at all on normalized margins for South America through the cycle, obviously you've seen.
So a lot of improvement this quarter and.
Sounding like your you think will be somewhere around breakeven this year or in the back half of the year, but what about longer term where where those.
Margins being right rather drilling a number out there just curious how and how and when do you think you get there.
We have Oh, we have a margin improvement a outlook for South America that we're working towards.
It's a I would say progressive year over year margin improvements, what we're looking for its not going to come and one period, but we think we've got the capabilities of continuing to move that those margins back up.
Closer to the company average.
Is it a new product or product density issue and just having more higher margin products or is it.
Is it a cost an execution issue in order to get there Im just trying to get a sense as to how much of it you feel like is really under your control.
Yes, I think the challenge we have is in terms of the.
I think our product costs and.
As I mentioned, we've been challenged by the weakening of the currency and when we brought in a lot of the new.
New products into South America, and new technology that was at a much higher imported content. So we've been somewhat being as we improve the cost structure, we've been taking a step back as the currency impacts the imported content. So thats why our focus is on localization of more of the key.
Content and the other other thing that we're focused on is a broader full line portfolio sales so growth and our non tractor business in South America is extremely important and making good progress and selling planners are precision planting business.
We are doing much better and combines this year so all of those.
Will contribute to improvement in the overall margin profile of the South American business.
Okay. Thanks.
The next question will come from.
Okay with BMO. Please go ahead.
I appreciate you guys taking my question.
So I am I want to ask the same sorts of questions about can you give us a sense like over the next three years, what the focus do you feel like the sort of the product transition you don't have more high horsepower and better gross precision planting and all those kinds of things is that largely in place or are there a lot more.
Thats the take to be able to drive the structural margins of the company higher over the next three to five years.
This is a question Eric right very good so we've got a lot of foundational elements in place.
The the work we've done an ideal combine that precision planting business create foundational work, we've got a strong sprayer business strong commercial hey business. So theres a lot of things that are good platform elements, but we've got a lot to build on top of that and so we've got a whole portfolio strategy in terms of products to continue to bring up more and more smart machines on the product.
Side. In addition to that impair lower were working extensively one of our biggest investments is on digital investments to be able to provide the interaction with our dealers and interaction with our customers in a more of a digital versus analog format, and we think that thats the way that customers want to consume information in the future and so we're investing heavily in that that's kind of an experience.
How you research our company, how you select a product how you get service by that product I guess supported how the connected machine interaction works all of that and so there is a product element. There is a digital interaction element and then there's a distribution element. We've we've got a fair bit of work.
Ongoing still twos to strengthen our strong dealers and then also and then also feeling some open territory in each of our regions. We still have some uncovered territory that that will provide growth and we're looking at.
Extending existing dealers or trying a new approaches in those uncovered territories. So we've got we've got to.
Several opportunities for further growth and we've got our organization focused on those.
And then as we go through these sort of very stressful times for everybody is there anything that sort of comes up in terms of Pls product line simplification parts of the company that maybe don't bid or need to be deemphasized as we go forward.
Anything significant enough to talk about.
Okay.
Nothing really to talk about at this stage, we are happy with our portfolio. We've made some acquisitions over the last several years. So we feel like we filled in some key gaps.
And we're happy with the portfolio that we have and our focus right now as an improving the performance of that portfolio and both product and and the digital element of it and then there and our distribution partners to support it.
Thats great. Thank you so much.
The next question will come from Tom Simon attached with Jpmorgan. Please go ahead.
Thanks. Good morning, this is Tom on San diagnosis.
Morning.
Morning, expecting 2020 production hours down 8%.
You comment on any regional variations that plan in the back half units at some catch up of must production UGC that lets say just curious if you have made any changes from the shutdowns that would impact.
Three production.
Yes, I have it.
Sure, Yes, Tom the.
If you look at where where we are and where we're going.
In terms of the biggest.
The biggest changes not surprisingly in in the second quarter with a shutdowns we add.
Yes, the most significant.
In Europe was down 22 roughly percent in South America were done.
And then in the mid Thirtys, so going into the back half of the year than we expect.
Europe to be about flat, but it's going to be up up in the third quarter and then down similarly in the fourth one of the things that we have going on as we get closer as we get through the back half to here as we have some more work to do in terms of our.
Dealer inventories, we expect for the full year to take about a $150 million out of our dealer inventories and a lot of that is going to happen in the fourth quarter. So if you look at the shape of our earnings.
It will be will reflect the fact that will be up.
In Europe in the third quarter and in South America in terms of our production and then Europe will be down.
Significantly in in the fourth quarter, and South America will be kind of flattish. So so kind of unusual pattern, but that's what we're looking at.
Thanks, Greg that's helpful.
Maybe you could just discussed farmer sentiment in Europe, the fundamentals that pretty stable, but how does that way up against and expect decline in direct payments you budget 320 27.
Thank you.
You know interestingly if you one of the parameters, we look at a number of indicators in each region and one of the barometers, we watches the seem index and that turned around nicely. It was had dropped significantly in March and April it's turned around nicely now and that matches, what we're hearing on the ground through our dealers and customers in that Theres more.
Positive sentiment.
The.
These there's more clarity on what that farm.
Package will look like.
In Europe going forward and it looks to be more stable. So I think that the farmers feel like the road is Morse more clear they've got a relatively good harvest coming and so they're sentiment is up.
And we're seeing that an order.
Bicep us it on.
The next question will come from Larry Demaria with William Blair. Please go ahead.
Hi, good morning.
Thanks.
Hey, Larry.
Hey, guys.
You talked about North America.
And obviously noted mix can cost control, obviously helped margins, but they're very strong in first half in general.
I'm just trying to understand if the business is structurally change with your offerings in precision planting.
And we can move towards assumption around double digit operating margins at least on the annual basis moving forward.
This was a little bit anomaly, because you're maybe ramped new production of new products like the contractor et cetera in North America or.
Just to understand if weve reached a new plateau at double digits at least on annual basis or if this is a little bit of an anomaly in the first half.
But I'd say, Larry the first half.
Much stronger mix for North America with that precision planting business with.
Well, we've seen in high horsepower sales that grain and protein business is also stronger in the first half so theres clearly a seasonal.
Change between the first half in the second half and then in the second half as we've talked about we're lowering some of our revenues and focusing on dealer inventory reduction but.
I will let Eric comment about what we're doing in terms of overall margin improvement.
In North America, I think I think we think we're still making progress there.
Yes, there's there's certainly theres the seasonal aspect, but there's a sustainable structural changes happening inside in North America are our dealer organization is continues to get stronger there's been a lot of focus on that and then our product mix is getting more balanced and so we've we've invested heavily in our combined.
Business Weve has invested heavily in planters, we've seen strong sales and planter large planter sales in South America that we're now going to be launching.
Just launched recently in North America and.
We've always had great commercial hey business and strong sprayer business.
So.
The platform of distribution plus products is we feel like it's a solidly moving forward with a strong focus on precision AG.
We are getting more and more of our machines connected being able to remotely interact with those machines.
Proactively we've had something like 600 proactive interventions, where we identified an issue before the customer or dealer even knew that the there was a problem and we were able to prevent that issue before it occurred.
By our remote monitoring centers. So that's the focus for the region I think it's well on track.
Thats great. Thank you and then secondly, obviously production has been down, but we still need dealer reductions curious why there wasn't a sell out at the retail level.
Given that production was down and that you plan to produce more in Threeq is that where are these inventory issues.
You just mentioned, obviously North America, but maybe just flush out a little bit where the inventory issues R&D and how confident you are that.
They are cleared up for normal production in 2021.
Larry I wouldn't call them in inventory issues I mean, I think you know in terms of where we are in terms of dealer inventory, we feel like we're still we're in pretty good shape right now.
But as we target to be more effective more efficient and more profitable in the future. We think if theres an opportunity to get our dealer inventories lower that that really helps us from a production standpoint pricing standpoint.
And so that's really the driver of these dealer inventory reductions as more of a promote efficiency standpoint, if you look year over year in the second quarter or dealer inventories lower and all of our regions compared to a year ago. So again, I wouldnt say that we have any issues.
In Europe.
Dealer inventory did come down.
As you saw the European market was down over 20% in the in the second quarter and a lot of that was due to product availability as well so.
Retail market was down and our production levels and wholesale activities were down as well.
Okay sounds like a bit more strategic on your guys part. Thank you and good luck to share.
Yes, you got a lot of focus on retail not wholesale got a lot of focus on building to demand and so all of those are the tools to get the efficiency that Andy is talking about.
Thank you.
The next question will come from Jami Rubin with Goldman Sachs. Please go ahead.
Hi, good morning, everyone nice to see the progress on precision planting playing out so well I'm wondering if you could update us on your sales expectations for the full year and it sounds like you're getting a lot of traction South America awful basis zero I think before you bought the business. So just update us on that portions.
Specifically and.
Also if you will mine just touch on.
What proportion of your installed base at this point.
Do you estimate has pursued planting.
So at this point.
Yeah, we're looking for about a 20% improvement in our precision planting.
Revenues year over year.
That's pretty consistent across North America, and South America.
And then we have very high percentage increases off of a very low base in Europe. So Europe. We're just getting started there so theres a.
A big increase there and then Eric you talk about the installed base. So we've got a couple of things three prong growth strategy with that business number one is to expand the innovation from continuing to focus on planting but expand it to be on planting and cover the crop cycle, especially another precision AG elements of.
Of the crop cycle. So that's number one is expanding innovation number two is expanding geography coverage and strengthening our we had a very strong North America business from the beginning we want to have equally strong business in the rest of the world where there is professional producers doing row crop plantings. So Europe is our primary target now we've we've.
We feel like we're well on track in South America, and our big growth opportunities in Europe as well as some parts of.
Asia and then the third dimension is leveraging that retrofit channel weve.
Retrofit is something that is somewhat difficult to do takes a lot of expertise and we've got some very passionate highly trained individuals in that channel and the combination of our dealers and our our field people, we want to make the most of that channel. So we think that theres a lot of upside with this business. When you when you consider all those.
Gross regions, especially when you consider that our installed base. We believe is something less than it's still high single digits in terms of the installed base penetration.
Okay. Thank you and then in South America, you folks at the Analyst day spoke about the need to really get us simplified product lineup out on the field at a lower cost point I'm wondering if you could update us on what are the key milestones on some of your higher volume models.
And making that transition.
Indeed from time, what's there would be helpful.
In our big issue. There was we came out with a new tier three tractor model and.
It's very high performing high quality and so on but it didnt address the full market and so what our activity has been two pronged one is to bring back into the market.
Our.
More volume oriented line, we call it our heritage models.
For a lower price point customer and we've got that done now that's back in the marketplace and doing well and secondly, the activities Andy talked about as localizing more component that production to get our cost base down when we first launch the product due to our focus on quality.
And performance, we had a little higher imported content than than our ultimate intention was.
We wanted to start off on the right foot. It came at a price of a little higher cost base. So we've been now that we feel comfortable with a product performance. We're working our cost out of the componentry. So those are the two major activities. We've got the other activities of of growing other products, but but thats the big shift over the last couple of quarters.
And Eric can you talk about the magnitude of margin improvement that you anticipate from getting the local cost point as opposed to what you pay now does that get your your chunk of the way there towards.
Four or 5% margins like you've had historically or will you require more work there.
It's going to we've had a lot of work in front of us in South America. So the localization is certainly one element of it but we need to continue to balance. The this sales performance of our overall portfolio, we've got high market share and tractors, we need to get higher market share in other products, we're seeing that market share gain happening.
In combined sprayers and planters.
That needs to continue and then and then thirdly, we need to continue to work on our dealers performance.
In many years, we are very strong dealers, we've got our own company store in the Mato Grosso region, the big growth area.
But we need to continue to strengthen our dealers as well.
There's pockets where.
Customers don't have the confidence we need them to have and so we need to work on that.
Appreciate it thank you.
The final question will come from Stanley Elliott with Stifel. Please go ahead.
Thank you guys fitting me in New York actually that was question I wanted to ask you guys about the company store down in Brazil does experience. There I mean is that what you're seeing in the margins for one and then to does it the experience that you've had there is that something you want to.
I would consider to expand out more broadly down there just given how the result in improved.
When it comes to.
Benchmarking, we compare all allow us sites on our factories on our brands globally on a systematic stocks at the end of regular basis and.
Continuous improvement process as Gavin T that learnings on buying.
Legion all one brand of uncontrolled. We also used if it makes sense in the other areas. So thats the answer to your second question, Yes, we look into that and yes, if there's something meaningful we can use outside puzzle we will do so.
First question.
I think it is interesting.
So im just in closing I would like to tell you that we have just hurt being informed about the passing of our pharma direct to home and Kane.
Our sympathies are with the family the odds of would like to make sure that to understand he was a very constructive direct off on many years any out me personally to understand fee American contract in general and the southern Couched in Georgia and Atlanta in special.
I just wanted to.
Mentioned that to you because it has just been published and it just happened today. Thank you very much.
Thank you at this time I would like to turn the conference over to Greg Peterson for any closing comments.
Thanks, and thanks to all the participants we appreciate your interest in Agco and feel free to.
Get back in touch with US today, if you have follow up questions, thanks, and everyone be safe.
Ladies and gentlemen, thank you for participating in today's conference call you may now disconnect.
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