Q3 2020 AGCO Corp Earnings Call
[music].
Ladies and gentlemen, thank you for it.
Hi, and welcome to come 2023rd quarter earnings release Conference call.
All lines are currently in a listen only mode.
After the speakers remarks, there will be a question and answer session. If you would like to ask a question. That's fine you may do so by pressing star and the number one on your telephone keypad. As a reminder, this conference is being recorded.
Now my pleasure to hand, the conference over to Mr., Greg Peterson Agco head of Investor Relations. Please go ahead Sir.
Thanks, Nicole and good morning to everyone and thanks for joining us on the call today.
This morning, we'll refer to a slide presentation, that's posted on our website at www Dot Corp. dot com. The non-GAAP measures used in the slide presentation are reconciled to GAAP measures in the appendix of that presentation. We will make forward looking statements this morning, including demand product development and capital.
Expenditure plans and the timing of those plans aquas position expansion and modernization plans and our expectations with respect to the costs and benefits of those plans and timing of those benefits will also discuss price levels earnings cash flow tax rates and other financial metrics and we.
We wish to caution that these are.
These statements are predictions and that actual results may differ materially.
We refer you to the periodic reports that we file from time to time with the Securities and Exchange Commission, including the company's form 10-K for the year ended December 31, 2019, and the form 10-Q for the quarter ended June Thirtyth 2020. These documents discuss 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 19, including plant closings workforce availability supply chain disruption in product demand.
Whether commodity prices and changes in product demand, we disclaim any obligation to update any forward looking statements, except as required by law will have a replay of this call later today on our corporate website.
On the call with me. This morning are Martin Richenhagen, our chairman President and Chief Executive Officer, Eric can sodium our chief operating officer, and our future Chairman and CEO, starting in 2021, and Andy Beck, Our Chief Financial Officer, and with that Eric. Please go ahead.
Very good thank you, Greg and good morning.
Appreciate your interest in Agco and your participation on the call today, we'll start on slide three that provides the financial summary.
Our third quarter results demonstrated solid execution as we manage a difficult supply chain ramped up production in Europe, and Brazil, and delivered a robust sales and income growth across all four regions.
Because of the cobot related factory shutdowns in the second quarter, we started the third quarter with a significant backlog.
Our third quarter production up it was higher than anticipated, which enables us to increase sales by approximately 20% in the quarter our.
Our strong sales also contributed to our inventory reduction goals, resulting inventories being down $220 million lower than compared to September 2019, both on a constant currency basis.
In addition, despite the increase quarter three delivery performance, our order board remains solid heading into the fourth quarter. This.
This exceptional operating performance translated into 390 basis points of adjusted margin improvement and third quarter adjusted earnings per share of $2.09.
The focus on working capital resulted in strong free cash flow in the third quarter and puts us in a very good position from a liquidity perspective.
Strong customer response to our improved product lineup is also showing up in our retail sales performance in 2020, and we plan to keep investing in new technology.
Our solid financial position is enabling us to maintain our planned investments in premium technology.
Yes, so smart farming solutions and enhanced digital capabilities.
Products like our smart planters smart novel Sprayers and connected premium tractor products are providing productivity enhancement options for our customers and new margin rich sales opportunities Franco.
On slide four we detailed the industry unit retail sales level by region for the first nine months of 2020.
As the COVID-19 pandemic unfolded earlier this year the consumption of green for food fuel and livestock was negatively impacted by the global economic constraints.
During the third quarter grain consumption began recovering consistent with the improved economic activities and increased grain exports to China.
Following the reduced forecast for ending grain inventories soft commodity prices have risen in the third quarter, which is positive for Pharmaco economics.
Consequently, our forecast of global industry demand for farm equipment has improved and is now expected to be flat in 2020 with the offsetting differences across the regions north.
North American industry retail sales of tractors increased in the first nine months of 2020 compared to the same period in 2019.
Growth in the sales of low horsepower tractors was partially offset by softer demand for high horsepower tractors and combines.
The fleet age for large equipment remains extended as replacement demand continues to be deferred in the north American market.
Industry retail sales in Western Europe decreased in the first nine months of 2020, due largely to COVID-19 related production constraints.
Market demand in the third quarter increased over the prior year, but only partially offset significant declines in demand experienced in the first half.
For the first nine months industry sales were the weakest in the UK, France and Spain.
And were partially offset by growth in Germany, which has benefited from tax incentives implemented for the year 2020.
Dry weather across much of western Europe negatively impact wheat production. However.
However, strong grain export demand and supportive wheat prices provided some offsets.
European dairy and livestock fundamentals of stabilized after weakening earlier in the year.
Industry retail sales in South America increased during the first nine months of 2020 with growth in Brazil, and Argentina, partially offset by weaker demand in the smaller South American markets.
Strong crop production in Brazil, and Argentina, as well as favorable exchange rates are supporting positive economics.
It was replacing their age fleet following years of depressed demand.
Due to economic weakness and challenging political environments.
As we communicated last quarter, our focus for 2020 has been to address the needs of all of our key stakeholders during the COVID-19 crisis.
This perspective is guided our actions since the outbreak.
First and foremost we established protocols for all of our facilities focusing on employee health and safety. These.
These activities have served us well and have been a critical factor in keeping our facilities operating.
However, our challenges in this area and not behind us.
As an example last week, we closed our production facility in Heston, Kansas, where we are making harvesting equipment, primarily for the North American market.
We currently expect our operations will be limited during the month of November.
However, our ability to restart production and our subsequent ramp up plan and Heston is uncertain and will depend on the availability of our workforce.
Finally, we expect a modest impact of fourth quarter results.
However, the actual impact will be dependent on the length and severity of the shutdown and the resulting lost production.
Similar risks remain for both our operations and our suppliers operations. So we will stay diligent to attempt to mitigate these issues to the extent possible.
We're very proud of the way our employees are going above and beyond to keep farmers and dealers operating through these difficult circumstances.
Innovative approaches to connecting with dealers and customers through digital tools have been a positive byproduct that we can leverage when we return to normal.
In addition, our focus on working capital and cost management has put us in a strong liquidity position heading into the fourth quarter.
[noise] echoes 2020 schedule for factory production hours is shown on slide six.
As we discussed last quarter, our manufacturing operations have been significantly impacted by the crisis, particularly in Europe and South America.
Our supply chain and production teams have done a great job securing parts to allow us to restart production in our factories and we will make great efforts to keep them running.
Our recovery from cope with 19, such shutdown has been much faster than expected.
Resulting in our third quarter results being better than expected as we made progress catching up on our strong order board.
Total company production hours were up approximately 10% for the third quarter versus the same period in 2019.
Much of the growth is in Europe, and Brazil. As these factors are covered from shutdowns during the second quarter.
Our full year production plans for 2020 also factor in targeted reductions in both company and dealer inventories.
Weve made good progress on both fronts through the first nine months of the year.
Company inventories are lower than September 2019, and dealer inventories are below their prior levels in most of the categories in all of our regions.
Turning to our order Board our September 2020 order board for tractors remains significantly higher in North America, Europe, and South America compared to a year ago.
Before we hand over the presentation, Andy I'd like to take a few minutes to recognize Martin Richenhagen and his contributions to eggo.
Since we last spoke on our second quarter earnings call Martin has announced his retirement from Echo effective December 30, Onest 2020.
Under his 16 years of leadership Martin has made a lasting impact on agco broader farm industry and communities, where we operate.
During Martin's tenure equity evolved into an integrated global manufacturer of high Tech sustainable agricultural solutions that serves our farmer customers all around the world.
Equity span and expanded its product portfolio entering into new markets consolidated product platforms and significantly modernized facilities.
Driven by strong financial performance under his direction Echo improved to an investment grade credit rating, well initiating a dividend and a substantial share repurchase program.
Martin you've been a model of corporate leadership and courageous moves in the industry.
We are grateful your for your unwavering dedication vision and leadership.
Personally I have also benefited greatly from your Mentorship and guidance.
We wish you well as you embark on your next adventure Martin Best wishes.
Thank you and they cause those right kind words and good morning to those of you on the call with US This morning.
This is my 16 core earnings call in my last call is Jim and then.
Without getting too then.
Let me just say that my great pleasure and privilege to solve alongside my ankle colleagues for the past 16 years that dedication integrity.
Great and commitment to our customers help make echostar generics all generic company and I'm proud to I pod it seems to be part of our culture.
I also want to thank you and thank our investors.
Well Youre support it has been an honor to lead please guide echoing what they do today I have amended confidence in echo in April yet and again, Andy and elevate the belief that ankle, but they are yet to profit while that smokers that.
I thought we had and Andy Please go ahead.
Hey healthy.
Thank you Martin and good morning to everyone. I'd also like to thank you Martin for your Great leadership over the past 16 years, it's truly been an honor to work with you and to be part of your team during such an important period in echo's history.
Now, let's go back to the quarter I'm going to start on slide seven which looks at AG coast Regional net sales performance for the third quarter and first nine months of 2020.
And 'cause net sales were up about 20% compared to the third quarter of 2019, excluding the negative impact of currency translation. The Europe Middle East segment reported an increase in net sales of approximately 19% excluding positive impact of currency compared to the third quarter of 2019.
Sales growth was driven primarily by higher rates of production in our European facilities as they recovered from the Cove it shut down, especially at our ultra plant, which had shifted its maintenance work into the second quarter to avoid its normal July shutdown.
Growth occurred across most of the European markets with most significant increases in Germany.
Sales in North America increased approximately 9%, excluding unfavorable currency translation compared to the levels experienced in the third quarter of 2019 increased sales of high horsepower tractors replacement parts and precision planting equipment accounted for most of the growth exited third quarter net sales and sales.
South America increased approximately 48% compared to the third quarter of 2019, excluding negative currency translation impact midway.
Mid range and high horsepower tractors as well as our new momentum planters produced most of the increase sales growth was significant in Brazil and Argentina.
Net sales in our Asia Pacific Africa segment increased about 21% in the third quarter 2020, compared to 2019, excluding the negative impact of currency translation strong growth in China, and Australia was partially offset by continued weakness in Africa.
Consolidated replacement parts sales were approximately $391 million for the third quarter of 2020, and we're up about 7% compared to the same period in 2019, excluding the positive impact of currency translation.
Moving to slide eight we examine sales agco sales and margin performance echoes adjusted operating margins improved by approximately 390 basis points in the third quarter of 2020 compared to the same period last year.
Margins were positively impacted by primarily by higher levels of net sales and production cost control initiatives.
As well as favorable material costs also contributed to the higher margin experienced in the third quarter.
The Europe Middle East segment reported an increase of $65.5 million in operating income compared to the desert. The third quarter of 2019, resulting primarily from significantly higher sales and production volumes as well as a richer mix, partially offset by higher engineering expenses.
North American operating income increased approximately $25.8 million in third quarter compared to the third quarter of 2019 as operating margins reached 10% increase sales of high horsepower tractors and replacement parts produced a positive sales mix and.
In addition, despite lower sales improved margins in the grain and protein business contributed to the margin expansion.
Our South American segment reported operating margins of 6.1 person in the third quarter as operating income improved $22.3 million from the same period in 2019 higher.
Higher sales and improved sales mix include.
Including strong seasonal planner sales and reduced expenses all contributed to the improvement.
In our Asia Pacific Africa segment operating margins expanded by 400 basis points to 10.1% higher sales and improved sales mix and expense control efforts contributed to the improvement.
Slide nine details GSI or a grain and protein results by region and by product, our grain and protein sales decreased by about 12% excluding negative currency translation impacts in the first nine months of 2020 compared to 2019.
Globally grain and seat equipment declined approximately 17% with our Europe Middle East and Asia Pacific Africa regions, showing the largest decline.
In Europe, we have 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 nine months of 2020 due to declines in the North America and European region.
Firstly offset by growth in the South America, and Asia Pacific Africa region. The.
The protein production segment has been significantly impacted by the pandemic, particularly in North America were protein processing capacity has been challenged.
In China protein producers are beginning to recover from Asian, swine fever, and have started to rebuild the production capabilities our order flow for production.
Or protein production equipment in the Asia Pacific Africa region has improved throughout the last nine months.
Slide 10 addresses AG, because liquidity and free cash flow for the third quarter and first nine months of 2020 starting.
Starting with free cash flow, which represents cash provided by or used in operating activities less capital expenditures, our strong sales and earnings performance. In addition to our working capital discipline contributed to strong free cash flow in the third quarter as a result of our improve working capital position our net debt at the.
End of September 2020 was approximately $323 million below September 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 repurchases in the first quarter and suspended future repurchases during the second quarter and third quarter given the uncertainty we will.
Continue to evaluate operating condition determine the proper time to reinstate our share repurchase program.
Other details for the quarter include losses on sales receivables associated with our receivable financing facilities, which are included in other expense net for approximately $6.1 million for the quarter compared to $10.6 million in the same period of 2019.
Our updated 2020 outlook for the three major regional markets is captured on slide 11, we.
We currently expect higher retail industry demand across north and South America, mostly offset by lower demand in western Europe.
In North America. The U.S.P.S.U.S.D.A. is projecting higher 2020 farm income in the U.S., primarily due to additional subsidy payment we.
We protect north American industry unit tractor sales to be up about 9% and 2020 compared to 2019. This.
This increase is due solely to higher sales of low horsepower tractors. Despite increases in the third quarter industry sales of high horsepower tractors are expected to be lower for the full year compared to 2019.
He you farm economics are expected to remain supportive in 2020 lower yields are expected to be offset by higher commodity prices milk prices are down from 2019 levels that economics for dairy producers are healthy although industry demand is expected to be more stable in the fourth quarter, we will not provide an offset to the signal.
Can't declines experienced in the first half of the year Accordingly industry demand for the full year 2020 is expected to be lower than 2019.
Following two years of improving farm income and low levels of industry demand, we expect industry sales in Brazil, and Argentina to increase as farmers or replace their age fleet. The smaller markets of South America are expected to be weaker due to pandemic impacts into their economy in total industry demand in South America is.
Expected to improve from 2019 levels.
On slide 12, we highlight the assumptions underlying our 2020 outlook our priorities for 2020 continue to be maintaining a safe work working environment for our employees and providing proactive support to our customers and our dealers. We also continue to manage our costs while preserving our.
<unk> expense in digital technology, and smart farming product development.
Our 2020 forecast assumes relatively flat global industry demand, but no additional impact from the pandemic in the fourth quarter.
Our sales plan includes market share improvement price increases of 1% to 1.5% and targeted dealer inventory reduction.
At current exchange rates, we expect currency translation to negatively impact sales by about 2%.
Engineering expenses are expected to be relatively flat compared to 2019 on a constant currency basis at about 3.9% of sales implying year over year increases to the engineering expense in the fourth quarter.
Operating margins are expected to be up 50% to 60 basis points from 2019 levels with improved product mix and favorable pricing.
Net of material costs, partially offset by the negative impact of lower production volumes in the first half of the year, we are targeting an effective tax rate ranging from 34% to 36% for 2020 interest and other expense is expected to be modestly lower compared to 2019.
Level.
Slide 13 lists our view of selected 2020 financial goals, we continue to operate an uncertain condition and this outlook does not consider any further business disruptions caused by the COVID-19 pandemic.
We are projecting sales to be in the $8.9 billion range with 2020 earnings per share targeted at approximately $5 per share weeks.
We expect capital expenditures to be approximately $250 million and free cash flow to be in the $300 million to $350 million range.
I'll now turn the call back over to Greg.
And before we take your questions. We wanted to give you a scheduling update for our annual analyst meeting that we traditionally host in December. We're currently targeting early morning early March for that meeting and we'll be sending out a save the date in the next few weeks. So now as we turn to the QNX section and to broad.
And the participation.
During this session will ask that you limit yourselves to one question each.
And so Nicole we are ready to take questions.
At this time I would like to ask an audio question you may do so by pressing star and the number one on your telephone keypad.
Any color on your question has been answered you may lose yourself from the queue by pressing the pound Q.
One moment for the first question.
The first question will come from the line of Rasco Lardy with Bank of America.
Hey, good morning, guys.
Hi, Ross.
I would love to just get your perspective on the Americas, and I think that we straight quarters now double digit margins in North America. Finally got back to six in South America was the best in a very long time.
Have we turned the corner and do you think any.
A like a low double digit margins for North America.
And sort of mid single digit for South America.
How did you gave of what what's normalized through the cycle as we as we model, Florida over the next few years.
No.
Really crazy things happen in the world.
Ross.
Well, we have gone through some really seasonally strong orders in North America and seen a lot of improvement in South America as you pointed out it in North America.
The fourth quarter, you know is not as seasonally strong for us from a mix standpoint, and so now those margins will come down in the fourth quarter. So.
We're not going to be at that double digit level at the end of the year. However, obviously, that's our target that's where we want to get too and with some improvement in volumes.
Volumes from that on the market and what we're doing with our growth and.
Hi horsepower equipment and trying to grow our business in North America through precision planting.
And our Gram protein business recovering, we think thats, a very attainable target in terms of South America again in the fourth quarter is not as seasonally slow.
Strong of a quarter for us that the revenue down and the mix isn't as strong. So we're well, we'll see those margins come down for the full year, but we'll be solidly in the profit for the full year and that was our goal.
Getting into this year was to turn that business around and be profitable again, and we've got a lot of work to do there.
But again our goal is to get back up to corporate averages in terms of our our margins, it's going to take us some time, but with our work in terms of our cost reduction.
And the growth we're seeing in the market that will certainly help us.
Got it. Thank you and then just as a follow up can you just comment a little bit more on the retail sell through.
Your new product and.
Santen ideal Julien.
North America.
In South America, and where your margins in the Americas.
Heavily influenced at all from just pipeline fill up a lot of those new products.
Region.
No I think you know to answer your last question first I wouldn't say there was any unusual activity now in North America we.
One of the reasons, where did better than we thought we were going to do this order was we are a little cautious on.
How quickly we could ramp up production, particularly in our European plants and get the products all the way over to North America and to get those into our dealers and our customers hands and so we were actually ahead of schedule. There. So we didn't get to invoice out to customers more of our.
Hi horsepower products in the third quarter.
And then we expected so the mix was was strong in the third quarter because of that and so we'll see a little bit of an offset.
With the fourth quarter, because we're ahead of schedule there.
In terms of our retail performance of our new products, it's going quite well you know our high horsepower tractor sales are up over 20% in North America and our.
The ideal combined sales are going to be up I think they are up about 50% globally from where we were a year a year ago, So making progress in both areas and that is contributing.
Two our stronger results, particularly the high horsepower growth in North America.
Thanks, Ross operator, we're ready for the next question.
Thank you.
The next question will come from the line of and dividend with JP Morgan.
Hi, Good morning, and Martin I know, Eric said that you had flat lasting impact on AG, but I think you've left a lasting impact on all of us where we're going to mid tier.
Sense of humor for sure.
Eric My question have you is more on the North America market.
On a tractor combine side or high horsepower side as well as on the grain storage side can you talk about the fact that farmers have dutton upwards of $70 billion over the last two years and government payment we.
We would expect and demand to have a much stronger going into the end of the year on the back of.
Yes, the windfall to us that they have received and maybe into early next year.
And then on grain storage are you seeing any pickup in demand our orders are replacement storage and given the huge storms, we had particularly in Iowa earlier in the year. Thank you.
Yes, I think theres, probably two dynamics that are laying on top of one. Another one is the numbers that you see in terms of government subsidies and those are strong for sure but if you just look think back over the last six months, there's been about as high of uncertainty environment as you could imagine even with the government payments about when they were going to trigger.
And how they're going to trigger and so on.
And commodity prices were low so I think the.
The farmers have Phil had a dose of caution working through the course of the year. The Cam nation now of both strong government payments and.
Renewed strength in the commodity prices is bringing confidence back into the market and we're seeing that in our order boards. That's what we spoke to even though we've built a lot we were continuing to see strong order boards and we're working our inventory down So North America market is doing quite well same thing you asked about.
Green solutions.
There is a lot of disruption to grain storage sites, especially in the Midwest with the.
Straight line winds that happened there and so there's been a fair bit of ordering to replace those bins, both commercially and on farm.
But overall that was one of the items that was on hold during the period of uncertainty, but we're seeing more recent recovery in that market.
Thanks, Thanks again.
Thanks, and we'll move on to call, let's take our next question.
The next question will come from the line of Jamie Cook with Credit Suisse.
Hi, Good morning, and same Martin congratulations on a great job and unlike handset I Smile I always appreciate your sense of humor responds leadership.
So I guess.
Just going back to.
To the margin question again, Andy Eric or margin.
You know to see North American margins approaching sort of the double digit range for three quarters, you know historically EAME would've been the only region at high double digit margin. So.
I'm just trying to understand you know just given where your market share in North America is relative team like why those margins are there already is it just sort of precision planting and structurally can those margins you know become close there over time and what needs to happen to get them there over the long term. Thank you.
Yes, I think.
In the North American market, we're showing good progress there in terms of profitability and our presence and some of these markets like high horsepower equipment and I think that's what's the big driver for US is if we can grow in the high horsepower sector that will give us a that's where the higher margin products.
Next our.
And you've already pointed out the contributions that were getting from our precision planting business and also our grain and protein business have all contributed to this so all those are high margin.
Profit product ranges that certainly help our mix in North America and that we can grow and gain scale I think that that's a big part of the equation to get the margins up further in our North America region.
Thank you.
The next question will come from the line, that's LIBOR with RBC capital markets.
Hey, guys good morning.
Maybe just a clarification and then a question can you just clarify with in North America, whether you'll be producing expect to be producing to retail demand next year and then just you know weaving that in.
Can you just with all the product introductions and.
Precision planting and whatnot can you just talk to your incremental margin framework by region.
You're expecting into a recovery scenario. Thanks.
Yes. Thanks, Sam So we have talked a good bit this year about being really focused on our our working capital and we've made progress as you can see from our cash flow statement. So far this year.
We do plan.
To reduce dealer inventories further in.
The fourth quarter, particularly in North America, and Western Europe, So that'll impact both of those regions in terms of year over year sales growth.
In terms of.
Looking oh in terms of incremental margins than.
Now that is particularly after we get beyond the fourth quarter, but I'd say kind of as we look into next year. We've said that historically, we would expect in.
Incremental margins ranging probably from the low twentys to the upper twentys or low thirtys, depending on the region. So typically we would expect our European margins to be at the upper end of that range. So high twentys potentially.
Potentially low Thirtys North America, we would expect to be more kind of in the mid Twentys with our South America incremental margins more in the lower twentys.
So thanks, Seth and Nicole Let's go ahead and take the next.
Just a question.
The next question will come from the line of Jerry Revich with Goldman Sachs.
Hi, good morning, everyone and Mark Eric Congratulations.
Thank you.
Can we talk about South America into you mentioned that there is still work to be done from a localization process can you just quantify that for us in terms of.
What proportion of your content is localized today.
The opportunity set from here.
As you heard from others based on the margin.
It feels like you've got a lot done over the past couple of quarters, but maybe you can quantify and expand on on where you stand.
Yes, Jerry our margin improvement in South America are really driven by a lot of factors that the.
The growth that we're seeing gives us a little more leverage and scale over our our cost structure.
And we're seeing again strong.
Growth in some of the higher margin products that we have down there. Some of the you know the complimentary products like planters sprayers that really helped us as well also our grain and protein business sales are up in South America. So there's a lot of reasons why we're seeing improvement as it relates to the localism.
In addition efforts and the margins on our core products it's been.
A lot of work that to still do there.
The exchange rate weakening in Brazil has caused some further challenges and on those margins, we've been adding some pricing to try to offset some of that but it just shows that we still need some to get some more localization of the of the parts on some of those new products. So we're making some progress but.
I would say that work still got at least another year, even maybe into two years to go to to get to where we complete we want to be but we're making some progress.
And sorry can you specify they.
Number just rough ballpark on where we stand in terms of localization versus target or we had 50%, 60% just a bit of context to close.
[music].
So jerry to to sell the products in South America, we have to be 60% local so we're probably closer to 60 than we have been historically historically, we've probably been 80 or 90% local so we have.
We obviously have a ways to go to get back to where we want to be to kind of minimize that exchange.
Pack that Andy was talking about.
Thanks, Gerry Nicole Let's go ahead and take thank you next question. Please.
The next question will come from the line of Larry de Maria with William Blair.
Thanks, Good morning, I know, Chris Best wishes Tomorrow, and good luck to the team I guess, we will get to hear from Mark in December, which we always look forward to.
Curious on Europe. The fundamentals have you described and Robert reasonable wondering how much demand and maybe you can pull forward in Germany, given that packaging, there thats going to be the hurdle to growth in the medium term in other words, if we need other markets to come back to in Europe to balance the European outlook and second part of the question is if you could just.
Scott, maybe fleet age and the need for replacement in the European market.
Thank you.
It Jerry you know its interesting German market is one of the few markets in Europe, that's up this year and it.
It was up year to date about 8% or in a lot of the other markets are down and so I do think there is evidence that those tax incentives there was some VIP.
Relief and also some accelerated depreciation incentives that were put in place is those those incentives are helping the German market. So.
There is likely to be some pull forward because of that.
And so, but we're still obviously working and developing what we think is going to the market is going to be like in 2021, but likely we'd like to see some recovery from some of the other markets to offset.
Some of that pull forward in Germany, just as you described.
And then the other piece of your question was Where's the replacement demand cycle looking at.
At least that we use.
Yes, exactly age of the fleet, we see the last you know like sub Pete first of all in general that market is flatter, it's less volatile than some of the other markets and so you don't have that big spikes up in you on the big spikes down the last and a localized hi.
Hi point was in 2017 18 time period, and then there has been a bit of a softening. Since then but what that tells you is the fleet is fairly fresh we don't have the same kind of replacement gap.
Or demand gap, there that weve seen in South America, and North America, it's not as not as acute in Europe.
Thank you good luck.
Thanks, Larry.
The next question will come from the line of Chad Dillard with Bernstein.
Hi, good morning, everyone.
Thanks, Ed.
Hi, I just wanted to.
At our localization conversation in Brazil.
Just hoping you could you could provide the roadmap to get from where you are at around 60% to about 9% just from a practical standpoint, what's going to happen.
Yes can you go.
The current Merkel from about the conference.
And then just secondly on the GS site component can you really can quantify.
How high orders are versus the prior year or how should we think about that Tom should we think more materialize in 2012.
One.
Maybe I'll take a stab at this and then Andy can jump in as well if there is something to add but.
You know the want to make sure that we you heard Andy's comments I think in the weekend intended them to be or Gregs comments.
That is that for now many law requires roughly be around 60% local content and that's right. That's essentially where we are historically with some of our heritage products, we were up in the 70% to 80% range.
And that was because they had been designed locally they weren't being there wasn't a design that was being brought in from another location in localized it'd been designed for the local market. So it was naturally utilizing local suppliers with the exception of just a few components that needed to be sourced from global component global suppliers.
As we move to global platforms, we're taking global designs and then designing them once building them in multiple locations and.
And so you will see on average more of a localization effort versus designing unique products for each region.
That's what you're seeing in South America.
We don't expect to take those products up to 90% as a strategy will take them higher than they are today, maybe 70, maybe of the 80, but it won't be so intensely high because we want to maintain one of the benefits of global designs and global platforms is global volumes going through global suppliers and so we will.
Want to maintain the advantage of both cost and quality that comes along with that.
And as was mentioned earlier, it's probably a couple of years yet for us to extract all the value out of the localization of some of those tractor programs.
Great and then just a question on onshore bye.
Where did your order book today versus a year ago. If you can quantify that how should investors think of the time for those.
Those orders to convert into revenue between Q1.
Yeah, Our order board for grain and protein is it's up about 40% compared to where we were a year ago is a pretty low level.
Level a year ago.
And I would say over half of that is really for 2021. So we're seeing we're seeing a number of projects that are being deferred for.
Whatever reason because of economic issues or availability of workforce to complete the project. The number number of issues. So our revenues are going to be down here and grain and protein this year.
Because of the weak market conditions and you know we do have obviously, a better order board coming into 2021 because of these deferrals and so we'll have to obviously take that into account when we figure out what our what our planning is for 2021, but at least where we'll have a better order board entering into the.
Year.
Thank you.
The next question will come from the line of Courtney Epsilon is with Morgan Stanley.
Hi, good morning, guys.
Maybe just first on the clarification I think you mentioned that order boards are seeking.
Higher than one year ago.
But if you can just give us any more color by region.
Then.
Secondly.
Obviously, you talked about some of the seasonal mix impact on margin in the fourth quarter to.
They are fine.
Yes bye.
The year on can you just give us any other color aside from Nick if there's any other items that we should be thinking about.
Especially as it relates to that you said you know the Kansas production coming out, but you're not really taking a much other cobot disruption to teams.
They want to be impacting the fourth quarter.
Did that answer your second question first the one thing that we would point out other than mix is that we are.
Catching up a little bit on our engineering expenses in the fourth quarter. So we we got a little behind in terms of what we expected in the second quarter and we.
We still have some projects that were.
And some work that we are trying to get done by the end of the year. So our engineering expense is going to be up I think about somewhere between.
$12 million to $14 million.
In the fourth quarter year over year, so that has a fairly sizable impact on on our margins in the fourth quarter.
In terms of the order board you know that the order boards are up as we said and in almost all of our major markets.
Now what happens with the order boards, it's obviously a.
And determination of our dealers outlook in terms of where the markets are but also.
Their consent.
Ladies and gentlemen, we aren't you technical difficulty please remain on the line.
Speakers have returned to the conference.
Sorry for that interruption, we were just maybe Andy you could probably reiterate what you were saying about the order board in terms of regionally, yeah, or hopefully we're not sure where we cut off so we'll we'll cover that again in terms of our order board, they're up all over our major.
Our market significantly higher order boards are a factor of obviously, our dealers anticipation of future retail sales, but there also.
Dealers also factor in availability of production slots and so we think both of those are factors of wire order boards are are higher than where we were a year ago and North America orders are up over 20%.
In Europe, our orders are up over 50% and in South America, we actually have a new basis of how we accumulate orders, we give dealers more incentives to give us.
More forward looking visibility of their orders and so our orders are up over double where they were a year ago. So we have a good order board gives us very good visibility.
Visibility for the balance of the fourth quarter.
Great. Thank you.
The next question will come from the line of Nicole Deblase with Deutsche Bank.
Yeah. Thanks, good morning, guys.
Primary medical.
So I just wanted to ask a follow up on your commentary.
Inventory progress you made could you possibly guidance current level at one time.
Probably and I guess, maybe.
Quantify the level of underproduction that you expected profit.
In Europe relative to what you said and third quarter and then last quick question do you guys still expect a pretty in line with retail demand in 2020.
Okay.
In terms of how our dealer inventory somewhat flows throughout the year. You know look what happens is our low point and dealer inventories the end of the year and what we do is it builds seasonally.
In the first quarter, and then kind of maintain that through through the third quarter and then we bring it back down in the fourth quarter. So we're always.
Reducing dealer inventories in the fourth quarter. This year, we're going to reduce them more than we did last year and so that will give us the effect of having lower dealer inventories at the at the end of the year Thats been our target all year and as Greg discussed that will impact our fourth quarter sales of.
Little bit.
What we're right now our dealer inventories in North America, and Europe are probably about 5% below where they were a year ago at the end of September and our target for the full year is somewhere between.
Five and 10% are those markets South America, our dealer inventories are substantially below where they were a year ago and I think thats an industry wide phenomenon.
Phenomena, all all the participants in South America, rather dealer inventories down during 2020, and so what we're looking at is really relative to last year's reduction reducing them a little bit more in order to create that.
Impact so what we've said is the impact to our sales. This year from this work we've been doing is somewhere between one and 2% of our sales and to answer your last question or 2021, assuming we hit our dealer inventory targets this year.
Then we think we're in a very good position wouldn't likely plan for further reduction in 2021.
Great. Thanks, Daniel.
The next question will come.
From the line of BMO.
Joe Your line is open you may be muted sorry, you were breaking up the whole thing was gone going off.
We've had a lot of good good commentary I wonder if there's any way you can give us a little bit of.
Just some of the factors for 2021, you know, obviously not guidance, but you're coming in with lower inventories. It sounds like the mix is getting better from higher horsepower.
Any any impact from.
Like Gs I guess would be positive for Mick and.
Maybe incentive plans are kicking in any anything you can help us with just sort of frame the year very generally thank you.
I mean, I can make some some high level comments I would start off with saying you know as we talked about with our farmers in the beginning of the call. There was a lot of uncertainty over the past months, we still see a tremendous amount of uncertainty over the coming months, we shared with you today on our call.
The Heston facility.
You know.
Theres still potential with rates going up in Europe, and North America for there to be.
Challenges ahead that you can't exactly plan for right now so that's kind of the background music, playing and we expect that could be here for for another couple of quarters or so.
Given that commodity prices are strengthening.
Confidence is strengthening we have a a.
A situation where there is an older fleet in North America, and South America those are both positive.
And and so and we've worked inventory down to target levels in most situations. So.
So we think it's.
In like Andy said, our Geos, I or grain and protein business and working really hard. This year. It's just that some of those projects got deferred into next year. So we captured we we've got the orders, but not the sales yet.
So next year should be.
It should be a pretty solid year, but.
But we want to give too much more guidance than that.
Those are just the high level figures that we've talked about.
Or factors.
Okay, and then not to waste My second question can can you give us a little sense in South America, we have kind of a new run rate of operating margins you know again with all the background noise I understand but.
Structurally do you feel like you're kind of climbing back to give this division a chance for a double digit operating margins again over the next two years or so.
Joel I would say that that's probably too aggressive.
We're making progress and we want to continue to make progress that's our our goal is steady progress year over year. It's.
You know, it's all dependent on a number of factors in terms of what the industry demand is and those kind of things.
But I.
Our goal would be just to see continued steady progress on the margins and the profitability in South America.
Okay. Thank you I, just gotta look too excited with this quarter [laughter].
The next question will come from the line of Adam Gilman with Cleveland Research.
Hey, guys. Good morning, Martin Congrats again on the retirement.
I guess my question overall is on.
Capital allocation here it sounds like the the buyback is on pause.
So the rest of the year, maybe Eric you could.
Could you share your you know your appetite for acquisitions, maybe what does the acquisition pipeline look like today and.
When could we expect this the share repurchase start to tick back up thanks.
You bet. So we are you know an active company at looking at acquisitions and we continue to do that we've got our watch list of companies that we think would be a good fit for for agco and we're continuing to cultivate that but like is typical it's a it's an opportunistic scenario, where you just never know when when.
The timing will be right for the seller to be ready to sell.
We think the business could be a good fit so we keep that actively going and that would be our top priority. If one of those target acquisition.
Opportunities came available that's our first choice to be able to move quickly and be able to to marry them up we were very happy with the acquisitions. We've made over the last few years.
And they have been good contributors like we had intended them to be.
At relative to share buybacks, that's been a part of our history, we've put that on pause because of the uncertainty and I tie that back to the discussion you talked about relative uncertainty. We we see this is going to be with us for some time yet.
And with a fair bit of volatility in terms of of what could happen. So we're taking we're continuing our cautious stance for some period yet with the intention at some point, we'd return to share repurchases.
Once once the market stabilizes as no more predictable.
And we have time for one final question. Our final question will come from the line of Joe O'dea with vertical research.
Hi, Good morning, everyone. Thanks for taking my question and Martin I'll add my congrats and best wishes moving forward.
Eric I just wanted to ask you a high level on precision AG any notable areas should really call out and his leadership positions for you or laggard hearings for you that you're trying to narrow some of that and then also just how the 2021 launch pipeline in precision AG.
Typically compares to 20 Tony.
Yes. So you know our our intention is to be a full crop cycle provider of two as a partner to our farmers and so that means we want to have very strong planting spring and harvesting solutions that <unk> in each case, our be able to Intel.
Currently observe their environment make onboard calculations to optimize their performance and then when the farmer wants to they can we can put those machines in auto pilot mode in the machine Optimizes its own performance. So those are what we think of when we talk about smart solutions are smart planter sales are up significantly to the tune of about.
300% from 2018 to 2020, our smart sprayer nozzle smart nozzles sales sales are up about 185% since 2018.
The total rose of planters that we sell has gone up 57% in the last two years up 28%. This year. So our focus on precision AG is strong and is continuing and so.
And we don't <unk>, Andy mentioned harvesting before so we're intending to continue to invest in this area heavily and continuing to grow it because we think thats, where we can add the most value to our farmers.
Okay. Thanks very much.
HM.
I'll now hand, the conference back for closing remarks.
Thank you Nicole and we want to thank everyone for participating. This morning. We appreciate your interest in Agco and if you do have follow up questions feel free to email me at Greg Peterson Agco Court Dot Dot com. Thank you very much and have an Austin debt.
This does conclude today's conference call. We thank you for your participation and ask that you. Please disconnect your line.
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