Q4 2020 AGCO Corp Earnings Call

February 4, 2021

For the speaker presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.

Please be advised that today's conference is being recorded.

If you require any further assistance. Please press star zero I would now like to hand, the conference over to Mr. Greg Peterson Agco head of Investor Relations. Thank you. Please go ahead Sir.

Thank you Shelby and good morning, welcome to those of you joining us for AG because fourth quarter 2020 earnings call. This morning will refer to a slide presentation and we've posted the slides to our website at Www Dot Agco Corp, Dot com the NAV.

Non-GAAP measures that we will use our that are used in that presentation are reconciled to GAAP measures in the appendix of those slides.

This morning, we will make forward looking statements, including demand product development and capital expenditure plans and the timing of those plans and our expectations with respect to the costs and benefits of those plans and timing of those benefits, we'll talk about production levels share repurchases dividend rates and our future.

Revenue price levels margins earnings cash flow tax rates and other financial metrics, we wish to caution you that these statements are predictions and that actual events 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 September 32020. These documents discuss important factors that could cause 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 COVID-19, including plant closings workforce availability supply chain disruption in product demand.

Whether commodity prices and changes in product demand may also influence 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.

On the call with me. This morning are Eric <unk>, Our chairman, President and Chief Executive Officer, and Andy Beck, Our Chief Financial Officer.

And with that Eric. Please go ahead.

Thank you Greg and good morning, we appreciate your interest in Agco and your participation on the call today.

We'll start on slide three that provides the financial summary.

We finished 2020 with a very solid fourth quarter, while overcoming supply chain delays and ongoing COVID-19 challenges.

I want to start this morning by thanking Eric was 21000 employees for their hard work that resulted in our world class support for our farmer customers throughout the pandemic.

I could not be more proud of their efforts that enabled agco to do our part for the global food supply chain, while keeping our factories and coworkers safe.

These efforts helped deliver fourth quarter sales growth of 8% and a 180 basis points of operating margin expansion on an adjusted basis.

Another major focus for us from 2020 was reducing our inventories the progress we've made in this area contributed to record cash flow from operations for the year as well as put us in a great position to benefit from the strengthening market demand we are forecasting for 2021.

Positive customer response to our improved product lineup is benefiting our retail sales performance and we plan to keep investing in new technology.

Our substantial cash flow from operations is enabling us to maintain our planned investments in smart farming solutions and enhanced digital capabilities.

Products like our smart planters smart nozzle sprayers and connected premium tractor products, our propriety, providing productivity enhancement options for our customers and our new margin rich sales opportunities for agco.

The recent rally in soft commodity prices lifted farmer sentiment and created higher demand for agricultural equipment as we finished 2020.

We expect supportive market conditions to continue in 2021, and our new financial outlook reflects this optimism.

We are targeting sales growth margin expansion and significantly higher earnings in 2021.

Slide for details industry unit retail sales by region for the full year of 2020.

As Covid pandemic unfolded early last year, the consumption of grain for food fuel and livestock was negatively impacted by global economic constraints.

Towards the end of the year Green consumption began recovering.

System with improving economic activity and increased green exports to China.

Following reduced forecast for ending grain inventories soft commodity prices rose, which is positive for farmer economics.

Consequently, global industry demand for farm equipment improved as we finished the year.

North America industry sales of tractors increased in 2020 compared to 2019 growth was strongest in the sales of low horsepower tractors with improving demand for higher horsepower tractors as we finished the year.

The fleet age for large equipment remains extended providing a strong potential for replacement demand in north American market.

Industry retail sales in Western Europe decreased modestly during 2020 due largely to the COVID-19 related production constraints.

Market demand in the second half of the year increased over the prior year and mostly offset significant declines in demand experienced in the first half.

For the full year industry sales were in the weakest in the United Kingdom in Scandinavia, and they were partially offset by growth in Germany, which benefited from some tax incentives implemented in 2020.

Dry weather across much of western Europe negatively impacted wheat production, although strong grain export demand and support of wheat prices provided some offsets.

European dairy and livestock fundamentals have stabilized after weakening earlier in the year.

Industry retail sales in South America increased during 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 farmers.

Farmers are replacing their aged fleet following years of depressed demand due to economic weakness and the challenging political environments.

As we communicated last quarter, our focus for 2020 was to address the needs of all of our key stakeholders during the Covid crisis.

This perspective has guided our actions since the outbreak.

First and foremost we established protocols for all of our facilities focused on employee health and safety.

These protocols have served us well and have been critical factor in maintaining production.

During the fourth quarter, we face considerable challenges with our component availability from our supply base.

Due to those efforts of our purchasing and manufacturing teams were ultimately able to secure the components in time to exceed our fourth quarter production projections and meet customer demand.

The COVID-19 risks of component supply availability as well as Covid work force issues remain for both our operations and our suppliers' operations, which may impact our planned production output.

We will stay diligent to attempt to mitigate these issues to the extent possible.

We are 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 our dealers and customers through digital tools have been a positive byproduct that we can leverage in the future.

Agco's 2020 factory production hours are shown on slide six.

For the full year production was down about 5% compared to 2019 levels.

As previously discussed our manufacturing operations were significantly impacted by the crisis, particularly in Europe and in South America in the second quarter.

Our supply chain and production teams have done a great job, allowing us to recover the production in the second half.

Total company production hours were approximately flat for the fourth quarter versus the same period in 2019.

Growth in Brazil was offset by lower production in the U S and Europe, where production was reduced to facilitate planned dealer and company inventory reductions.

We met our dealer inventory reductions in North America, and South America as well as in the <unk> region.

Turning to 2021, we currently project production hours to increase approximately 6% to 8% compared to 2020 levels. In addition, our order board entering into 2021 for tractors is significantly higher in North America, Europe, and South America compared to a year ago.

Let me now hand over the call to Andy Beck, who will provide you more information about our fourth quarter results.

Thank you, Eric and good morning to everyone.

I'll start on slide seven which looks at Agco's regional net sales performance for the fourth quarter and full year of 2020 Agco net sales were up about 7% compared to the fourth quarter 2019, excluding the positive impact of currency translation.

Europe Middle East segment reported an increase in net sales of approximately 8% excluding positive impacts of currency translation compared to the fourth quarter of 2019, the largest increases occurred in the U K, Turkey, Poland and Italy.

Net sales in North America decreased approximately 10%, excluding favorable currency translation compared to the levels experienced in the fourth quarter of last year.

Primarily due to our dealer destocking efforts deep.

Decreased sales of grain and protein equipment as well as sprayers were partially offset by increased sales of compact tractors and precision planting equipment.

Fourth quarter net sales in South America increased approximately 53% compared to the fourth quarter of 2000 1919, excluding negative currency translation impacts sales growth occurred across all South American markets with the most significant growth in Brazil.

Net sales in our Asia Pacific Africa segment decreased about 4% in the fourth quarter of 2020 compared to 2019, excluding positive impacts of currency continued weakness in Africa, and smaller Asian markets was offset by growth in Australia and China.

Consolidated replacement part sales were approximately $345 million for the fourth quarter 2020, and were up about 13% compared to the same period in 2019, excluding the positive impact of currency.

Turning to slide eight we examine agco's sales and margin performance Agco's adjusted operating margins improved by approximately 180 basis points in the fourth quarter sales from 'twenty compared to the same period in 2019 margins were positively impacted by higher levels of net sales cost control initiatives.

<unk> pricing as well as a favorable mix in the fourth quarter Europe Middle East segment reported an increase of $24 $8 million in operating income compared to the fourth quarter of 2019, resulting primarily from higher net sales, partially offset by higher warranty and engineering expenses nor.

With American operating income increased approximately $2 7 million in the fourth quarter compared to the fourth quarter of 2019.

Despite lower sales a positive sales mix improved margins in the grain and protein business.

And lower warranty expense helped to offset the lower sales.

Our South America segment reported operating margins of five 9% in the fourth quarter as operating income improved $34 1 million from the same period in 2019 higher sales and improved sales mix and reduced expenses all contributed to the improvement.

In our Asia Pacific Africa segment operating margins expanded by 150 basis points to 10, 6% in the fourth quarter higher sales and improved sales mix and cost control efforts contributed to the improvement.

Slide nine details the grain and protein sales by region and by product.

The sales decreased by about 11%, excluding negative currency impacts and the full year of 2020 compared to 2019 globally grain and seed equipment sales declined.

15% with our <unk> and North America 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 7% in 2020 due to declines in the North America and European regions, partially offset by growth in South America, and Asia Pacific Africa. The protein production segment has been significantly impacted by the pandemic, particularly in North America, where protein <unk>.

And capacity has been challenged in China protein producers are beginning to recover from the Asian swine fever, and have started to rebuild their production capabilities. Our order flow for protein production equipment in that region has improved throughout the year.

Slide 10 addresses agco's free cash flow, which represents cash resulting from operating activities less capital expenditures, our strong sales and earnings performance. In addition to working capital discipline contributed to significant free cash flow generation.

Of $627 million for 2020, which was a record for the company.

As a result, our improved working capital position our net debt at the end of December 2020 was approximately $339 million lower than December 2019, with respect to our capital allocation plans, we will continue to invest as needed and capital expenditures to support new product development and the needs of.

Our factory in the rest of our business, we will remain opportunistic on acquisitions and we also plan to retire about $275 million in term loan debt in the first half of this year.

This is to repay debt, we took as additional liquidity in 2020 at the outset of the crisis.

And also we are discussing with our board our plans for returning cash to shareholders in 2021.

With the exception of our quarterly dividend, we suspended any further shareholder payments at the beginning of the Covid crisis, while we haven't determined the details yet we intend to return to share repurchases during 2021.

Lastly losses on sales receivable associated with our receivable financing facilities, which are included in other expenses net were approximately $5 $6 million during the quarter compared to $12 1 million in the same period of 2019.

Our 2021 outlook for the three major regional markets is captured on slide 11, we currently expect higher retail industry demand across north and South America with relatively flat demand in western Europe.

In North America, higher commodity prices and improved farmer sentiment is expect to result in increased 2021 retail sales.

Replacement demand for age fleet of larger equipment is expected to drive most of the increase.

Demand for smaller equipment is expected to be more stable after several years of increasing demand.

We project North American industry unit tractor sales to be up 5% to 10% in 2021 compared to 2020.

The EU farm economics are expected to remain supportive in 2021 higher commodity prices are expected to support healthy demand in the arable farming segment milk prices have stabilized at profitable levels, but higher feed costs will challenge the economics for dairy producers western.

Europe industry demand is expected to be mixed across the markets in 2021 with total industry demand stable compared to 2020 levels elevated commodity prices and favorable exchange rates are expected to support additional growth in South America. During 2021 as farmers continue to replace aged.

Equipment and.

Total industry demand in South America is expected to improve approximately 5% from 2020 levels.

On slide 12, we highlight the assumptions underlying our 2021 outlook our priorities continue to be maintaining a safe working environment for our employees and providing proactive support to our customers and our dealers.

We will also continue to manage our costs, while preserving our investments in digital technology and smart farming product development.

Our 2021 forecast assumes improved global industry demand with no additional impact from the pandemic. Our sales plan includes market share improvement and price increases of two 5% to 3% aimed at offsetting higher material cost inflation during 2021 at <unk>.

Current exchange rates, we expect currency translation to positively impact sales by about 4% and.

Engineering expenses are expected to increase by $50 million to $60 million on a constant currency basis compared to sales in 2020 and be about 4% of sales.

The increase is to fund investments in smart farming and precision AG products as well as to continue our rollout of our platform designs.

Operating margins are expected to be up 80 to 100 basis points from 2020 levels driven by higher sales and production favorable pricing net of material costs.

And productivity initiatives, partially offset offset by the increased investments in smart products in our digital initiatives we.

We are targeting an effective tax rate ranging from 30% to 32% for 2021.

Slide 13 lists our selected 2021 financial goals, we continue to operate in an uncertain conditions and this outlook does not consider any further business disruptions caused by the Covid pandemic, we are projecting sales to be in the 10, two to $10 $4 billion range with 2021 earnings per share.

<unk> targeted in a range from $7 to $7 25.

We expect capital expenditures to be approximately $300 million and free cash flow to be in the $400 million to $450 million range.

For the first quarter, we projected improvement in sales and earnings over 2020 levels. Our current estimate for the first quarter is that our earnings per share will be approximately $1 per share.

This estimate is highly dependent on the component availability some from suppliers and the resulting timing of production.

With that I'll turn it back to Greg.

Before we take your questions. We wanted to remind you that our annual analyst meeting is scheduled for March 3rd Youll find details of that meeting on slide 14.

And on starting on February 15th Youll be able to register for the event.

And we look forward to engaging with you. During this meeting with that let's go ahead and open it up operator for questions and as a reminder, we'd like to limit folks to one question with a very brief follow up.

Let's go ahead and start the Q&A.

At this time, if you'd like to ask a question you may do so by pressing Star then the number one on your telephone keypad again that is star one if you would like to ask a question.

Your first question is from Kristen Owen of Oppenheimer.

Great. Thank you so much good morning, Thank you for taking our questions.

If you could talk a little bit more about the improved backdrop and supporting some of the additional investments in precision AG and Digitization.

Are you seeing the opportunity to accelerate investments in certain areas and can you provide some additional detail on areas in the crop cycle, where you see agco, having the highest entitlement at this stage.

Yeah.

Yes, I can I can start us off.

So thanks for your question Kristen.

Yes, so the market, let's start at the macro level and will go into more micro at the macro level, we're seeing a stronger market environment with farmer sentiment going up and we've already seen commodity prices and all of that so that provides a strong backdrop. It marries up nicely with our already existing intention to really focusing on.

Precision AG and what we call smart machines.

And so we've taken our portfolio and accelerated it were.

Adding more investment to the tune of about $50 million to $60 million to our investment from last year and.

And pulling forward some of the projects that we had planned for.

We believe we've got a really good track record here in that when you take a look at a few of the most recent measures. We won three out of the for tractor of the year Awards, we won eight of the.

AG Engineering 50 awards in North America, the most of any company. So our teams have been delivering good smart solutions that are well received by the industry and well received by customers and so on its a good place to invest in an area of the industry that we think is ripe for more value added to the marketplace.

Now specifically to the crop cycle.

We actually have investments all through the crop cycle, we see ourselves as the as the as a leader in planting technology between R. R.

From the factory full plant for solutions as combined with the retrofit opportunities that we have through precision planting to upgrade existing planters from from where they are today to being latest cutting edge high Tech planters well, we've got a lot of investments in spray technology.

And we've also got the.

The ideal combine and we continue to build on top of that you saw us come out with we have the only combine in the industry that has joystick steering we've taken this dream rollout we've got the only kind of mine in the industry, where you have auto hookup of the header weekend. That's our platform, we continue to bring innovation to that platform as.

As well as our tractor lineup you see we've launched new tractors in all of our brands this year and got recognized significantly so.

Precision AG works as a system all of these tools have to work together and so that's essentially our approach.

Great. Thank you and then as a brief follow up just something shorter term in nature, you did mentioned from the supply chain bottlenecks.

Q1 production can you just provide some additional details there where youre seeing that bottleneck.

Well currently I think are our most stressed from Covid is in our European supply chain, but we've also got a number of suppliers that we're working closely with in South America. It's.

Our number one concern is COVID-19 impacting their operations that reduces their capacity.

And it may cause some.

The distribution disruptions. So we're working with suppliers, we're putting in some safety stock component inventory, where it makes sense and just managing the good thing is this is not a new.

A new action for US we've been doing this now for in this intense mode with control towers, all around the world around each commodity for about a year. When we first had this come up in Asia and the team has gotten to be very very good at it.

Your next question is from Stephen Volkmann of Jeffries.

Yes.

Hi, Good morning, everybody. Thank you may.

Maybe Eric if I can stick with the precision AG topic.

You mentioned, some strong order boards and so forth I'm just wondering if you could put any meat on the bones.

Or where you would like to kind of define it in terms of.

How much growth in penetration you saw in precision AG type equipment in 2020, and what that growth could look like into 2021.

Okay. Yeah, I can give you a few data points, if we compare 2020 to 2019, our smart planter sales when you buy a full completed outfitted plant or from the Agco factory was up over 200%.

Our row unit sales for planters through OEM and retrofit channels through the precision planting business had a 40% growth rate that's been an ongoing strong AG tech business, that's growing and we're we're spreading the wings of that business to work on projects throughout the crop cycle.

In sprayers, we had a 35% growth rate on agco machines, using smart nozzle technology.

We doubled our fleet of connected machines. So youre seeing we've got dashboards that are driving.

Creation of new technology, new innovation as well as making sure that we're getting that all the way to our customers understanding the value that they receive on their farm and speaking to them and farmer economics or agronomy, depending on the on the future and so those are maybe some examples of where we are today and we've got projections of those going into 2000, all the way through to 2025.

Going forward for our smart Smart machine development.

Super. Thanks, that's helpful. And then maybe just almost kind of a similar comment on how the center rollout is kind of going in North America, and what we should expect there.

You know very strong its going actually little better than planned.

It's a combination of our product strategy of bringing in a.

The best of the best in the tractor business for those customers that are the most demanding want the highest technology highest quality and best support.

We serve those customers with our fendt offering.

So we've got a great product that we're very happy with but the lion's share of the work is more about the whole fendt experience getting our dealers trained getting our marketing message is clear.

And then having all of the touch points throughout the throughout the buying and support cycle to be to the federal level.

And so we are rolling out in a measured pace not every dealer can can that carry the fendt brand they have to earn their way to through the performance criteria.

So we feel like we're in a in a measured rollout and we're slightly ahead of plan.

And that comes from useful Anthos.

Centers are really excited.

They love the overall fendt experience. So we think what we've got this is the right solution set for these most professional farmers.

Are you willing to say roughly how much revenue in 2020 was sent in North America I'm sure, it's still small, but just order of magnitude.

Well, let me just Steve I'll say that our if you look at our total high horsepower sales they were up.

17% when the industry was flattish or maybe down a little bit. So I'll just I'll just leave it with that.

Your next question is from Ross Gilardi of Bank of America.

Yes, good morning, guys.

Robert and run for Us.

Hey, there I just wanted to understand a little bit better I mean, just given your order commentary around the world and why are you guiding to European market flat.

Okay.

Ross, there's a couple of factors there.

First of all there is.

I'm kind of a backdrop.

One other things that we think will be driving the improvements in north and South America is really the age or age of the fleet and the level of replacement demand out there that the European market always has been more of a stable market and don't have these big swings in the cycles that <unk>.

Create these imbalances in.

The fleet age and so don't think there is that there is that same level that we would have like in North America. Secondly, one of the biggest markets in Europe is Germany, Germany had.

A number of tax incentives and incentives customers to buy in 2020 the day.

Market in Germany was up 11% in 2020, and so we anticipate that that was somewhat of a pull forward so that market, where we're projecting to be.

Modestly down in 2021 with offsetting improvements in some of the other markets that didn't that were down in 2020.

And the.

The yields were relatively mixed in Europe. This year. So they are not coming off of a really strong position, but certainly better commodity prices.

<unk> made comments about kind of a stable dairy.

<unk>.

And so I think the economics are good for the European farmer, but probably not to the same level of what we're seeing in North America.

Okay.

Yes. The order Board is you asked about order boards also.

Those are yes up.

Up significantly across other regions.

Well, that's what that was where my question was coming from Greg Your order boards are up significantly across the regions you are saying.

You're calling the European market flat for the reasons that and Andy decided it just seems.

Given what youre seeing in your order boards, that's a pretty conservative assumption.

No.

For the retail activity is what we're talking about and what.

What the order board reflects our other things like.

<unk>.

Dealers wanting to kind of get in line to get their products.

Ready for available for their customers.

<unk>.

And Theyre also seeing inflationary pressures and things like that so there's other factors that influence. These these order boards, but.

We're obviously seeing a strong order situation so.

We're ready to go if the market is stronger than what we anticipated.

Okay got it and then just my follow up was what are you assuming for North America margins in 2021 and your guidance.

Yes.

And I think part of the issue with your high tax rate over the over the years has just been limited profitability in North America outside of GSI and it seems like you've come a long way just in the last 12 months.

When are we going to see that tax rate actually come down too.

More of like a mid 20 type rate.

Well first of all North America margins.

Got them going up.

But but not as much as what we have in our 80 to 100 overall.

One factor for North America is that.

Exchange rate.

Is going to limit their margin improvement a little bit in 2021.

When the euro, particularly as strengthening.

And that gives us strong gives us earnings improvement on the translation of our European earnings, but there is a.

Offset to that in terms of the margin impact on our North America results. So.

Little bit of a.

Headwind on on foreign exchange impacts for the North America market in terms of our tax rate, we are projecting it to come down this.

This year, we were at about 33%, we're seeing 30% to 32 and as you point out.

The stronger earnings, particularly in North America, and South America will contribute to continued reduction in the tax rate. So as we improve our profitability in the U S and can take advantage of that lower.

Tax rate and we'll have to see where that tax rate goes in the future that will continue to pull down there that rate. So we're also anticipating opportunities for further tax rate reductions in the future.

Your next question is from Larry Demaria of William Blair.

Hi, Thanks, good morning.

I wanted to go into a little different direction here.

Obviously, you have an activist situations, hence not every day that obviously board member it becomes an activist. So can you just kind of just discuss some of the concessions how it's playing out.

Considering at this point any divestitures that she has suggested.

Yeah.

Yes, we can talk about that.

You know theres, a number of dimensions to that relationship.

There is one dimension as.

Our board member, but we also have to remember <unk> had a commercial relationship with agco for.

Five decades now.

<unk> Srinivasan is on our board as a board member so that's.

A second dimension and then there is also a shareholder dimension. So we need to kind of think about managing all of those at the same time and also recognize that in any kind of partnership that we have the if you start off with that the courts have operating partnership or.

Our interests are not always going to be aligned.

Although it's been a long standing relationship or just not always be aligned and so the board is very very focused.

And making sure that we're doing all actions and making all decisions based on what's good for all shareholders and so we continue the dialogue with <unk> as well as a broader range of all the shareholders that are out there, we're doing very proactive investor outreach and making sure we're listening to what's on their mind sharing with what we've got going on.

Some of those things have to do with you know.

If you take a look at the actions that have happened over the past months. Many of those have been in the planning stages and working and analysis stages for quite some time, but <unk> seen them come.

Come to conclusion in terms of an entire new compensation system for the whole company.

Many different board governance updates.

Specifics on that would be where we've had some planned director retirements. This year and then some very recent additions of two new independent directors, Bob delaying from Caterpillar President role, there and Matt, saying, the Chief Technology Officer from GM, Both outstanding New Board members, who are going to bring in just terrific.

<unk> is an expertise and leadership to the boardroom as we evolve our smart machine solutions and really focus on our farmers, but then we've also enhanced our corporate governance profile and again. These were in the works for quite some time, but we've appointed a new lead director, we bolstered bolstered the definition of the lead director responsibilities.

We've rotated the committee chairs for audit governance Finance committees established term limits for the board leadership positions to promote independent oversight and.

You know when we remain very very focused on strong independent and focus on the best governance of the company. So that we're making the right decisions for all stakeholders and stockholders. So that's kind of where we stand we I'm very happy as the incoming leader of the company about all of the activity that is half.

The strengthening and we're doing with the board. It's a very fresh new set of committee chair people for which I will be working with.

And so I think we're in a good position and we're not done.

The activities are still under way of looking at listening to our investors and understanding what other ideas may be out there for improvement and incorporating those over the course of time.

So that's a quick quick overview.

Yeah that was a good overview. Thank you Eric and then just if I could follow up on that day.

You, obviously have a good balance sheet.

You actually go to the board to use.

The acquisition pipeline you noticed you noted you might be opportunistic, but how's the pipeline looking should we be.

Thinking that you'll be active out there and that's it thanks very much.

Yeah, you read more about that 2021 may be a good year for acquisitions, we've got a number of target companies like we usually do it's a it's kind of a well trained muscle within agco of being able to be proactive at understanding what would be a good fit on the one hand, and then also being very responsive.

<unk> two new opportunities that came up that.

That.

For more of a surprise because of accompany change in direction or whatever so we're actively working that avenue and.

And we've got a number of opportunities in the in the in the pipeline, but nothing mature enough that we would be able to share any specifics today.

Your next question is from Nicole <unk> of Deutsche Bank.

Yeah. Thanks, guys, that's a new one on the last name.

Uh huh.

Good how are your day nickel ankle.

Thanks can we just maybe start with the assumptions that you're using to get for that dollar of earnings in the first quarter can you talk a little bit about the expectation for growth and margin expansion is kind of in line with what you're expecting for the full year or any other things to consider with respect to just the <unk> outlook.

Sure Nicole we're looking at sales growth.

Around 15% or so.

And I think currency impacts of that are going to be about 5%. So.

I have some core growth there as we take advantage of these stronger.

Order boards that we discussed.

Our operating margin projections are going to be a little lighter than our full year, So maybe up.

50 basis points in the first quarter, we do have expanded engineering expenses and some higher other.

Other investments that are we're kicking up early in the year that are going to limit the margin expansion.

Expansion to some extent.

And so that's kind of how we think the first quarter is going to go.

The shape of the year will be.

Very different than what we had in 2020, because as Eric mentioned, we had.

Issues with Covid and severely impacted our second quarter and then we had a strong catch up in the second half of the year and so we do see a significant improvement.

The potential in the second quarter, and so thats, where youll see.

The strongest year over year improvement.

Got it thanks, Andy that's really helpful. And then so my follow up can we just talk a little about South America margins another impressive quarter.

Better than expectations. If you could talk about drivers of upside and then how to think about.

The sustainability of the margins that you guys have seen as we've moved through 2020.

We turned the calendar into 2021.

Sure the south as.

As you say the South America margins, we were really ahead of schedule there.

The market's really helped us with stronger sales and production, giving us better leverage over our costs, but also we are seeing.

Good growth in some of our higher margin.

Businesses down there.

The planting area with precision planting and our our momentum planter sales have been very good growth in our grain and protein business down. There has also been very strong so.

We're seeing a better mix of sales and thats, helping us along with cash.

Core <unk>.

Productivity improvements and things like that as we as we move into 'twenty. One we are expecting to continue to move our margins up we certainly won't do it at the same pace, we did in 'twenty versus <unk> 19, but still like to see at least a <unk>.

Basis point improvement, so being a force next year.

Where.

A lot of the same elements of growth.

Crude production improve sales are going to help drive that margin improvement, we do see one of our better markets for margins, Argentina actually coming down so that'll be a little bit of an offset and we're challenged in South America with the high inflation that we're seeing right now so it's a big.

Talents to keep up with the cost changes with our pricing. So we're we're focused on achieving that as well, so but but overall margin improvement again in 2021.

Your next question is from Joel <unk> from BMO.

Hi, guys hows it going.

Hey, Joe Hey, Joel I Wonder if you could talk a little bit about if theres any way to tilt protein production segment.

Into more of a way to protect customers and other animals from from future diseases. It seems that there's been a you know a series of outbreaks and different things and you guys are in a great position to maybe be able to address some of that.

You bet. So you know one of our.

Key certain macro again and go to micro to answer your question.

Sustainability is going to it's got a very high focus for the company Youre going to see other sustainability report coming out with our annual report and it's embedded in our go forward strategy and so on one of our focus areas within the overall sustainability topic is animal welfare and so theres a number of opera.

<unk> two <unk>.

Both kind of like we think about precision AG, where theres new farming practices on the one hand, and new technology on the other to help with farmers getting more productive and more sustainable while we can do that our focus is to do that same thing with animal protein production and we've invested in.

Building up some new facilities on the University of Georgia campus.

They've got one of the top.

Protein production research sites in the world. So we're going to be putting a few buildings right on their campus to have student research go on on a number of different trial cases, much like we do on our model farms or a crop tour activities with with agronomy, who will be doing that there with.

On Asian of tests of <unk>.

Changing of all of practices as well as new technology sensors reporting mechanisms optimization protocols and so on so that's that's underway and we look to learn about the problems learned about how to solve them and then 10 rows into solutions that we can sell them to the to the protein producers.

Yeah.

Oh, okay.

I allowed to ask about your current mix of high horsepower across the whole company.

We know what percentage of revenues roughly as of today and where could it be in five or 10 years.

That's all I am not sure I have a right yeah I'm not sure I have a number there.

For you we'd have to maybe do a calculation but.

I would I would say just generally we're.

Our AR.

Business is focused on the high horsepower sector, so, particularly in Europe.

We have a heavy reliance on high horsepower equipment on.

On the premium sector, and so where our market position is very strong and they're in North America. It's less so it's still a majority of our business in North America is.

Row crop or a higher horsepower.

But.

It's it's where we need to grow and we want to continue to grow in that sector and this really similarly in South America were stronger in.

Small tractors and looking to grow in the high horsepower sector with some of the new technology that we've invested in so but overall, it's still a.

A large majority of our businesses is tied to that high horsepower sector of the business.

[noise], Joe to give you a little bit of color globally high horsepower sales are.

Hi horsepower tractor sales are in the low forties in North America for this year. It was only about 15, so significant opportunity in North America to take advantage of the technology that we have both in our fendt brands in our mass brands and our challenger brands.

Your next question is from Chad Dillard of Bernstein.

Hi, good morning, guys.

And in Asia.

You talked about in the past being able to achieve 10% operating margins.

Michael you're guiding to 8% for this year.

So I just wanted to understand kind of how we close the gap about 200 basis points can you just walk through your expectations in terms of how.

How much is allocated to volume versus self help for us is product mix.

Versus precision now and how are you thinking about that.

Yes, we have said there is a volume aspect to that and so this.

Hopefully, we're seeing some of that come come into play with the market developments that we're seeing.

The other areas, where we need to focus is continued improvement in our margins in South America continued growth in the higher horsepower sector, which generally carries.

Higher margins.

Continued growth in our precision planting business.

And better.

Absorption of our parks business, so getting us a larger market share of that so all of the high margin business.

Areas, where where folk.

<unk> for growth and then on top of that we want to continue to be.

Developing more cost effective products and that's a real key element to it and our productivity and purchasing initiatives that we've talked about before so all of that added up.

Should give us the opportunity to continue to progress our margins from what we've talked to and this and this current guidance.

Got it okay, and I'm really pleased with we're really pleased with a lot of those things coming to light in 2020.

Our overall sales were only up 1% you can call that flat and yet we were up 110 basis points on margins and it was coming from all the things that Andy was talking about the areas, where we're focused on to improve our business and do the self help we got no market.

Tailwind in 2020.

Yet we had a lot of margin improvement, we're not there yet we still got a long road in front of us, but the areas that we're focusing on are delivering.

And just sticking with margins. So your guidance from 'twenty, one implies a 15% incremental margin, which is a lot lower than kind of like that the mid 20th that would be more typical for the business.

Now how much of a GAAP comes from something temporary costs come.

Going back from 2020.

And is there anything else moving to call out to bridge that gap.

Yes, Thanks, Chad first of all if you if you look at our incremental margins implied here on a constant currency basis, taking the currency out even more.

At closer to 20% and then if you take out the engineering investments, we're talking about were more in the mid <unk> and so I think thats more in line with what we typically see.

We think we can accomplish.

To your question about some of the costs other costs that are coming back in we do have some of that first of all we have.

Investments in digital and other technology and some growth initiatives that we put into our our planning this year and also a partial return of expenses like travel and farm show cost we built into the.

The plant as well that's probably.

The shows in the travel and some of these things are probably in.

$30 million to $40 million range and so that's built in as well. So those are incremental expenses that were absorbing that do influence that incremental margin that you've.

You've talked about.

Our next question is from Jerry Revich of Goldman Sachs.

Hi, This is jokes for Mohan on for Jerry Revich can you talk about opportunities for the company to improve its competitive position over the next cycle. What are the biggest pockets of opportunities that you see in any areas, where the company strategy is likely to evolve.

Well, that's a good big picture question I would say it ties back to a few of the themes we've touched on today.

One of them would be to become a stronger full crop cycle partner to the farmer.

Have a very strong tractor historical tractor business and we continue to invest in and want to strengthen that but we have more upside potential than some of our non tractor business as planters sprayers combines and hay equipment and so on so that's one dimension. The second dimension, we're investing heavily in precision agriculture, and what we call smart machines.

Machines that can use sensors to understand their environment.

To onboard a calculations and optimize their performance automatically essentially go into autopilot mode.

We've been rolling those out with momentum planter smart for them or from precision planting ideal combine so on and and farmers really appreciate them and they end up being good margin products for the company so that would be a second dimension.

Another growth dimension would be our digital solutions and changing aside from our products changing how we interface with our farmers and allow them to interact with the company through more digital tools, we're creating digital pathways to our directly to our customer as well as to our dealer to allow them to engage on the research buying serve.

<unk> and support processes, either to brick and mortar like they do today in most of our industry work, we did at a local or a combination of the two.

And then we also think there's some upside with a focus on sustainability.

Agriculture, I mentioned, the animal welfare element of our sustainability focus, but we've got the.

The other opportunity is to help farmers with carbon sequestration climate changes, if you're having a really really big topic and all of all of the industries in the world are looking at how do we reduce our footprint on emissions have our facilities and our products contribute less to the problem.

But with farming, we have the opportunity of where farmers can help solve the problem capturing some of that carbon out of the year through photosynthesis get it back into the soil and sequestration.

But farming has to change their practices.

And there is new technology that will be able to be brought to the market to facilitate that so that's another growth opportunity for for the future of the company will outline a lot more of this in detail on our March 3rd Analyst day, but those are some teasers that.

It will be in line and maybe the wrapper that goes around that is it agco intends to be the most farmer focused company in the AG industry and we're requiring a lot of what we do in line with what we have started doing with our crop tours in model homes and other things too to really be connected to our farmer and be able to be arm in arm with them.

As they as they manage through the challenges in the industry.

Alright, thank you.

Youre welcome.

Your next question is from Ann Duignan of J P. Morgan.

Hi, Good morning, everyone. This is Tom trimming that Sean for him.

Thank you Nathan.

2.5% to 3% pricing will more than offset raw material cost inflation. This year can you just elaborate from that.

Sure, we as you say pricing two 5% to 3% net of.

Material cost inflation, we expect that to be probably about half a percent.

So we are projecting fairly significant material cost inflation, we're seeing that right now.

And.

It does there is a little bit of a lag as it it comes from when you see it hit spot prices and things like that to end up hitting us in terms of component cost typically it's about a three to six month lag. So we're really starting to see those increased costs.

Start to hit our component costs and so we've got to get this pricing into offset it.

And just a follow up that some.

Some deferred projects and grain equipment, you have inflation closes on those projects, so what sort of pricing power do you have in GSI.

Yes, it's a.

The big challenge for GSI and that.

There is a heavy steel content to their products and being able to match.

Orders and projects with with cost is a concern.

Do have the ability and a number of the contracts to make adjustments for commodity price cost changes.

That's in place and then we also regularly.

Regularly change the price.

But it is it is one of the challenges that we're going to see here for the grain and protein business in 'twenty, one as is to to keep pace with the change of the of the.

Steel prices.

Your final question is from Courtney <unk> of Morgan Stanley.

Hi, Good morning, guys. Thanks for the question.

I wanted to go back to the comment about the shape of this year from the very different and you gave us some good color on <unk> and QQ, but.

The comments that you're making about material cost pricing kind of lagging.

When it hits the P&L anything else you can help us as we think about you know kind of first half versus the second half cadence given the strength of the second quarter and especially.

Net production was much higher from here in the second half for 2020, I'm just any any high level thoughts as we're as we're modeling out for full year.

So Courtney as you think about 2021, the seasonality is going to be a lot.

I would say more normal so that implies for second quarter is going to be.

Likely our biggest volume quarter. In addition to margins we have.

Especially in North America, we have a couple of businesses that are very first half.

Centric precision planting.

Does at least half of their business probably in the first quarter ahead of planting season, so those sales and especially margins will be especially good especially in North America.

Grain and protein second and third quarters are heavy.

For that business, so second quarter will will benefit both grain and protein as well as precision planting.

And then just production levels overall.

If you recall, we closed plants.

This year as a result of Covid in Europe, and South America and had an extended shutdown.

For our vault for business, so Europe volumes and margins well look obviously significantly better than.

Probably much more.

Similar to <unk> 19.

<unk> 19, or 18 in terms of volumes and margin as it relates to first for third quarter. So.

Yes from much more normal seasonality as we think about for sure.

Okay. That's helpful.

And then Andrew said anything you'd call out on on margins you know for the first half versus the second company set up to do best.

In the first quarter, but is that roughly what we should be thinking of other second half so.

In the second quarter, we're talking.

Probably three or 400 basis points year over year because of the.

Significant production shutdowns this year and then the back half in total probably is going to be similar to last year.

This concludes our Q&A portion of the call I'd like to turn it back to Greg for any closing remarks.

We just like to thank everyone for your participation today and again remind you of our analyst meeting on.

March the third thank you very much and stay safe.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

[music].

Ladies and gentlemen, thank you for standing by and welcome to the Agco 2024th quarter earnings release Conference call. At this time all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session.

Ask a question during the session you will need to press star one on your telephone.

Please be advised that today's conference is being recorded.

If you require any further assistance. Please press star zero I would now like to hand, the conference over to Mr. Greg Peterson Agco head of Investor Relations. Thank you. Please go ahead Sir.

Thank you Shelby and good morning, welcome to those of you joining us for Agco as fourth quarter 2020 earnings call.

This morning, we will refer to a slide presentation, and we posted the slides to our website at Www Dot Agco Corp, Dot com for now.

Non-GAAP measures that we will use our that are used in that presentation are reconciled to GAAP measures in the appendix of those slides.

This morning, we will make forward looking statements, including demand product development and capital expenditure plans and the timing of those plans and our expectations with respect to the cost and benefits of those plans and timing of those benefits, we'll talk about production levels share repurchases dividend rates and our future.

Including the company's form 10-K for the year ended December 31, 2019, and the form 10-Q for the quarter ended September 32020. These.

These documents discuss important factors that could cause 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 and <unk>.

Putting those resulting from COVID-19, including plant closings workforce availability supply chain disruption in product demand.

Whether commodity prices and changes in product demand may also influence 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.

On the call with me. This morning are Eric <unk>, Our chairman, President and Chief Executive Officer, and Andy Beck, Our Chief Financial Officer, and with that Eric. Please go ahead.

Thank you Greg and good morning, we appreciate your interest in Agco and your participation on the call today.

We'll start on slide three that provides the financial summary.

We finished 2020 with a very solid fourth quarter, while overcoming supply chain delays and ongoing COVID-19 challenges I.

I want to start this morning by thanking Eric was 21000 employees for their hard work that resulted in our world class support for our farmer customers throughout the pandemic.

I could not be more proud of their efforts that enabled agco to do our part for the global food supply chain, while keeping our factories and coworkers safe.

These efforts helped deliver fourth quarter sales growth of 8% and a 180 basis points of operating margin expansion on an adjusted basis.

The other major focus for us from 2020 was reducing our inventories the progress. We've made in this area contributed to record cash flow from operations for the year as well as put us in a great position to benefit from the strengthening market demand we are forecasting for 2021.

Positive customer response to our improved product lineup is benefiting our retail sales performance and we plan to keep investing in new technology.

Our substantial cash flow from operations is enabling us to maintain our planned investments in smart farming solutions and enhanced digital capabilities.

Products like our smart planters smart novel, Sprayers, and connected premium tractor products, our propriety, providing productivity enhancement options for our customers and our new margin rich sales opportunities for agco.

The recent rally in soft commodity prices lifted farmer sentiment and created higher demand for agricultural equipment as we finished 2020.

We expect supportive market conditions to continue in 2021, and our new financial outlook reflects this optimism.

We are targeting sales growth margin expansion and significantly higher earnings in 2021.

Slide for details industry unit retail sales by region for the full year of 2020.

As Covid pandemic unfolded early last year, the consumption of grain for food fuel and livestock was negatively impacted by global economic constraints.

Towards the end of the year Green consumption began recovering consistent with improving economic activity and increased grain exports to China.

Following reduced forecast for ending grain inventories south commodity prices rose, which is positive for farmer economics.

Consequently, global industry demand for farm equipment improved as we finished the year.

The fleet age for large equipment remains extended providing a strong potential for replacement demand in north American market.

Industry retail sales in Western Europe decreased modestly during 2020 due largely to the COVID-19 related production constraints.

Demand in the second half of the year increased over the prior year and mostly offset significant declines in demand experienced in the first half.

Dry weather across much of western Europe negatively impacted wheat production, although strong grain export demand and support of wheat prices provided some offsets.

European dairy and livestock fundamentals have stabilized after weakening earlier in the year.

Industry retail sales in South America increased during 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 farmer.

Farmers are replacing their age fleet following years of depressed demand due to economic weakness and the challenging political environments.

As we communicated last quarter, our focus for 2020 was to address the needs of all of our key stakeholders during the Covid crisis.

This perspective has guided our actions since the outbreak.

First and foremost we established protocols for all of our facilities focused on employee health and safety. These.