Q1 2021 AGCO Corp Earnings Call
Yeah.
Good day, and thank you for standing by.
I'll come to the Agco 2021 first quarter earnings release conference call.
At this time all participants are in a listen only mode.
After the Speakers' presentation, there'll be a question and answer session.
And ask a question during the session you will need to press star one on your telephone.
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Now I'd like to hand, the conference over to your Speaker today, Greg Peterson Agco head of Investor Relations. Please go ahead.
Thank you James and good morning walk on to all of you joining us for Agco's first quarter 2021 earnings Conference call. This morning, we're going to refer to a slide presentation that we posted to our website, you'll find it at www Dot Agco Corp Dot com.
We'll be using non-GAAP measures and the slide presentation and those non-GAAP measures are reconciled to GAAP measures and the appendix of that presentation.
And we'll also be making forward looking statements this morning, including demand product development and capital expenditure plans and timing of those plans and our expectations with respect to the costs and benefits of those plans.
And we'll talk about production levels share repurchase dividend rates 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 Securities and Exchange Commission, including the form 10-K for the year ended December 31 2020. 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 and the agricultural industry, including those resulting from COVID-19, including plant closing closings were.
Force availability supply chain disruptions and product demand.
There's also risks around whether commodity prices and changes and product demand, we disclaim any obligation to update any forward looking statements as except as required by law will have a replay of this call available on our corporate website later today.
Moving on so on the call with me. This morning are Eric and soda, 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 snag co and your participation on the call today I'm on.
And to begin my remarks on slide three where you can see that we had an excellent start to 2021, our first quarter sales grew nearly 20% on a constant currency basis compared to the first quarter of 2020 the.
The recent rally and commodity prices lifted farmer sentiment, creating higher demand for agricultural equipment and the first quarter adjusted.
Adjusted operating income was up over 94% driven by 300 basis point increase and our adjusted operating margins with improvement achieved in all of our regions.
Favorable pricing helped to offset material inflation and the first quarter. However, we expect to see a more significant impact of higher material costs. During the remainder of the year. We are also facing significant challenges with our supply chain is capacity constraints and COVID-19 disruptions continue to impact timely receipt of components for production.
Yeah.
Based on improved market forecast and our first quarter results, we have increased our financial targets for the full year of 2021 and.
In addition to improved sales and margins. Our plan includes increased funding for smart farming precision AG and digital investments to driver and our strategic ambitions that we outlined to investors earlier this year.
Last week, we announced a new capital return framework to enhance the company's ability to return cash to shareholders across a variety of market conditions. The.
The new capital return strategy includes a regularly regular quarterly dividend payments.
Share repurchases and.
And and annual variable special dividend to return excess cash and.
On the announcement included a 25% increase and a regular dividend.
And a four dollar special dividend to be paid out on June one and he's going to have more details on those plans and a few minutes.
And slide four we detailed industry unit retail sales by region for the first quarter of 2021.
And the gradual recovery from the pandemic and reopening of economies have increased the demand for green, putting pressure on global grain inventories, which which are well below last year's levels.
Agricultural commodity prices have risen, resulting in more favorable farm economics, as well as increased demand for machinery.
These improved conditions are expected to generate industry growth across all major equipment markets and 2021.
In North America industry retail sales increased about 31% and the first three months of 2021 compared to the same period and 2020.
Sales of low horsepower tractors moved above the prior peak levels, while demand for high horsepower tractors also improved.
With the fleet age remaining extended industry retail sales of North American large AG equipment grew approximately 12% and the first quarter.
Industry retail sales and Western Europe also increased and the first quarter of 2021 with growth across nearly all major markets.
Wheat, dairy and livestock prices are generating very positive farm economics and improved farmer sentiment.
We expect this favorable environment to generate increased equipment demand in 2021.
And South America industry sales increased during the first three months of 2021, driven by improved demand in both Brazil, and Argentina, as well as recovery and the smaller export markets are.
And a healthy first crop as well as favorable exchange rates are supporting positive economic conditions for farmers, who continue to replace and aged fleet.
Agco's 2021 factory production hours are shown on slide five.
While our supply chain and production teams have done a great job to minimize the impact our ability to meet the robust end market demand has become increasingly difficult are.
Our supply chain has been impacted by COVID-19 related disruptions as well as capacity constraints due to this surging industrial demand.
Currently our European and Brazilian production facilities are feeling the largest impact for example production was suspended and our fendt factories in Germany last week and will resume on Monday.
We are facing supplier bottlenecks and delays and all regions and expect significant challenges and the quarters ahead as we work to meet it.
Expected increases and end market demand.
Total company production was approximately up 25% for the first quarter versus the same period and 2020 with the largest increase and our South America factories.
Were projecting a 10% to 12% increase and full year 2021 production compared to last year with most of the increases occurring in the first half of the year and you can.
And remember that we had extensive COVID-19 related plant shutdowns and the first half of 2020, and then extremely high production schedules and the second half of 2020.
Turning our attention to and because order board as of the end of March our order board for tractors and combines was significantly higher and North America, Europe, and South America compared to a year ago.
On the handover the call to Andy Beck, who will provide you more information about our first quarter results.
Thank you Eric and good morning to everyone I will start on slide six which looks at Agco's regional net sales performance for the first quarter of 2021 and <unk> net sales were up about 20% compared to the first quarter 2020, excluding the positive impact of currency translation.
Strong end market demand and favorable pricing drove the increase across all regions Europe Middle East segment reported increase and net sales of approximately 12%, excluding the positive impact of currency compared to the first quarter of 2020.
Largest increase has occurred and Germany, Turkey, and the U K.
Net sales in North America increased approximately 10% excluding favorable impact of currency translation compared to the levels experienced in the first quarter 2020 increased sales of tractors precision planting products and replacement parts produced most of the increase and.
Because first quarter net sales and South America grew approximately 84% compared to the first quarter of 2020, excluding negative currency translation impacts.
Sales rose across all of the South American markets with the most significant growth in Brazil.
Horsepower tractors combines and planners showed the strongest growth net sales and our Asia Pacific Africa segment increased about 66% and the first quarter of 2021 on a constant currency basis compared to 2020 last year. Our Q1 sales were impacted by plant shutdowns and our China facilities.
Strong growth in China, and Australia, as well as recovery and Africa, where the highlights.
Consolidated replacement part sales were approximately $399 million for the first quarter of 2020 part sales were up about 23% compared to the same period and 2020, excluding the positive impact of currency translation.
Slide seven examines agco's sales and margin performance and.
Adjusted operating margins improved by approximately 300 basis points and the first quarter 2021 compared to the same period and 2020.
Margins were supported by higher levels, and net sales and production as well as positive net pricing and the first quarter.
Our first quarter pricing of approximately 4% was adequate to cover inflationary cost increases for the remainder of the year and we expect material cost inflation to intensify with continued pricing required to maintain margins.
The Europe Middle East segment reported an increase of $42 million and operating income compared to the first quarter of 2020, resulting primarily from higher net sales, partially offset by higher warranty and engineering expenses.
North American operating income increased approximately $14 million and the first quarter of 2020.
Compared to the first quarter of 2000.
<unk> versus 'twenty.
<unk> 21, higher sales and improved margins and the grain and protein business all contributed to the improvement on.
Operating margins and our South America region reached six 7% and the first quarter and operating income improved $25 million from the same period in 2026.
Significant increases and end market demand and improved sales mix all contributed to the improvement.
And our Asia Pacific segment operating margins expanded to 10, 5% and the first quarter, reflecting improved sales and production along with and improved sales mix.
Slide eight details grain and protein sales by region and by product.
Sales increased by about 21%, excluding currency impacts and the first quarter of 2021 compared to 2020.
Globally grain and seed equipment sales increased approximately 18% with our North America, and Asia Pacific Africa region, showing the largest increase protein production sales grew approximately 24% and 2020 with higher sales and the Asia Pacific Africa, and South American regions offsetting lower.
Sales in North America.
The protein production segment has been significantly impacted by the pandemic, particularly in North America, where protein processing capacity has been challenged and China and protein producers are beginning to recover from Asian, swine fever, and have started to rebuild their production capabilities. We.
We are expecting a recovery and the grain and protein sales and 2021 following week sales and 2020, which were heavily impacted by the pandemic.
On slide nine we address AG, because free cash flow for the first quarter, which represents cash used in operating activities less capital expenditures, our seasonal requirements for working capital are greater and the first half of the year and thereby resulted in a negative free cash flow and both the first quarter of 2020.
And 'twenty one.
Agco strong free cash generation last year allowed us to repay $276 million term loan facility that was taken out to provide liquidity last year.
Last week, we outline and because capital allocation priorities and our capital return framework, which includes regular quarterly dividend payments share repurchases and and annual variable special dividend to return excess cash flow.
Following our strong free cash flow generation in 2020.
We were in position to increase our quarterly dividend by 25% and announced the first variable special dividend payable in the second quarter. We currently expect to repurchase shares opportunistically with a target amount of a $120 million to $150 million during 2021.
And the variable special dividend payment declared last week and the amount of $4 per share payable on June one 2021 to shareholders of record at the close of business on May 10th.
Future returns of cash to shareholders will be based on cash flow generation, our investment needs, which includes capital expenditures and acquisition opportunities as well as our market outlook.
Other details for the quarter include losses on sales and receivables associated with our receivable financing facilities, which are included in other expenses net were approximately $4 $6 million during the first quarter compared to $8 one.
And in the same period of 2020.
Turning to our full year forecast, our 2021 outlook for the three major regional markets is captured on slide 10.
We have increased our market forecast for all regions expect higher retail industry demand globally and compared to 2020.
And North America, higher commodity prices and improved farmer sentiment and is expected to and result in increased 2021 sales replacement.
Demand for and 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 sales to be up approximately 15% and 2021 compared to 2020.
European Union Farm and farm economics are expected to remain supportive and 2021 higher commodity prices are expected to support healthy demand from the arable farming segment milk prices have increased and economics are positive for dairy producers.
Western Europe industry demand is expected to remain strong and grow modestly in 2021.
Elevated commodity prices and favorable exchange rates are expected to support additional growth and South America. During 2021 as farmers continue to replace aged equipment and.
And total industry demand and South America is expected to improve 5% to 10% from 2020 levels.
Slide 11 highlights the assumption 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 dealers. We also continue to manage our cost while preserving our investments in digital.
Technology, and smart farming product development on.
Our 2021 and forecast assumes improved global industry demand with no additional impact from the pandemic are.
And our sales plan includes market share improvement and price increases of three 5% to 4% aimed at offsetting material and cost inflation during 2021.
At current exchange rates, we expect currency translation to positively impact sales by about 3%.
Engineering expenses expenses are expected to increase by $50 million to $60 million on a constant exchange rate basis compared to 2020. The increase is targeted at investments and smart farming and precision AG products as well as continue our rollout of platform designs on.
Operating margins are expected to be up approximately 150 basis points from 2020 levels driven by higher sales and production favorable pricing net of material cost and productivity initiatives, partially offset by increased investments and smart products and our digital initiatives.
We are targeting and effective tax rate ranging from 28% to 30% for 2021.
Slide 12 lists our view of selected 2021 and financial goals, we continue to operate and uncertain conditions and this outlook does not consider any further business drop disruptions caused by the COVID-19 pandemic.
We are projecting sales to be and the 10, 6% to $10 $8 billion range with 2021 earnings per share targeted and a range of $8 40 to $8 60 per share.
We expect capital expenditures to be approximately $300 million and free cash flow to be and the $450 million to $500 million range.
For the second quarter. Our current estimate is that earnings per share will be and the range of approximately $2 10 to $2 20 per share we project, a significant improvement and sales and margins of the 2020 levels, which were impacted by COVID-19 impacted suspensions and our European and Brazilian production.
We also plan to ramp up engineering expenses, and the second quarter to facilitate new product introduction schedule and 2021.
While our order backlog supports our outlook the timing between quarters of our sales is difficult to forecast due to supply chain challenges that we anticipate will continue during 2021.
The quarter to estimate is highly dependent on component availability from suppliers and production levels throughout the quarter.
With that we'll turn it back over to Greg.
Thanks, Sandy and and the spirit of expanding participation in the Q&A portion of this call lash that you limit your questions to well limit yourselves to one question and one follow up James with that why don't we move to the Q&A section.
As a reminder to ask a question you will need to press star one on your telephone keypad and order to withdraw your question. Please press the pound key and please note that we do ask that you limit yourself to one question and one follow up please standby, while we compile the Q&A roster.
Yes.
And our first question comes from the line of Kim <unk> with Citigroup go ahead. Please your line is open.
Yes. Thank you good morning, maybe just.
Follow on Andy's comments, there in terms of.
Margin.
<unk> plus.
140 basis points what is that.
And just unclear.
And what does that assume in terms of.
Net pricing and thank you.
Give some color regarding the first quarter Im not sure does that does that get fully on wound for the full year or is the expectation that.
And it narrows and you stay on the plus side for the full year.
Yes.
We're anticipating that we stay on the plus side, so and the first quarter that net pricing was.
Little below 2% impact so that well as well.
We got the pricing and in advance of.
This surging commodity price and.
And increases that we expect to see for the remainder of the year as we get to the full year.
We set our pricing would be three and 5% to 4% and our net price.
Would be about 50 to 70 basis points. So we expect to stay say positive there are.
And some challenges that we see kind.
Kind of keeping the pricing up with with.
Cost and some businesses and the middle part of the year, but by the end of the year, we expect to be.
Fully covering all of these costs.
Okay got it and.
And quick follow up on.
On the on the full year what is the.
And the assumption in terms of.
Dealer inventory.
The issues around component and just product availability and getting some prioritization there that's going on in terms of.
Hitting retail orders versus stock orders, but maybe just some color there in terms of of that kind of 10 seven at the midpoint for the full year revenue outlook.
What is assumed in there in terms of.
And with dealer inventory and the year. Thanks, a lot right OE as you know we worked hard on getting our dealer inventories down last year and as we look at where our dealer inventories are.
And at the end of the first quarter. They are substantially below where we were a year ago and a loss.
Lot of that is due to the work that we did last year, but also the strong retail activities that we've had so to your point.
The focus is on retail.
For sure, but we want to make sure we've got enough adequate supply of inventory to meet all the demand that we can that we can accomplish our our business plan or model really anticipates that our dealer inventory will be relatively.
Relatively flat year over year by the end of the year. So no no additional incur.
Increase or reduction plan.
Our next question comes from the line of Stephen Volkmann with Jefferies. Go ahead. Please your line is open.
Great and good morning, everybody.
I'm curious maybe Eric how are you thinking about sort of how this cycle is unfolding here and maybe I'll refer to your slide 10, where you have your various regional outlooks are those outlooks. What you think can actually get produced and sold or is that really what you think demand is and I guess, what I'm trying to figure out is.
Does demand get pushed into 'twenty, two because we have supplier issues and 'twenty one.
And then just sort of what are you thinking about in terms of the medium term.
Good question Steven Yes.
And I would respond to that is that I believe that there is more demand out there than the industry will be able to supply and 2021.
Especially and some of our markets I think South America will be curtailed with the highest confidence of being curtailed.
North America is at risk Western Europe is probably less vulnerable to a curtailment, but theres just a lot of uncertainty left and the marketplace for what the impacts will be on COVID-19. So.
So your assumption is the same as what I would guess as well.
Some of this demand will not be met.
And then just a follow up on that is it logically reasonable to think that incremental margins would be better in 'twenty two as always supply of things kind of revert and we have a more normalized kind of a year assuming that happens.
Assuming things smooth out, which with vaccines coming online and that's the root cause of these component tissues.
That plus a lot of the freight problems, but there's just such a surge and the overall infrastructure wasn't able to catch up and then we're having spot issues all over the place on all sorts of different commodities and largely COVID-19 is the root cause so it all comes down to our assumptions on that if the vaccines work.
Their way through the system and they hold and our effective than next year could return to normalcy and a lot of these hidden cost and waste could fade away, which would lead you to believe that there is some incremental margin to be had.
Our next question comes from the line of Adam Uhlman with Cleveland Research Go ahead. Please your line is open.
Hi, guys. Good morning, congrats on the strength.
Thanks, Adam.
And you had a question on on slide five for your tractor production hours.
I guess I'm just wondering why after the second quarter.
Ours would it be more elevated and the second half of the year, maybe closer to I don't know.
And more like the first half of the year I guess.
And I would be pulling back on their production hours on a absolute basis.
And I think that last year. It was kind of an unusual year in terms of production.
We really had.
Significant delay and production last year, and the second quarter and so the third quarter when we typically have.
Summer shutdowns and things like that we actually worked last year. So.
And our plan this year is to have normal summer shutdowns and.
And our plants and 2021, and so that's going to naturally mean that our production and third quarter last year is going to be higher than and what we had this year, despite the demand and and the fourth quarter, we expect to see some some production increases.
And.
Back in so.
I think also the fourth quarter is relatively strong and started to see some of these market increases. So that's that's what we're seeing so far.
Okay and could you dimension.
The order intake I think.
And I think you mentioned that it's and orders are up significantly and are we looking at like 30% type of order growth and.
Maybe flush that out by region and and are you.
Assume that you are sold out and.
And some areas of the globe, maybe maybe you could share with us.
And availability.
Yes, so were.
Adam.
Close to doubled pretty much across across the regions, which gives us.
And some very good lead times and gives us some good visibility.
Really into the back half of the year so yes.
Yes.
Even though the we.
We saw some growth on our rewards through.
Through the end of last year, we continued to see order strength and as we came through the first quarter and ended up like I said about double where we were last year and Adam that includes grain and protein.
And our next question comes from the line of Jamie Cook with Credit Suisse. Go ahead. Please your line is open.
Hi, Good morning, I guess just my first question can you just talk about I mean, obviously the order book is pretty strong here today can you talk about what youre seeing on the market share front salmon and successes potentially and North America, and South America, and if theres anything to be said, there and then I guess my follow up question.
Andy and obviously the sales growth is looking to be pretty good.
And for South America margins improved again in the first quarter and.
Any change and sort of your margin outlook for South America. Thanks.
Sure you want to hang on I'll take the first half yeah.
We're continuing on the same trajectory that we have talked to you about and the previous discussions and that we're seeing good success and our large horsepower high horsepower tractors.
And that's driven largely by our globalization of the Fendt brand and then our precision AG business.
And I can give you a few numbers here in 2021, our momentum planter volume is going to grow by 60% over 2020.
Smart rose so we also.
Addition to selling full fledged planters out of the factory. We also sell Roes that are intelligent and largely out of precision planting that's up 42%.
From 2020.
And then our smart and novel installations that go on sprayers coming out of the factory.
Projecting that will be up 35% since 2019, and we expect that to continue to grow.
Across all markets going forward, so and our connected machines by the end of the year will be up Forex versus 2019, So precision AG is growing strongly and some of the largest growth rates are in North America, and South America, but then on a full machine sales in terms of high horsepower in North America and.
And especially the sprayers planters combines but even tractors and South America are all growing in terms of share as well and.
And Jamie.
And when you look at share one of the things that looks a little bit puzzling, especially with our north American numbers is that our sales didn't grow and grow quite as fast as a market and that's a function of.
It's not building our dealer inventories as much and the first quarter of 'twenty, one as we did and 20, so our retail market share as Eric said did very well and.
But it's a little bit masked by the fact that we didn't build our inventories like we did last year.
Okay, Great and then just any color on the South American margins sorry, yes.
So on this on the South American margins as you said, we got off to a good start.
And this first quarter, but we're looking at for the full year is somewhere.
100 to 150 basis point improvement and the margins we do see.
A little bit of a weaker mix.
Some of our stronger margin markets like Argentina, and we'd expect to start to.
Slow back down and we're also the cost increase and cost inflation is the most severe and South America right now and so there is <unk>.
<unk>, keeping our pricing up to offset all of that so a little bit of a.
Issue and a few markets and a few products there so.
150 basis points 100 to 150 basis points is what we're targeting.
Our next question comes from the line of and do it again from Jpmorgan go ahead. Please your line is open.
Okay.
Hi, Thank you and sorry, and diagnosed and yes, I'd like to come back to your end market versus your production areas and I'm not sure that you answered the earlier questions and sufficiently and we can give.
And I play this year and the supply chain constraints and.
Q4 production absolute our slips.
And frankly woefully low I mean, why wouldn't it be higher than Q3.
Back to at least maybe Q1 or Q2 levels.
And then the lack of dealer inventories and the expectation that demand and just like need to be pushed into 2022.
And unless you believe that North America, and low horsepower and by the fall off a cliff in 2022 after.
And then a huge expansion we've seen in the last couple of years. So if you can explain that nothing year over year production hours. The absolute Q4 hours I wouldn't may be higher.
And.
And what we have and the fourth quarter is that it was against the backdrop of a pretty strong fourth quarter 2020. So we are.
At this point have a revenue and our projections up only about.
3% to 5% and.
And the fourth quarter. So I think I think we have the huge increase in Q2.
And then the back half, it's getting a little more.
And Q3 as I as I mentioned our sales.
And are expected to be relatively flat versus 2020, because of the increased production, we had and and <unk>.
Catch up that we did on a year ago and then.
Up about three and a half 3% to 5% and Q4.
So I think that that's the focus.
In terms of is there opportunities for an increase I think it.
As Eric said is about.
Ability to produce and certainly we're going to be watching the end markets for the rest of the year.
But that doesn't really explain the strong demand and the lack of I mean every dealer we speak to says they have no inventory they need inventory and if you can produce and the absolute levels and Q2 debt you're forecasting like anshan produced and in Q4.
Well I think I think.
And last year, we had.
And our dealer inventories coming down and this year, that's going to give us some what of and increase in terms of production hours.
I'm more focused on what our revenue is going to be and Ive already described debt.
Production hours, two should should pick up as we said in the fourth quarter.
And then be somewhat in line with what we said the sales increase would be and then also and keep in mind that in Brazil.
We also have maintenance shutdowns and the fourth quarter, so seasonally the.
Production is going to be lower because of those maintenance shutdowns and Brazil, we have those maintenance shutdowns in Europe and the third quarter. So that's why it typically that fourth quarter production levels aren't as high.
Our next question comes from the line of Larry de Maria from William Blair Go ahead. Please your line is open.
Thanks, Good morning, everybody.
And you talked about some of the products and good momentum planter et cetera, I think if I'm not mistaken maliki presentation called out is slower than maybe expected rollout of the ideal combine.
Update us on where you are versus where you thought you'd be.
And to understand the strength of the overall portfolio, including the harvesting as we go into this up cycle and thank you.
Yeah ideal combine is.
Performing extremely well relative to all the all the competitors and the marketplace. We run it head to head we've done tests and North America, South America, Europe, Australia, running and the same field against the competition and it's got just outstanding performance we've been.
And the early stages, we had some reliability problems. We believe that those are largely behind us now.
But we always had planned to have a staged ramp up here in terms of making sure. This is a very complicated machine on the one hand.
And we had a lot of dealers that werent.
So focused on combines and some parts of our network and so we wanted to walk our way into this marketplace, but the machine is performing very very well customers really like it we've been supporting it very carefully to make sure that the ramp up has been successful and.
And so we're on track and it continues to grow and we're going to have significantly more sales this year and our projection is too.
And growing that again into next year. So it's on a it's on a steep growth curve.
Globally, we're still producing and two locations in Europe and in South America and at some point, we will turn on our U S location when the volumes justify so that was always part of the plan.
Okay, Thanks, and as a follow up.
And obviously, if shareholders voted your proxy and performance and the quarter and obviously, it's pretty good very good.
And we more or less do we think.
But the actavis tissue is maturing and coming to our head and or is it becoming to it's still a distraction or how would you characterize it overall.
Yes.
Well.
And.
It's a I would say we got positive votes.
<unk> votes on all directors and all proposals from Tuffy.
We've been having active discussions within the board meeting.
Our board meetings, and so I think that it is it is coming towards the discussions are moving towards the center.
It's hard to predict exactly where things will go we've had a long term relationship with taffy, but.
Our interest will not always be perfectly aligned but.
But I think that at least for right now it looks like we have.
We've got a strong vote of support during the shareholder meeting and and we'll just see where things go from here.
Our next question comes from the line of Nicole Diblasi with Deutsche Bank Go ahead. Please your line is open.
Yes, thanks, good morning, guys.
Good morning, Nicole.
And I wanted to start on a question similar to and rather than focusing on the revenue performance that you guys expect throughout the year can you talk a little bit about how you're kind of thinking about the progression of margins and it might be that the margin path kind of followed what you said about revenue, but any color would be helpful.
Sure, we expect a sizable margin improvement and Q2 again last year was.
Down because of the lack of production. So we're looking for 250 basis point improvement and Q2 over.
Q2 last year.
And Q3 are margins, we expect to actually be lower and 22020 again, we had unusually high sales and and production and 2020.
And so that's that's.
We think we'll get kind of more normal normal cadence that we see and 2021 and then Q4, we expect our margins to be up again.
Year over year, and the fourth quarter by 100 to 200 basis point, So all in all.
As we said and our and our comments that that would lead to about 150 basis point improvement and margins on an annual basis.
Got it that's really helpful. Thanks, Andy and then one more question on margins for Yale the other driver of upside I think versus what we were thinking for the quarter. Aside from South America was North America margin also looked really strong can you talk a little bit about what you're expecting for that segment for the full year.
Sure we've got.
Little bit over 100 basis points improvement for the full year for North America.
Some of the improvement is as you point out it came and the first quarter.
Good first quarter and the higher production levels and.
And pricing that we expect to get we think can support that margin improvement. The one negative area and I'd point out is we do get a little bit of a hit on foreign exchange impacts, we import product from Europe into North America, and so that.
And with the with the stronger Euro is giving us a little bit of a tighter margin on and on our.
North America results, but obviously overall with our strong European profits are offset by translation benefit so to the company's bottom line, it's not a big impact, but it does show up and the margins for North America, but overall, our margin improvement as expected and North America expected.
Get to double digit margins this year.
Our next question comes from the line of Joel <unk> with BMO go ahead. Please your line is open.
On a change the format a little bit and have a comment and then a question I bet. Martin is doing cartwheels right now with the stock price so strong versus getting all worked up about how his name is pronounced.
And then.
Can you guys talk about how the.
And how the operating margins like what kind of normalized levels could be possible like like looking three to five years out and South America and it seems like there has been a very quick turnaround there and I just wonder like if I try to think more structurally what's changed how do I think about how that translates into March.
And as a couple of years out when things normalize and thank you.
Yes.
We talked about debt a little bit and our strategy discussion that we felt like we needed to continue to focus on the South America margin improvement is a key element of.
Focus for the company over the next.
A number of years, we are way ahead of schedule because of how strong the market is.
And so that's really helped us and where we're seeing great success in terms of improvements in all aspects of our business down there in terms of grow and our higher margin.
Planner business growing and grain and protein and <unk>.
Movement on our part sales and all those things are really driving a lot of this improvement we still have work to do in terms of our cost structure on our our tractors and combines we've talked a lot about how we brought in a new and.
And localize some of our global designs.
As.
The cost have been impacted a lot because we are importing more of the content. So we need to localize more of that and find ways to reduce reduce those and we're also putting significant amount of pricing and to also.
Offset a lot of this inflation this year, but hopefully that will carry into improvements in margins going forward. So all that being said, we think we've got still opportunity and work to do and South America. Obviously the March the market has helped us but.
We expect South America to be in line with our other regions as we move forward.
Yes, Okay and expectations, we just had another view on that business with the board.
They are very pleased with the progress or like and he said ahead of schedule from the plan that we presented them last time and and the mission for every business has to be above 10% ultimately.
Okay. Thank you.
Our next question comes from the line of Chad Dillard with Bernstein Go ahead. Please your line is open.
Hi, good morning, guys.
Good morning, Chad Good morning, Chad.
So if you go back to a comment.
And you guys maybe net.
<unk> remarks about our low horsepower being above the prior peak.
Just wanted to get your perspective.
Are you seeing some sort of structural change in that business and that would lead to.
Higher mid cycle higher peaks.
And just like what's your view on like the medium term.
In terms of demand.
Continue to grow over the next couple of years within this business line.
Chad My our expectation here is that this is a to some extent a pull forward of demand. This is a peak largely tied to COVID-19.
Root cause where you have a lot of folks.
And their home looking outside and doing special projects you see the same thing happening and home improvements lumber prices.
Clients availability and so on and there is not a structural change and refrigerators. We don't think there is a structural change and small horsepower tractors either so it's a it's a surge and demand that is very very high right now, but it's largely tied to COVID-19.
Got you.
I wouldn't change the long term perspective of the industry.
Got it that's helpful and.
And then can you just give some color on revenue contribution from your precision.
And you called it out as a $400 million business.
How are you thinking about that segment for this year and what's embedded in guidance.
Yes in terms of one thing we can report on is the precision planting aspect of that precision planting sales I think were up.
Most to 20% and the first quarter so off to a really good start there that's about half of that revenue.
The rest of the growth is probably in line with what we've seen.
But with our core business so were.
Progressing well there and.
We will report maybe more specifically on that.
Hopefully throughout the year.
Our next question comes from the line of Jerry Revich with Goldman Sachs. Go ahead. Please your line is open.
Hi, This is the shocks and the mill head on for Jerry Revich, you mentioned expectations for 250 basis point year over year improvement in margins and the second quarter, which implies flattish margins sequentially and normal seasonality is for margins to be up around 300 basis points sequentially. So I'm. Just wondering are there any transitory items and the first quarter margins that we should.
Okay.
And the first quarter margins and second quarter second quarter, while the second quarter margins I think the thing to keep in mind is that we.
Uh huh.
I have a pretty significant ramp up and engineering expenses.
And also our SG&A expense is also expected to.
Ramped back up last year, and the second quarter, we've really dialed down everything because we were shut down.
<unk> anything and so.
Kind of.
Going back to a little more normal activity levels. So our second quarter engineering expense should be up somewhere 40% to 50% and our SG&A up and the 20% to 25% and the second quarter. So I think debt is part of it and then also again there are some areas like particularly grain and pro.
Teen Ware.
Our pricing is lagging a little bit east searching steel prices on some.
Some of the.
Product sales that will have on the second quarter, so a little bit tighter margins there so issues here and there on.
Price cost would be the other thing that I'd highlight.
Great and in terms of the increased investments and smart farming and precision AG and I'm. Just wondering if you can provide extra details on the investments being considered and also how you think about organic versus M&A opportunities.
Well, we've already talked to you about the.
$50 million extra and and and engineering expense largely that's all aimed at precision AG type solutions and so that's the organic portion we're actively looking all the time at our acquisitions that would fit in either as a product to fill and our precision and portfolio or a capability.
So you saw $1 51 research and our <unk>.
Grain and protein business, a little while back provided provides intelligence to our green beans, and now you can essentially get and MRI signal on the Green power, we've got other discussions underway.
And and so we're looking for a balance between the two to try and accelerate this as fast as we possibly can our vision is to become.
A trusted partner and industry, leading smart AG solutions, and we want to we don't want to propel forward as fast as possible to deliver on that vision.
The other piece of it we're also investing.
Investing and it doesn't show up and engineering is and our digital customer experience, we talked a lot about that at our analyst meeting and when you think about our web presence and our ability to do business with our customers electronically. That's one of the areas that has been a key focus and we think it's going to help us drive.
Better penetration of some of our products and better service levels to our customers going forward. So that's another area that we're spending a lot of time and effort around.
Our next question comes from the line of Kristen Owen with Oppenheimer Go ahead. Please your line is open.
And taking my question.
And really strong performance and grain and protein and the quarter.
I believe you came into the year with a strong backlog. There. So can you talk about the order trends for that business and what your market share expectations are for the year.
For the grain and protein order board is up about 80% I think versus a year ago. So we have a good good order backlog.
Really varies a lot by region.
We have seen significant orders increase and Asia Pacific Africa, as we mentioned in our comments.
Lot of interest and refreshing and improving the protein production capabilities of that market. So we have very strong demand there.
South America market is still strong in North America, we're seeing.
Very high orders and interest on the grain part of the business, so the silos and and conditioning and equipment and handling equipment.
And our orders are down and and are are down on the protein equipment. So protein as we also commented.
Is where there is a lot of issues in terms of with the higher commodity prices as their higher input costs. So their margins are challenged and also still a lot of disruption from.
From the COVID-19 situation in terms of protein production facilities. So they're not investing right now so it's a little bit of a mix of what's going on better and grain and worse and protein right now.
Thank you for that color and then my.
Follow up question is and it's really as it relates to the other side of the coin on on commodities inflation.
And we are seeing a lot of tightness and crop protection, that's driving up prices and so can you talk about any impact that that may be having on demand for some of your precision technologies. Thank you you mentioned and some numbers around prior orders, but any additional color you can provide there.
Yeah.
So I think it's a.
It's a great time for precision AG growth. There's just there's a gen for the reasons you said precision AG one of the roles of precision AG is to more efficiently apply inputs seed and chemical and so that's one driver and then the second driver is general affordability of the farmer and both of those.
And are extremely positive right now and so that's why I gave you those numbers of what we're seeing in terms of growth year over year, and planter and sprayer technology, it's extremely strong anywhere from 40.
And 40% on ROE is 60% on planters and.
And 35% on our novels from 2019.
Our next question comes from the line of Rob Wertheimer with Melius Research go ahead. Please your line is open.
Yeah, Hey, I just have a big picture question on where you would put kind of Europe and the cycle.
Sure the Western New York numbers I don't know if the rest of EMEA has been generally stronger over the last couple of years, whether that's structural or not and.
And.
You have more granular detail on on what you saw in France, and Germany and other places.
2021 day.
On the high cycle, or where would you characterize it and then.
The real question I guess as a follow up please.
Are you seeing farmers want to sustainably purchase more or accelerate trade and especially in Europe due to precision and I'll stop there. Thanks.
We'd say Europe is close to mid cycle.
It doesn't go through the same volatility swings that other markets do.
One of the major reasons is that Theres, a higher subsidy level in Europe. So that provides more stability because a larger portion of the farmer income as subsidy base. So you don't have the highs and the lows that other markets too.
So we see increased mark farmer sentiment increased market demand.
And that's generally based on really commodity price driven today and so those two are linked closely precision AG.
Is also a driver of interest we're growing our precision planting business and throughout Europe.
And it is growing it doesn't grow quite as fast as we're seeing in North America, and South America typically those two markets lead and one of the reasons is farm size that.
And that the average farm size and Europe is generally smaller and now in eastern Europe, and that's that's not the case, but what and Western Europe and.
And average firm sales at a little bit smaller so precision AG adoption happens a little bit.
Later than it does and north and South America.
And we have time for one last question and our final question comes from the line of Brett Linzey with vertical Research go ahead. Please your line is open.
Thanks for squeezing me in and good morning, everybody.
Good morning.
Just wanted to come back to the order boards really healthy I appreciate all the color on some of the different technologies.
You already opened order slots for next year is their customer indication.
And Theyre looking to.
Procure equipment and looking into next year.
So we don't have we don't have order slots for next year, yet those are just dealer forecast and market forecasts.
And then just back to the production downtime you noted.
Suspending production and Germany, what is the duration there and what is the.
<unk> impact and I guess, what is the gating factor to shuttering more capacity and other regions.
Yes. So most of these shutdowns that we described this one was a week to 10 days something like that we've been.
We've had plants some plants not be affected so far we've had some plants down two weeks, so far and what are.
Manufacturing teams are working on is how to how to catch these last days back up working with.
Unions and works councils to determine whether we can work on weekends, we can take vacation days or flex days, all sorts of mechanisms to get that capacity back in later in the year. So that's.
And part of the challenge. This year is constantly re planning and re forecasting and and working on being as flexible as possible. So that we can produce and meet all the demands that are out there.
But a lot of these commodities are.
A couple of days here and there or a week.
And so that's what we're dealing with right now.
And with that ladies and gentlemen, and I'd like to turn the call back over to Mr. Peterson for any closing remarks.
Thanks, James and we just want to thank everyone for participating today and for your interest and Agco, we look forward to continuing to answer your questions. As we go forward in the coming days, thanks, and stay well everyone.
We thank you for joining the call today. This concludes today's conference call and you may now disconnect.
Okay.
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