Q2 2021 AGCO Corp Earnings Call

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Yes.

Good morning, My name is Thea and I will be the conference operator today at this time I would like to welcome everyone to the Agco 2021 second quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer.

And if he would like to ask a question during that time simply press star and the number 1 on your telephone keypad. If you would like to withdraw the question press. The pound key. Thank you at this time I would like to turn the conference over to Greg Peterson Agco's head of Investor Relations. Please go ahead Sir.

Thanks.

And good morning to those of you joining us for Agco.

Second quarter earnings call. This morning, we will refer to a slide presentation, that's posted to our website at Www Dot Agco Corp Dot com.

Non-GAAP measures used and the slide presentation are reconciled to GAAP metrics and the appendix of that presentation. This morning will also make forward looking.

Because such statements, 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 timing of those benefits. We'll also discuss production levels engineering expense exchange rate impacts pricing.

Looking sir repurchases dividend rates and future retail revenue margins earnings cash flow tax rates and other financial metrics. We do 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.

<unk> share commission, including the company's form 10-K for the year ended December 31.2020. These.

These documents discuss important factors that could cause the 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.

Cultural industry, including those resulting from COVID-19, including plant closings workforce availability supply chain disruption and product demand.

And.

Also whether commodity prices and changes in product demand.

We disclaim any obligation to update any forward looking.

Except as required by law a replay of this call will be available later today on our corporate website.

On the call with US. This morning, we have Eric and Saudia, 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 everyone joining us on the call today, we've come a long way over the last year responding to the global pandemic and addressing the needs of all of our key stakeholders during the Covid crisis.

And then it is helpful to remember where we were in that journey during the last quarter and the second quarter of last year and order to provide some context.

To our current results.

Last year, we experienced extended second quarter shutdowns, and our European and South American factories, which negatively impacted our sales and earnings.

Over the last 3 quarters global economies have started to reopen and demand and our end markets has rebounded to a very high.

Texas <unk> results for the second quarter of 2021 reflect robust market recovery as well as strong execution by the agco team.

We delivered sales and earnings growth despite significant ongoing supply chain challenges.

Let's start on slide 3 where you can see the net sales grew.

Level of 43% compared to the second quarter of 2020 adjust.

Adjusted operating income increased nearly 150% driven by a 420 basis point increase and our adjusted operating margins with improvement achieved in all regions.

Favorable pricing helped to offset raw.

<unk> Hill and component cost inflation, and the second quarter, and we expect to see a more significant impact of higher material costs during the remainder of the year.

The supply chain challenges, we discussed and our last call are still a major factor as capacity constraints and COVID-19 disruptions continue to impact timely receipt.

Receipt of components for production.

Underlying these farmer fundamentals remain very strong and our order boards continue to be significantly above last year.

Based on improved market forecast across all regions, our strong second quarter results.

We increased our financial targets.

For the full year of 2021, and our investments in smart farming precision AG and digital solutions are paying off as we are seeing excellent demand for our technology rich fendt tractors are precision planting solutions and other aftermarket products are.

Our healthy balance sheet supports our technology related investments.

As well as funds the return of cash to our stockholders as evidenced by the variables special dividend the company paid on June 1.

Slide 4 details industry unit retail sales by region for the first half of 2021.

And the reopening of economies has increased the demand for green putting pressure.

And on global grain inventories, which remain at low levels.

Agricultural commodity prices have fluctuated over the past quarter.

But continue to support favorable farm economics, resulting and increased demand from machinery.

These improved conditions are expected to generate industry growth across all major.

But mint markets and 2021.

In North America industry retail tractor sales increased about 22% and the first half of 2021 compared to the same period and 2020 with industry retail sales of large AG equipment growing by approximately 24%.

Row crop farmers are taking advantage.

<unk> improved commodity prices and projected healthy income levels to upgrade their equipment.

Industry retail sales and Western Europe also increased from the first half of 2021 versus supply constrained levels a year ago with.

With growth across all major markets higher wheat, dairy and livestock prices.

Combined with healthy levels of crop protection production are generating positive farmer economics and farmer sentiment.

In South America industry sales increased during the first 6 months of 2021, driven by improved demand in Brazil, as well as recovery and the smaller export markets.

And healthy first crop as well.

Its 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 5.

Our suppliers have been impacted by Covid related disruptions as well as capacity constraints due to surging industrial demand.

Quite a great work by our purchasing team, we continue to experienced supplier bottlenecks and delays and all of our regions.

We expect significant challenges and the quarters ahead to meet the current strong levels of end market demand.

Since last quarter, we increased our production plan to meet additional end market demand.

Despite this increase our new production plan does not represent the top of our capacity.

If we see further increases and end market demand and the second half of the year subject to our supply chain and ability to respond we would still have room to further increase our production.

Total company production was up approximately 40% for the.

Quarter versus the same period and 2020 with the largest increases in our European and South American factories.

Which were shutdown proportions of the second quarter of 2020.

We are projecting a 15% to 20% increase and full year 2021 production compared to last year and.

And remember that our.

Our production ramped up significantly and the back half of 2020, so our growth and the second half of 2021 will not be as large as what we have experienced and the first half.

Turning our attention to Agco's order board as of the end of June our order book for tractors and combines was significantly higher and North America Europe and.

And South America compared to a year ago.

I'll now hand over the call to Andy Beck, who will provide you more information about our second quarter results.

Thanks, Eric and good morning to everyone I'll start on slide 6 which looks at Agco's regional net sales performance for the second quarter and first half of 2021.

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Sales were up about 35% compared to the second quarter of 2020, excluding the positive impact of currency translation.

Strong end market demand and favorable pricing drove the increases across all regions.

And Europe Middle East segment reported an increase and net sales of approximately 34%.

Excluding the positive impact of currency compared to the production constrained second quarter of 2020, the largest increases occurred in France, Turkey, and the United Kingdom.

Net sales in North America increased approximately 29%, excluding the favorable impact of currency compared to the levels experienced.

And the second quarter of 2020.

Increased sales of tractors.

<unk> and planting products and replacement parts produced most of the increase.

Agco's second quarter net sales and South America grew approximately 53% compared to the second quarter of 2020, excluding positive currency translation.

Impact.

This significant growth was in Brazil, which was up over 65% excluding currency impacts combines midsized tractors and grain and protein showed the strongest growth.

Net sales and our Asia Pacific Africa segment increased about 40% and the second quarter.

Cancellation of 2021 on a constant currency basis compared to 2020.

Recovery and Africa, along with strong growth in China, and Australia were the drivers of the growth.

Consolidated replacement part sales were up approximately $480 million for the second quarter of 2000.

And 'twenty, 1 part sales were up about 12% compared to the same period of 2020, excluding currency impacts. In addition, our sales of precision AG products were up approximately 37% from the first half of 2021 compared to the first half of 2020, reflecting strong except.

Acceptance of our smart farming solutions.

Slide 7 examines agco's sales and margin performance and <unk>.

Adjusted operating margins improved by approximately 420 basis points and the second quarter of 2021 compared to the same period and 2020.

Margins.

<unk> were supported by higher levels of net sales and production as well as positive net pricing and the quarter, our second quarter pricing of approximately 4.5% was adequate to cover inflationary cost increases.

For the remainder of the year, we expect material cost inflation to intensify with continued pricing.

Acquired to maintain margins.

The Europe Middle East segment reported an increase of approximately $110 million and operating income compared to the second quarter of 2020, resulting primarily from higher net sales and production, partially offset by higher engineering expenses.

The American operating income increased.

Approximately $39 million and operating margins reached 14, 1% and the quarter.

Higher sales and improved product mix contributed to the stronger results operating margins and our South America region reached 8.3% and the second quarter and operating income improved.

Nearly $18 million from the same periods in 2020 Cigna.

Significant increases and end market demand and a better sales mix supported the growth.

And our Asia Pacific Africa segment operating margins expanded to 11, 5% and the second quarter, reflecting improved sales and production.

Yeah.

Slide 8 details grain and protein sales by region and byproduct.

Sales increased about 24%, excluding currency and the first half of 2021 compared to 2020.

Globally grain equipment sales increased approximately 23.

<unk> with our South America, and European regions, showing the largest increases protein production sales grew approximately 24% and 2.

2021, with the strongest growth and Asia Pacific Africa, and South America and regions.

Marine equipment demand has been stronger supported by <unk>.

<unk> and prices and profitability of farms. However, demand has been muted by significant price increases by manufacturers to cover surging steel costs and <unk>.

OTC production equipment market remains lower due to labor issues and higher input costs such as grain.

Protein prices are improved.

And so profitability is recovering the protein production segment was significantly impacted by the pandemic, particularly in North America, where protein processing capacity continues to be challenged and China protein producers are beginning to recover from the Asian swine fever outbreak and have started to rebuild their.

Production facilities.

We are expecting a recovery and grain and protein sales and 2021 following week sales from 2020, which were heavily impacted by the pandemic.

And.

Slide 9 addresses agco's free cash flow for the first 6 months of 2021, which represents.

Used in operating activities less capital expenditures, our seasonal requirements for working capital are greater and the first half of the year and resulted in negative free cash flow and both the first 6 months of 2021 and 2020.

Agco strong cash flow generation last year allowed us.

And to repay the $276 million term loan facility that was taken out to provide liquidity and the prior year at <unk> capital allocation priorities include investment and our precision AG offerings and digital capabilities as well as opportunistically, adding bolt on investments and.

Cash and terms of return on cash to shareholders. We will continue our regular quarterly dividend payments share repurchases and and annual variable special dividend to return cash to shareholders and the first quarter, we increased our quarterly dividend by 25% and paid the first.

And special dividend and the second quarter, we currently expect to repurchase shares opportunistically during the second half of 2021.

Future returns of cash to shareholders will be based on cash flow generation, our investment needs, which includes capital expenditures and acquisition opportunities.

Very 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 expense net were approximately $5.1 million during the second quarter compared to $4.3 million and the same period of 2000.

20.

Turning to our full year forecast, our 2021 outlook for the 3 major regional markets is captured on slide 10.

We increased our market forecast for all regions and expect higher retail industry demand globally compared to 2020.

And North America.

As lottery prices and improved farmer sentiment is expected to result in increased 2021 sales replacement demand for and aged 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.

North American industry unit tractor sales to be up approximately 20% and 2021 compared to 2020.

European Union Farm economics are expected to remain supportive and 2021 higher commodity prices are expected to support healthy demand from the arable farming segment.

Segment milk prices remain above the 10 year average and economics are positive for dairy producers.

Western Europe industry demand is expected to remain strong and grow approximately 10% and 2021.

Elevated commodity prices and favorable exchange rates exchange rates are expected.

To support additional growth and South America during 2021 as farmers continue to replace aged equipment and total industry demand and South America is expected to improve approximately 15% from 2020 levels.

Turning to slide 11, we highlight.

<unk> underlying our 2021 outlook, our priorities continue to be maintaining a safe working environment for our employees and providing proactive to support to our customers and dealers.

And in addition to focusing on meeting the robust and market demand. We will also make significant investments and the development of new.

<unk> to support our farmer first strategy.

Our 2021 and forecast assumes improved global industry demand with no additional impact from the pandemic.

And our sales plan includes market share improvement and price increases of approximately 4.5% aimed at offsetting higher material.

<unk> inflation during 2021.

At current exchange rates, we expect currency translation to positively positively impact sales by about 3% engineering expenses are expected to increase by $50 million to $60 million on a constant exchange rate basis compared to 2020.

Cereal and the increase is targeted at investments and smart farming and precision AG products as well as to continue the rollout of our platform designs.

Operating margins are expected to.

Be up approximately 2200 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 investment and an effective tax rate of ranging from 27% to 29% for 2000.

'twenty 1.

Slide 12 list our view of selected 2021 financial goals, we continue to operate and uncertain conditions and this outlook does not consider any further business disruptions caused by the COVID-19.

Al.

Outbreak, where we are projecting sales.

Sales to be and Neil 11, 3 to $11.5 billion range with 2021 earnings per share targeted and approximately $9.50.

We expect capital expenditures to be approximately $300 million.

And free cash flow to be and the 450 to 500 million.

Range.

The third quarter. Our current estimate is that earnings per share will be and the range of approximately $101.70.

$2.1.80 per share.

This estimate is modestly below the third quarter of last year, which was unusually strong as our Europe.

European and Brazilian production facilities work to catch up lost production from the second quarter 2020 shutdowns. We also plan increased engineering expenses and the third quarter to facilitate new product introductions scheduled in 2021.

While our order backlog supports our.

The timing between quarters of our sales is difficult to forecast due to supply chain challenges that we anticipate will continue during the rest of 2021.

The Q3 estimate is highly dependent on component availability from suppliers and production levels throughout the quarter.

Our outlook currently expect our fourth quarter 2021 results to be significantly improved over our 2020 performance.

With that I'll turn the call back over to Greg.

Thank you Andy and we're ready now operator to take questions and in order to encourage broader participation and we'd like you to limit your questions to.

1 question with 1 follow up thanks, and we're ready to take questions and.

And at this time I would like to remind everyone that if you would like to ask a question restaurant 1 on your telephone keypad again, Thats star 1 for any questions well pause for just a moment to compile the Q&A roster.

And the first question will come from.

And Stephen Volkmann with Jefferies. Please go ahead.

Greg Good morning, guys and thanks for taking my question, maybe just to start off on some of these supplier issues that you mentioned and I guess I am curious do you feel like supplier issues limited or reduced.

<unk> accomplished and the second quarter.

We have some sort of finished product waiting for parts.

At the end of the quarter and then.

And sort of longer term it sounds like you expect a pretty big improvement and the fourth quarter. So maybe just a little color around that.

And Stephen This is Eric yes, the answer to all of your questions is yes, we have.

Did you add challenges all through the year and those continued right on through to the end of the quarter 2 and in reality. They are going to we expect them to continue for the rest of this year.

And those show up as having extra raw material and extra machines that are mostly built waiting for 1 part of the other so we closed out the quarter with a tremendously.

<unk> order board.

Probably highest in the company's history.

Our teams are working really hard to build through that order board, but we still got a lot of machines built that are not ready to invoice yet and we expect that situation. That's why Andy made the comments he did and we expect that situation to continue.

Lehigh and time yet.

Okay, but obviously the fourth quarter it looks like a pretty big quarter based on your guidance and I guess, you're assuming things normalize then.

I wouldn't say normalize, but we think we'll get a little bit of relief.

We believe that perhaps the world.

The worst of it is behind us, but we're not out of the overall topic yet.

And we expect quarter, 3 and is still to be quite challenging.

Aiming for quarter 4 to be a little bit less so, but not it's not smooth sailing yet.

Alright, thank you.

Yes.

The next question will come from Jamie Cook with credit.

Please go ahead.

Hi, good morning, nice quarter, and I guess.

Eric noted.

How great the order book and I'm, just wondering how much of your order book today.

For 2022, and assuming you have orders for 2022, how do you.

Approach pricing just given the challenging.

<unk> dynamics related to material cost rate supply chain type stuff. Thank you.

Thanks, Jamie not much of the order bank yet is for 2022, there is some but most of it is still for 2020.

And when you think about the size of the order bank its largest filling up most of the rest of 2021 with a few products.

Sprinkling into 2022, our order banks.

And just talk about like say for example, South America, we only open up windows at a time say a 2 months maybe 3 months window at a time and we will take orders for that period at a given pricing position and.

And then and then close the window.

So that allows us to manage the situation with inflation being highly volatile.

Our most intense market relative to inflation, we can match the pricing situation with the cost inflation situation and make sure that those the timing is lined up with those.

And so.

Doing early order programs are set that way, so we're making sure that we're putting pricing in place and advanced and so far year to date, that's proven to be the case. We've been ahead of the cost with all of our pricing actions year to date.

Okay, and then just as a follow up Eric there's a lot of debate around where we are and the cycle and concerns at the farm.

And Thats, what word market sort of at peak zone.

And just given your your your your experience level.

Can you help us understand where you think the farm equipment cycle and by region and sort of relative to the peak or mid cycle. However, you wanted to find it and then I'll get back in queue. Thank you.

Yes, the farming cycle overall.

And we would say is very strong right now and no question about that is it at peak, we don't have it marked at peak yet we are we have at above mid cycle.

And we went into the year forecasting early and late late last year. We are forecasting this year was going to be a little bit below mid cycle. We've got it above mid cycle now.

And.

Raul, we still think that there is room for this to play out for some time, yet because of a number of factors, there's low grain inventories theres high commodity prices and Theres still ripped.

Replacement demand thats unmet yet from many years of farmers holding off on purchases during the lean years.

And so when you combine all of that good current conditions a lot of pent up demand, we think that there's a.

A fairly strong market in front of us for a period.

Great. Thank you very much.

And welcome.

The next question will come from and Donnan with J P. Morgan. Please go ahead.

Yes, Hi, Eric.

But on the back half.

And last question and your response I mean, I think the 1 pizza.

And I'll, let you did not speak to is that input costs have risen and faster for farmers and ever before.

And so it is.

And quite likely that their net income and sort of peak this year. So could you.

And into consideration as you talked through.

You talked about.

Farm cycle and I think you were really talking about a quick 1.

And secondly, if you could just talk about.

Farmer income and North America, and the squeeze from the input cost that they're seeing and what that might do to your outlook.

Yes, and this half.

And as every time this is a very typical behavior. So it is not.

Not unusual this cycle.

And each cycle. There is there is a period, where theres been constrained purchasing and so commodity prices are low cost or low there's not room and the marketplace than there is especially with us when there is a.

And take Virgin demand and all of the input suppliers are racing to try and catch up with that demand. We're seeing steel prices up 2.5 times in North America, 1 and 1.7 times and Europe, and so those kinds of pressures are because of the ramp up.

And our farmers are feeling that too.

And to some.

<unk>, especially like in green and been purchases that slowing down their purchase behavior and so we think that thats. Another reason why there's a good chance that this.

And this market strength may actually.

Stabilized for some time, because it's cooling off now we think that that.

<unk> prices not going to stay at those elevated prices and I think that allows for more room downstream for for farmers to get back in and buy.

Perhaps next year or the year after.

Yes, I'm not talking about steel prices and prices are your commodity I'm talking about seed.

Fertilizer call.

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Greg.

Whatever it is from a farmer's P&L perspective.

Could you and yes, I think it's all the same.

Yes, I think it's all the same though and I think they are all behaving. The same there is a massive run up right now and so there is a high price inflation, but.

So I think that will so farmers are paying more for fertilizer.

Steel proceed more from machine and they are paying a lot more for everything and.

And to some extent rental prices are going to go up so that will cool down their buying behavior, but those prices likely are going to also moderate. So that's why I use. The steel example, just because it's closer to home, but it's I think it's going to be the same thing for fertilizer as well.

And more of those those are cool demand and the short term, which should spread that demand out over the midterm.

Yes.

Okay, I don't think that Thats Andrew.

Thank you Youre.

Youre welcome.

The next question will come from Christian Owen with Oppenheimer. Please go ahead.

Great. Thanks for taking my question.

And when you talk a little bit about mix and North America.

And at this time and attraction and.

Expansion, there and any indication for how that impacted your market share.

And can take that yes sure.

And we're seeing.

And really strong growth and our high horse.

Our equipment and North America and.

Most of that is driven by the improvement and and our net sales and North America. So we're right on track with that.

Our sales of high horsepower equipment, I think are up over 40%.

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First half of this year and I think thats, a big contributor to that so.

The acceptance of the Fendt product has been good we continue to develop our distribution and so thats.

And all leading to some of the stronger results Youre seeing.

And North America.

And my.

My follow up is somewhat related on the precision AG numbers that you provided up 37% and the first half.

Can you give us a sense of what that was into Q and maybe parse it out between precision planting and the rest of the precision AG portfolio.

Thank you.

Sorry, I don't have it by quarter, we just had the first half numbers that precision planting aspect to that precision planting is up about 40% and the first half.

And so the.

Other OEM.

And aspects of precision.

And AG debt.

Developing revenue on is a little below that 37%, so kind of and the low thirties, and Christian net 30% or 37% was pretty consistent across the first half. So it's been strong first half and as.

As Eric mentioned, our order boards are strong for the back half of the year as well.

And maybe I'll just build on that the precision planting story is playing out exactly like we told you. We are aiming for so we've got multiple growth levers. There..1 is to continue to grow the planting business and second 1 is to grow outside of planting into other technologies around the crop cycle and the third 1 is to grow globally.

And you take.

Take a look at the quarter 2 from precision planting South America sales were up over 100% European sales were up over 200%.

The strategy and each of those dimensions is happening as we've targeted.

The team is doing a really great job and the customers are very excited about the solutions coming out of that that business.

Oh.

And I appreciate the color. Thank you so much.

You're welcome.

The next question is from Larry Demaria with William Blair. Please go ahead.

Thanks.

First of all day.

Okay.

And maybe.

And margins and that business.

Okay.

We try to see the impact of what that is on your overall margins.

So precision AG margins, yes, I would categorize those as average.

Aftermarket type margins and so they're typically double what just like our parts business typically double what we get from a normal OEM machinery sales.

Okay, Thanks, and a true.

For the full year, a couple of hundred million dollars.

More than that.

Yes, so our revenues.

News were about.

$400 million last year, and you can see what growth rate, we're running right now would probably expect that growth rate to come down a little and the second half because precision planting is really a first half business and.

Not as important and the second half, but we.

And the pretty significant sales and the and the full year.

Okay. Thank you and if I could ask my real question.

And obviously to maintain this positive industry pricing and it requires a disciplined from Oems and not to overproduce into next year kind of whats your overarching philosophy as we think about production and next year you gave a good.

Good color on South America, and how you open the windows and that should maintain from discipline, but how are you thinking about production into next year any possibility of moving early order programs getting named attached to orders and there'll be maintained this relatively lean inventory and positive pricing.

Yeah, Larry and what we.

Uh huh.

No.

Our focus is not to just focus on the order board, which as Eric described are extremely high right now, but really look at what the retail demand and retail sell throughs going to be and that's going to dictate.

Our production levels and things like that and I think if we continue to monitor.

And the retail sales and produce to retail then that will be the right approach.

Approach and keep our dealer inventories and our company inventories, obviously and line right now our dealer inventories are well below where we were a year ago.

Production constraints.

And issues, there and the strong retail market is.

Basically, forcing our inventories lower and we plan for some of that during 2020, but they're even lower now and 2021 really because of the strong retail demand. So.

As we go through the.

Back half of the year, our plan is that our dealer inventories at the end of the year will be fairly level with last year, but given the strong retail demand I would expect.

And likely at least and some of the markets that our inventory levels will still be lower than.

The prior year.

Okay.

Yeah.

The next question will come from Nicole Diblasi with Deutsche Bank. Please go ahead.

Yeah. Thanks, good morning, guys.

Good morning, good morning, and cool, maybe just starting with price cost appreciate that it was positive and the first half is your expectation that you can remain ahead of.

And.

Second half and I guess like you said inflation remain an issue is there appetite for further price increases.

Yes, so our.

Our plan for the year is to continue to maintain and add pricing where needed.

To offset the material.

Felicia.

That's a big challenge because of how severe some of these cost increases are and.

And in some cases, we're not able to do that like and sometimes in our grain and protein business. We are getting squeezed there, but overall, we believe that we will have pricing and offset all of this material costs.

And our net pricing which is the.

And the pricing over material costs is expected to be about 50 basis points for the full year.

Okay got it and that's really helpful. And then just a follow up on South America margins I mean, the traction there was once again really impressive this quarter.

And so I guess, how are you thinking about the second half for South America margins, and that's a pretty important variables and the overall margin.

Our South American margins as you say, it's been really a way ahead of schedule in terms of the improvement that we look for there's just a significant.

Volume and production increases year over year really help trigger that along with some strong mix and the first first half as we go into this and the third and fourth quarter. We're looking at our margins to be relatively flat and the third quarter, and then a little bit down and the fourth quarter.

Despite the fact that our sales will continue to be higher.

We're seeing some increased expense levels and engineering and other other areas and also the mix is not as strong and the second.

Second half of the year, we are seeing growth and some of the lower horsepower equipment.

And thats, giving us a lot.

Little weaker mix, but overall the profitability levels and second half will be better than what we had and the second half of last year.

Got it thanks, Andy Oppenheim.

The next question will come from Ross Gilardi with Bank of America. Please go ahead.

Good morning, guys.

I just had a question about raven and them and how big of a supplier or day to you and does the business going into a competitor's hands, where are you at all and potentially to cause you to go captive on whatever you are buying from them.

Yes Ross.

A good question there.

Fairly minor supplier and the Grand scheme of things, we buy a little bit of technology from Raven and in terms of sprayer controls.

But it is somewhat limited.

If you think about there's a couple of different dimensions to that and the short term.

And we've already had discussions with C and H and.

And they are committed to continuing to honor all of the prior Raven commitments to agco and.

The components that we buy and we feel that there is a nice structure, there that we supply C and H with precision planting componentry for their planters now and.

So we feel confident that.

C and H and Raven will continue to supply us with the spirit and components that we purchase today.

We.

We also feel like your second half of your question is going forward in terms of future developments.

We are intending to keep.

Several of the programs going that we had with Raven.

And the future of Componentry, and we've got commitments that will be walled off from the rest of the organization in terms of intellectual property and data sharing and so on.

But we continue to look.

Precision AG policy is really a 3 legged stool internal development partnerships, and then acquisitions, where they make sense and so we've got a very.

And in terms of.

Looking at the landscape of precision AG companies, and finding where we can partner or acquire for technology and the landscape and so I think that will be.

And that will talk about more over the next few quarters.

That's super helpful. Eric. Thank you I mean, just in terms of your priorities for cash flow.

Thank.

A larger precision AG related acquisition that improves your competitive position ranked in the overall pecking order versus returning more of your free cash flow.

Well when you look at it from an investor standpoint from an internal standpoint, it's a high priority from a meaningful impact.

Act Investor, it's a low impact because the companies are relatively small size.

And that are out there. So we think it's an important ingredient a small group of people can make a big impact like you see with precision planting.

The relatively small size acquisition relative to the overall company of Agco, but look at the impact they are making.

<unk>, 2 and and it's a big impact internally relative to cash flow consumption from investor and how it would eat into returning cash and other forms I think a smaller impact.

Thanks very much.

Youre welcome.

The next question will come from Jerry Revich with Goldman Sachs. Please go ahead.

Ed.

Yes, hi, good morning, everyone.

I'm wondering if you could just comment on how you see for your dealers their used equipment inventory balances heading into year and just so we can get a sense for potential length of cycle, where do you view inventories for us.

And today versus long cycle averages and.

If you could comment by region to the extent you have visibility that'd be helpful.

Yes, I don't have this.

Specific numbers in front of me.

Jerry but overall the market.

The strength that we're seeing extends into the used market as well so.

And good solid demand there are our used inventories are below where they were a year ago very lean.

And.

Used prices are up and I think thats.

And most important.

But north America, and Europe, it's not as big of a used market and South America.

But overall that section sector of the market's going well and.

As you know, it's a really important part to monitor and but it's moving right along with what we're seeing with the new.

Equipment share 1 of the ways, we kind of monitor that we look at equipment returned equipment and our finance company.

And our inventory of used equipment Thats been returned is extremely low and.

And normally there is some cost associated with reselling that and so thats usually.

Our cost of doing business for our finance company. This year, we're actually making a profit on reselling that used equipment, so really a good sign.

Not only is the used.

Used equipment inventory and AR and a really good place.

And that supporting prices, but.

What's driving prices up so that helps us.

Cell or our price our new equipment, so very supportive.

Okay, and then as we look at it.

The exit rate for earnings and in the fourth quarter, obviously, a pretty robust number you know anything that we should think of as we model out what 22 looks like relative to normal seasonality.

This is where do you think extraordinarily positive and this quarter's numbers or is that.

Type of seasonally adjusted run rate, we should be thinking about.

Business Center and 22.

Overall, we are seeing.

Margin expansion of.

Probably close to.

Is there and or basis points from the fourth quarter.

And that's.

Mainly driven as I pointed out South America, we're not going to see that mainly driven in North America and Europe.

If we think back to a year ago, we were working on reducing dealer inventories and both of those regions.

And so we're going to see some.

Sizable growth, particularly in North America revenue and in the fourth quarter and our margins should be higher.

Overall, because of higher production levels, and a strong mix of sales and the fourth quarter.

More clients.

Our high horsepower equipment sales so overall.

It should be a good solid quarter and the fourth quarter.

Okay. Thanks.

The next question is from Adam Uhlman with Cleveland Research. Please go ahead.

Hey, guys good morning.

I was wondering if we could chat about the <unk>.

And that's a little bit more could you remind us what the net sales.

The outlook is for this year I think you mentioned that.

Customers are starting to get a little sticker shock and.

The bookings have slowed down.

Could you maybe just update us on what the second half looks like and any thoughts on next year and then with.

<unk>.

Steel prices not so much could you remind us what the margin profile and that business.

Now here.

And here in the near and medium term.

Sure the grain and protein business.

We had a weak year last year, we really there was protein sector was shut down.

With all the issues and so we do see a nice recovery and revenue.

Our year to date revenues up.

Already mentioned, a little above 20%, 20% and we expect that for the full year.

And.

From a margin standpoint, we entered into the year expecting.

Margin improvement now it looks like margins are going to be relatively flat and thats really driven by my previous comments about the.

The material costs, and our ability to keep up with pricing to offset that these are longer project oriented type deals and.

And the.

They are there.

Longer lead time between when we get the order and finish the project so little bit of a.

Squeezed there so that will give us some opportunity moving into 2022 in terms of grain and protein margin.

Gotcha and then.

Earlier in the call.

Look I think you mentioned that there could be some more upside.

To revenues this year.

Component availability will improve I guess could you help us understand where we.

We are standing today.

Supply availability.

Okay, what's pre how.

How much how much growth and the current footprint, we have without pretty significant capex.

Yes.

The capacity and our factories is not yet a problem.

It's really all in the supply chain today.

And we're getting closer.

And a couple of factories, but fundamentally the big picture is getting the components to flow into the factories.

And so this year for sure we don't expect a running out of factory capacity unless you say you burned up enough production days, because you had to shut down or lose a shift here or there.

And run out of capacity that way.

So it's really the stories about component flow and.

And.

For the next couple of years, we don't see a major capacity capital requirement. We've been steadily feeding these factories with improvements in automation and that continues to work through the bottlenecks, we put into new.

System, and some automation and ours through lots of factory recently, and some warehouse automation and several of our factories. Those continue to work through piece by piece the areas that are sticky and so we're staying out ahead of it with our factories big issue is the supply chain.

Great. Thanks.

The next question is from Joel <unk> with BMO. Please go ahead.

Hey, guys How's it going.

No.

I Wonder if we could zero in on the parts business for a minute. It sounds like it's doing really well some of it may be easy comps, but is it coming from capturing more of.

The installed base of equipment Thats out there or is it the deal is performing better or just a little sense of of what's underneath that that our success there.

Well I think we're making improvements on a few different fronts dealer absorption is up that's the measure of how much of their overall overhead is.

Is.

Offset by parts and service sales.

And so we want them to continue to move up towards 100%, where they're covering their entire overhead with parts and service sales and they are moving in that direction. So dealer performance has improved.

Our parts fill rate has stayed very strong through the.

Of the pandemic and and as and market, leading conditions and many of our markets, where the best and the industry and so I think we continue to build confidence in the marketplace with our farmers and to some extent of our dealers.

And so there's a bit of a shift there, but we still have a lot of untapped potential we haven't leveraged.

And our full potential from our connected machines and art.

Connected machine fleet will be up by the end of this year, we'll have 4 times more connected machines and we did just in 2019 and being able to use that to move more proactively into.

Driving service parts revenue is still and untapped potential so I think.

There are several areas both at the customer level and at the dealer level that are improving but we still got a lot of runway in front of us.

And and then as we go through all these kind of challenging times are there are there business units or pieces of businesses or product lines that seem like maybe they're a little more commoditized.

So it's harder to get the pricing through or whatever you are looking at that that might not really be the best use of capital.

Or that's too small to worry about.

We're pretty much across all of our businesses getting the price increases to stick right now.

Hi.

Granted some of this inflation is very high but we have been able to stay ahead of it with pricing. So we don't see any segments that are kind of no fly zones for being able to manage it the way Andy talked about.

Okay. Thank you.

And welcome.

The next.

Yes from Chad Dillard with Bernstein. Please go ahead.

Hi, good morning, guys.

Hey, good morning, Chad.

So a question for you on your price realization guidance, you're guiding to 4.5% versus probably molecule from baseline which is around 2%. So.

250 basis points.

Delta.

Can you just talk about how.

How much of that comes from them from a sales incentives versus mix versus core expenses.

Price increases.

Trying to understand like how sustainable and it says and then similar to some of the things you're seeing on the GSI side how.

And how much further can you push before.

Question of demand disruption.

And the pricing that we're getting comes from different sources some of it is.

The invoice price that we sell the equipment to the dealer.

But it's also adjustments to our discount program so a lot of our.

Most of our products.

Discounts that are.

After but below the invoice price. So we net net prices below the invoice price and we give discounts in terms of.

Multi unit programs.

Volume bonuses theres, all sorts of different programs to ensure.

There's dealers.

And so we've been able to restrict or or reduce those those promotional programs during the year and order to get some more pricing in place that's enabled us to get pricing without going and changing the list price on the unit and.

And when we get into <unk>.

Later, this year and we get into our we'll have model year repricing, we can reset a lot of those model prices and then kind of give ourselves room again in terms of our price levels. So overall I think we have different.

Approaches and.

Brent.

Levers too to enact this price increase that we need so we still think we have the ability to price.

And as needed.

And obviously.

I think the more issues timing, because we have such a strong order board.

And with.

And different.

Material cost kind of coming in and a lag here, it's whether we get squeezed or have some kind of mismatch between the timing of new pricing and the timing of the costs coming in so far as Greg pointed out and Eric pointed out we.

And we're running ahead of schedule in terms of pricing versus cost.

But we do see more of the cost increase is coming and the second half of the year and Thats 1 of the things that will really be monitoring very closely.

Got it that's helpful.

And then just a second question.

Deals with.

And price versus cost and I guess from net price.

We can see.

See that and I know, it and assume that and I guess im assuming that commodity prices stay where the other day.

How far out before.

And behind you.

And then I think you mentioned on the inventories side dealer inventories side that maybe exiting I guess flat versus 2010 levels and.

And I'm, assuming that you know.

Supply chain challenges abate.

Would you want to add inventory to a channel right now.

And in terms of pricing cost price I think probably the biggest challenge will be the third quarter I would expect that to start.

Assuming we don't see another surge.

<unk> and commodity prices would start to.

Got to get more balanced here and the fourth quarter. So that would be my expectation from that standpoint in terms of.

Dealer inventory levels, our target was to really just maintain our dealer inventory levels and as pointed out already theres probably.

And again, it's a bigger risks that they come they stay down just because of how strong the retail demand is.

We don't have any desire to increase our dealer inventory levels, we want to keep them at the right level, which we had kind of said is where they were at the end of last year, but with the higher demand certainly are.

Our month's supply of dealer inventories coming down, but the absolute amount.

And we're expecting to be fairly consistent year over year.

Great. Thank you.

The final question is from Steven Fisher with UBS. Please go ahead.

Great. Thanks, Good morning, guys.

And I know you said you have some some additional capacity I guess I'm curious, how you're thinking about the potential outcome.

And this growing season to meaningfully change the demand side are you hearing things that kind of gives you some sense of where that's leading our dealers are farmers telling you that.

And the drought isn't too bad and there will be some additional orders.

And what are you hearing from not from the field there.

While demand continues to come in strong and almost all of our segments.

There is there are weather events, the western half of the U S and Canada is under severe drought.

And heat and that's a problem for those farmers and South America. There is some severe droughts and now theyre getting freeze and snow, where they almost never gotten it before so there's there's weather events happening there, but you don't want to talk about the winter alphatec, so but thats.

Those are real and those are real impacts of the farmers the safe.

Safety net is that in North America, many farmers buy crop insurance.

And so when there is weather events globally that generally restricts the yield.

Grain produced and keeps inventories low so prices stay high and then those farmers that were impacted.

And stuff and at least in North America, and not so much and South America, and Europe, and North America insurance keeps them.

At least their nose above water.

So overall, we see a pretty strong market staying into the next cropping cycle because of.

The yield forecast coming out and.

And we have confidence that the demand is going to continue strong and got order bank strong now, but our order rate, adding to that order bank continues to stay strong.

Got it and then just a technology question, I'm curious which areas of technology.

You feel the most need or desire to.

And kind of expand.

Spanned into beyond precision planting as you mentioned earlier it sounds like Youre satisfied for now with the Ravens status quo on spring or where else.

And what are the kinds of technologies.

And motivated to expand.

Yes, a couple of categories 1 would be the first 1 is <unk>.

Making what we call smart.

That's why we sheen's automating the function on the machine such that it can adjust on the Gulf for the operator as an example, just to.

Tell you what we mean by that like our smart firmer sensor on the planter. It census soil conditions as you go and can allow them to plant or to make real time adjustments. It takes $2.3 million.

$2.3 million measurements per acre and so it can make.

On the go adjustments like 8000 adjustments per acre farmer would never do that they would never adjust that frequently so that's the type of application.

And we're looking for and planters harvesting whether its haier green.

Martin and sprayers.

Making the machine and be able to census environment make on the go real time adjustments to optimize its performance that's category number 1 and that's where the big focus that we have.

Right and our vision is to really focus there and then number 2 there is a lot relative to sustainability.

And whether.

And the alternative fuels of electrification or hydrogen or other things.

But then also helping with farmers and soil carbon sequestration and capturing carbon out of the air into the soil and we think that there is a lot of technology and farming practice evolution. So we've shifted our field trials to be.

They all used to be precision AG and the past now the precision AG plus sustainability. So those would be the 2 broad categories that have several ingredients and each 1 of them.

That's really helpful. Thanks, so much.

Youre welcome.

And at this time I would like to turn the conference back over to management.

And for any closing comments.

Thank you. We appreciate everyone's participation this morning, and your interest and Agco and encourage you to follow up with US. If you have additional questions. Thanks and have a great day everyone.

Ladies and gentlemen, thank you for participating in today's conference call you may now disconnect.

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