Q3 2021 AGCO Corp Earnings Call

October 28, 2021

Ladies and gentlemen, thank you for standing by and welcome to the Agco 2021 third quarter earnings release Conference call.

At this time all participants are in a listen only mode.

After the speaker presentation, there will be a question and answer session.

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

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

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

Thank you Shelby and good morning, welcome to all of you that are joining us right because its third quarter 2021.

Earnings call. This morning, we're going to refer to a slide presentation that you can find posted on our website.

Www Dot <unk> dot com the non-GAAP measures that we will be using in the presentation are reconciled to GAAP metrics in the appendix that presentation.

This morning, we will make forward looking statements, including demand product development and capital expenditure plans production levels engineering expense exchange rate impacts pricing share repurchases dividends and future commodity prices as well as crop production or supply chain inflation 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 Commission, including the company's Form 10-K for the year ended December.

31 2020.

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 agricultural industry, including those resulting from COVID-19, which might be which might include plant closings workforce availability and product demand and it also includes supply chain disruptions whether exchange rate volatility.

Commodity prices and changes in product demand, we disclaim any obligation to update any forward looking statements, except as required by law.

Replay of this call will be available on our corporate website later today.

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

Thank you Greg and good morning, we appreciate everyone joining us on the call today.

Our third quarter results were highlighted by sales growth and earnings improvement against the backdrop of a very challenging supply chain environment.

We continue to experience significant component shortages that are impacting our production volumes.

These supply chain disruptions have intensified in recent weeks and we have reduced our fourth quarter revenue and earnings estimates to reflect our revised production plants.

In addition material and freight cost inflation is increasing requiring additional pricing to offset its impact.

The encouraging news is that despite the global supply chain bottlenecks and inflationary pressures.

Farmer economics are very very healthy.

And global end market demand remains strong.

I would like to strongly recognize and appreciate the entire global agco team for their tireless and dedicated work to mitigate these challenging conditions serve our customers and maximize our full year results, which will feature strong margin and earnings improvement.

Let's start on slide three where you can see that net sales grew 9% compared to the third quarter of 2020.

Adjusted operating income increased nearly 13% while margins improved about 30 basis points.

Our investments smart farming precision AG and digital solutions are paying off as we are seeing excellent demand for technology rich fendt tractors are precision planting solutions and replacement parts.

Cause precision AG sales are up over 33%. So far this year with strong growth for both our precision planting business as well as our fuse suite of products.

Our healthy balance sheet supports our technology related investments as well as cash returns to our shareholders.

Slide four details industry unit retail sales by region for the first nine months of 2021.

The financial health of our farmer customers remains strong.

Global crop production in 2021 looks to be very good and agricultural commodity prices continue to support favorable farm income.

Resulting in increased demand for machinery.

These improved conditions are expected to generate industry growth across all the major equipment markets in 2021.

In North America industry retail tractor sales increased about 17% in the first nine months of 2021 compared to the same period in 2020 with industry retail sales of large AG equipment growing by approximately 28%.

<unk> farmers are taking advantage of improved commodity prices and projected healthy income levels to upgrade their equipment.

Industry retail sales in Western Europe also increased in the first nine months 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 production are generating positive farmer economics and farmer sentiment in the region.

In South America industry sales increased strongly during the first nine months of 2021 driven by.

Improved demand in Brazil, as well as recovery in the smaller export markets health.

Healthy crop production as well as favorable exchange rates are supporting positive economic conditions for farmers, who continue to replace an aged fleet.

Agco's 2021 factory production hours are shown on slide five.

As I mentioned <unk> continues to face unprecedented supply chain and logistics challenges as well as material inflate freight cost inflation.

Apply chain constraints have intensified in the recent weeks limiting our ability to increase our production to match the strong end market demand.

The scarcity of parts has impacted the company's ability to produce and ship units and.

And contributed to labor inefficiencies as well as higher than anticipated raw material and work in process inventory levels.

While we expect to reduce our inventories before the end of the year from our current situation the.

The volatile supply chain environment is requiring us to carry more inventory.

Total company production was up approximately 14% for the third quarter versus the very high rate of production in the third quarter of 2020.

The largest increases were seen in our north and South American factories.

Overall, we are projecting a 20% to 25% increase in full year 2021 production compared to last year.

You'll remember that production ramped up significantly in the back half of 2020, so our growth in the second half of 2021 will not be as large as what we've experienced in the first half of this year.

Turning our attention to Agco's order board.

As of the end of September our order board for tractors and combines was significantly higher in North America, Europe, 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 third quarter results.

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

And because net sales were up about 8% compared to an extremely strong third quarter of 2020, excluding the positive impact of currency translation robust end market demand, particularly in South America as well as favorable pricing drove the increase in Europe Middle East segment reported an increase in net sales of approximately 3%.

Excluding the impact of currency translation compared to the high level of sales in the third quarter of the prior year, which benefited from the catch up of deliveries of equipment. Following the factory shutdowns in the second quarter of 2020.

The largest increases occurred in Italy, Turkey, and the U K, which offset lower sales in Germany and France.

Net sales in North America increased approximately 9% excluding favorable impact of currency translation.

Compared to the levels experienced in the third quarter of 2020 increased levels of precision planting products and mid sized tractors produced most of the increase and because third quarter net sales in South America grew 37% compared to the third quarter of 2020, excluding currency impacts sale.

Sales were up strongly across all of the South American markets high horsepower in mid sized tractors and grain and protein equipment showed the most increases.

Net sales in our Asia Pacific Africa segment decreased about 2% compared to that level of sales in the third quarter of 2020 on a constant currency basis lower sales in China, and Australia were nearly offset by improved sales in Africa.

Consolidated replacement part sales were approximately $443 million for the third quarter of 2020 compared to $391 million for the third quarter of 2020.

On slide seven we examine agco's sales and margin performance Agco's adjusted operating margins improved approximately 30 basis points in the third quarter of 2021 compared to the same period in 2020 margins were supported primarily by higher levels of net sales and production our third quarter pre.

<unk> increase price increase of approximately 6% was able to offset the significant material and freight cost inflation that Eric discussed.

For the remainder of the year, we expect material cost inflation to accelerate and for net pricing to be approximately breakeven.

The Europe Middle East segment reported an increase of approximately $5 million in operating income compared to the third quarter of 2020, resulting primarily from higher net sales and production, partially offset by higher engineering expenses.

North America operating income decreased approximately $23 million is increased pressure from material inflation resulted in lower gross margins, particularly in the steel intensive grain storage business.

A weaker sales mix also contributed to the lower operating income.

Operating margins in our South America region reached 11, 6% in the third quarter and operating income improved nearly $28 million from the same period in 2020 Sigma.

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

In our Asia Pacific segment operating margins expanded to 11, 9% in the third quarter, reflecting an improved sales mix.

Slide eight details grain and protein sales by region and product.

Sales increased by about 20% in the first nine months of 2021 compared to 2020 globally grain equipment sales increased approximately 24% with our South America and European regions, showing the largest increases protein production sales grew approximately 16% in 2020.

One with the strongest growth in the Asia Pacific Africa, and South American regions.

Equipment demand has been stronger supported by improved grain prices and profitability of farms. However, demand has been muted by significant price increases by manufacturers to cover surging steel costs.

Protein production equipment market remains challenged due to labor issues and higher input costs, such as grain protein prices our improved profitability is recovering.

We are expecting a recovery in the grain and protein sales in 2021 for the full year. Following week sales in 2020, which were heavily impacted by the pandemic.

Slide nine addresses agco's free cash flow for the first nine months of 2020, and 21, which represented cash used in operating activities less capital expenditures Adil.

And additional working capital requirements this year related to higher inventory levels resulted in lower free cash flow for the first nine months of 2021 versus the same period last year, we expect our year end raw material and work in process inventory to remain elevated to help us manage through the difficult supply chain environment. We.

We've adjusted our full year free cash flow forecast to reflect an additional $200 million of working capital requirements due to increased inventory levels.

Agco's capital allocation priorities include investments in our precision AG offerings and digital capabilities as well as opportunistically, adding bolt on acquisitions, we will continue to return cash to shareholders through our regular quarterly dividend payments share repurchases and and <unk>.

Annual variable special dividends.

In the third quarter, we repurchased approximately $75 million and shares 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 included losses on sales receivables associated with our receivable financing facilities, which are included in other expense net were approximately $7 4 million for the quarter compared to $6 1 million in the same period last year.

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

We maintained our market forecast for all regions as we believe production constraints will limit further retail demand upside.

In North America, higher commodity prices and improved farmer sentiment is expected to result in increased 2021 sales replacement demand for aged fleets of larger equipment is expected to drive most of the increase demand for smaller equipment is expected to be more stable after several years of increasing demand.

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

European Union Farm Economics have remained supportive in 2021 higher commodity prices are expected to support healthy demand from the aerial farming segment milk prices remain above the 10 year average and economics for positive are also positive for dairy producers Western Europe and.

Industry demand is expected to remain strong and grow approximately 10% in 2021 <unk>.

Elevated commodity prices and favorable exchange rates are expected to support additional growth in South America. During 2021 as farmers continue to replace aged equipment in total industry demand in South America is expected to improve about 15% from 2020 levels.

Slide 11 highlights the assumptions underlying our 2021 outlook.

Our priorities continue to be maintaining a safe working environment for our employees and providing proactive support to our customers and our dealers and.

In addition to focusing on meeting our robust end market demand. We also make significant investments in development of new solutions to support our farmer first strategy.

<unk> results are expected to be heavily influenced by supply chain performance for the balance of the year. Our outlook is based on current estimates of component deliveries and because results will be impacted if the actual supply chain delivery performance differs from these estimates.

Our sales plan includes price increases of approximately five 5% aimed at offsetting higher material cost inflation. During 2021 at current exchange rates, we expect currency translation to positively impact sales by approximately 2%.

Engineering expenses are expected to increase by $50 million to $60 million on a constant currency basis compared to 2020. The increase is targeted at investments in smart farming in precision AG products as well as to continue our rollout of our platform designs.

Operating margins are expected to be up 150 basis points from 2020 levels driven by higher sales and production favorable pricing net of material cost and productivity actions, partially offset by increased investments in smart products in our digital initiatives, we are targeting an effective tax rate ranging.

27% to 29% for 2021.

Slide <unk> lists our view of selected 2021 financial goals.

The ability of our company's supply chain to deliver parts and components on schedule is currently difficult to predict following outlook is based on AG because current estimates of component deliveries our results will be impacted if the actual supply chain delivery performance differs from these estimates we are projecting sales to be in the 10 now.

9% to 11 $1 billion range with two <unk> 21 earnings per share targeted in a range of $8 75 to.

To $9 a share.

Sure, we expect capital expenditures to be approximately $300 million and free cash flow to be in that $200 million to $300 million range.

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

Thanks, Sandy and this morning, as we move into the Q&A section, we ask that you limit yourselves to one question and one follow up so that we can expand participation Shelby why don't you get started.

As a reminder, if you'd like to ask a question. Please press star one.

That is star one if you would like to ask a question.

Your first question is from Joel <unk> of BMO.

Wow I never get to be first.

Yeah.

Just wondering it seems it seems like the supply chain issues or the deliveries from from your suppliers have been kind of more week to week Youll have a good week and get a lot of stuff in the next week, maybe won't be so good and it seems like you feel a little more strongly with with you change guidance.

Just kind of get lumpier, or it's going to get a little bit less reliable can you give us a little bit of insight.

And to what you guys are seeing what's changed thank you.

That's a good read on it first of all thanks for the question is that the heart of todays topics really that's that's really the situation a quarter or two ago. We expected that by this time the supply chain would be healthier than we're seeing it actually to be.

And so it's over that time, the overall supply chain has gotten very liens essentially hand to mouth, so any disruption now.

Is causing problems.

And we have seen an increased rate of issues over the last few weeks where.

A lot of them are semiconductor chip related but not only those things theres still issues with tires plastics freight and other things.

It's the same issue here is this is not unique to our company, it's not unique to our industry.

It's hitting all industries.

It's the same thing we are hearing inside the company as you're reading in all the news journal is outside the company. So yes. It is more severe than we would have predicted a while ago.

It's fairly broad based.

And that's why we took the actions we did in terms of guidance.

Okay, and if I'm allowed a quick follow up I just wanted to ask Andy with only two months left in the year, how come we have such a wide range on the tax rate.

And then I'll go away. Thank you.

While the tax rate really is driven by profitability and.

So given a range of profitability that we're talking about.

We're sticking with that wide of a range so.

I think I think we will be able to get within that but.

That's typically why we give such a wide range.

Your next question is from Stephen Volkmann of Jeffries.

Great Hi, guys.

I'm curious I guess sort of in the third quarter or do you have equipment that sort of parked and waiting for parts, but pretty much ready to go that can shift as we move forward.

Yes, absolutely.

<unk> of machines that have been built.

And waiting for one two components and then and then ready to invoice to farmers.

Big picture here, we have a tremendous order bank we have.

Six to nine months of orders on average in some cases much more than that in some cases, we're sold out for next year. We have very strong market demand, we have strong pricing power in the marketplace to handle the inflation situation that we have been under and we forecast to be under its really about the supply chain bottlenecks.

We're dealing with and we feel they are particularly acute right now and we anticipate that those will ease over time. It's just it's just an unpredictable environment. We're in at the moment.

Okay, Great and then that was a perfect setup actually Eric because with so much backlog into 2022, what should we be thinking about in terms of the price impact in 'twenty. Two you probably have pretty good visibility there.

Yes, Steve.

We're still obviously you're making.

We're making estimates of what we think pricing will require next year first of all to cover the inflationary cost in the <unk>.

Carryover of the inflation that we're experiencing right now.

Along with what the market demand is going to be what pricing can we can we achieve.

This year, we as you see in our in our comments that we're expecting pricing to be about five 5% I would see pricing next year to be.

At least in that range as well.

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

Hi, good morning, guys.

Just wondering if you can just comment a little bit on how the supply chain issues are comparing globally.

You are calling these out.

Most of our margin assumptions for the rest of the world Aside from North America.

North America isolated issue or is that just more reflective of GSI, what we're seeing in margins there.

Just any comment on how it's impacting your production globally.

Yes, I think there's actually a couple of questions embedded in your question, So I'm going to Peel those apart a little bit one is supply chain disruptions in terms of material flow is not a north America topic, it's hitting us in all regions.

Perhaps more most acutely in Europe.

But it's a challenge all over.

Especially because we have a global supply base. So supplier, maybe located one region, but supporting factories in multiple regions. So disruption in terms of flow is global and then the second point you. In your question was about GSI. The second issue is component pricing.

And because GSI uses so much steel.

That's right Andy called it out as they are getting hit by the inflationary impact of steel, which is up between 50 and 150% depending on where it is.

And that's why margins are challenged within GSI this year.

Okay, Great. That's helpful. And then maybe just on South America.

<unk> got double digit margin. There. This quarter can you help us just think about what's the right longer term margin for that end market. Since I think we had historically thought of it as that.

Mid to high single digit.

Performer.

Sure Yes.

We obviously had a very strong.

Third quarter result, we had margins up because of stronger mix, our grain and protein business as we called out had a really strong quarter with good margins. So there was a number of positive things that went on in the quarter. We also.

Still haven't really seen the biggest wave of the cost increases hit our results yet that that's coming.

<unk>.

Be part of what happens in the fourth quarter, where that high inflationary cost will hit the South America results a little more so for the full year, we're looking at our our margins in South America to be between.

In the mid 7% and so I think that's a good good target for us.

For the future we what we've said before is that we don't see South America needing to.

We think it should be within the corporate average of our of our margin. So we would expect to.

Drive margin improvement going forward like we like we expect in the rest of our business.

Your next question is from Kristen Owen of Oppenheimer.

Great. Thank you good morning, I wanted to follow up on the GSI commentary.

Obviously, some strong seasonality to that business in the third quarter, but can you just parse out or put a finer point on the profitability impact on the quarter.

And.

You talk about just where the backlog stands in that business today.

Yes.

Youre right. The GSI business is typically strongest in the second and third quarters of the year. So.

We.

<unk> had sales increases as we talked about sales were up.

Nine or so percent in the third quarter up close to 20% for the year to date, we would expect their sales to be up probably 15% to 20% for the full year.

Our margins are going to be either in line or slightly below last year, all because of what <unk> discussed in terms of the surging steel prices than we've had.

Some of those orders that we fulfill this year, we're locked in and we couldn't raise the price and so we have somewhat of a mismatch between.

The timing of these cost increases hitting us and the pricing and so we think that third quarter is kind of the worst that we'll have on that and they'll start to.

Be better in the fourth quarter and as we move into 2022.

Great. Thank you for that and as my follow up if I could just summarize yes the.

The change in guidance is really about.

<unk> change in timing of deliveries not demand destruction.

You've talked about the favorable farm incomes backdrop.

<unk> seen some of the impact.

Of higher input costs on farms.

So can you just square the circle, there and talk to US about what you are hearing from your dealers and any potential for mixed mixed shift or precision application uptick. Thank you.

Okay. There's a couple of questions embedded in there too so let me let me.

Address them separately the first one was about demand.

Absolutely I want to underline we have extremely strong farmer sentiment leading to extremely strong demand, which has provided a huge order bank the highest in the company's history. So this is the demand is absolutely strong. In addition to that demand. We've got strong pricing power, we have had and we.

Expect for it to continue the demand in the marketplace is strong is able to.

They understand the situation.

We anticipate that is going to continue forward, we watch our order rate.

<unk>.

It has not slowed down a bit yet so so that's that's explained by the demand side. The guidance is all about our ability in the short term to build all the orders and we're building as fast as we can but thats. The situation. Then you also asked about precision AG.

And laying on top of the general strong market is a real success story around AG precision AG business.

The general business is up 24%, but inside of that as a precision AG business that's up 33%.

Our smart planter Roes are up 42% alright.

Our ideal combines are up 80%.

And we've been you've seen us announce the acquisition of a company a couple of precision AG companies one in the protein segment and one in the harvesting business.

This is an area we continue to invest in and we're seeing successes from those investments in the eyes of our farmers. They like the technology, they see a real profit benefit to their operation.

I hope I touched on all the elements of your question.

Your next question is from Larry de Maria William Blair.

Okay. Thanks, good morning, everybody.

Yeah.

Noted these price increases coming.

And you hope to have I think a similar level next year.

But you already have half of the year book.

<unk>.

As you noted so all else being equal can we still expect.

Pretty decent margin expansion next year or its backlog and not priced for today's material costs and we have to have further actions on the backlog to catch up maybe in the second half.

Yes, Larry that's a very natural questions and let me explain how we're thinking about it first of all we have two different kinds of orders one as our retail order Thats got a farmer name on it and the other kind of order is a dealer stock order that they would buy a machine to put it on there a lot to be sold later on.

<unk>.

We are treating those two different orders differently.

The dealer stock orders or a wholesale order we are not priced protecting.

And we are.

Taking them in but not confirming them, meaning we have some flexibility on timing and on pricing conditions.

In some situations. We may also apply surcharges on things like freight and other things to.

The order bank.

Those are those are some of the elements but.

During addition to the just the general order bank as we monitor.

We constantly monitor the pricing in the order bank compared to the expected inflation in the order bank and we feel that we're staying ahead of cost with the pricing. That's in the order bank that we have today, while retaining some of the flexibility to tools I've talked about and maybe last comment in South America, where the inflation rate is the highest costs are moving.

Faster there.

We only open up orders about one quarter at a time.

So we are now ordering opening up quarter, one to receive orders.

And then we will fill up that quarter order slot such so that we don't get too far out in front of the headlights in the most volatile market.

Okay. Thank you very much for that and if I could ask a follow up you called out market share gains.

What you can do every quarter, but are there any specific areas.

Full year improvements ideal it's up 80%.

Material to the overall industry market share is unclear.

Deere strike have any impact on how youre thinking about going after customers and I'll leave it there. Thanks.

Yes, I think where we're gaining market share is likely more in North America.

Right now, especially in large AG.

And then.

Let me see what was the SEC decision plant and precision planting is certainly growing our precision AG business in North America is where we're having our largest success and then theres a second half of his questionnaires strength Deere strike. Thank you yes.

I'll leave that to for them to comment on I'll, just say a couple of brief discussion is that.

At this point, it's only been a strike for a few days.

The last one I think that they had was back in 1986 that one last 163 days, but that was in a very different market condition.

If it lasts a short amount of time, then I don't think there'll be a material impact if it lasts a long time, then there certainly would be.

But I'll leave that to them to comment on.

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

Yes, thanks, good morning, guys.

Good morning, good morning, good morning.

Maybe first just starting off with what you're seeing from a pricing perspective relative to costs. I think you guys mentioned that you were still price cost positive in the third quarter. If you could confirm that and is the expectation that <unk> will be price cost positive and if you think about the carryforward of both inflation and pricing into 2022 is that the case.

Yes, so in terms of.

This third quarter, we were slightly positive.

And then the fourth quarter I think it will be it will be fairly neutral.

What that does is result in a little bit of margin deterioration when it's that tight so we typically.

I want to see a wider range there, but right now what's happening is because of some of these.

Orders that we've price protected and locked in we can't get the same amount of pricing is what we're seeing in terms of cost increases so that is affecting our margins here in the third and fourth quarter, a little bit but overall in terms of dollar coverage pricing over cost will be fairly neutral in the fourth quarter and.

As Eric mentioned, we've got some.

The levers that we can pull going forward into next year to get more pricing even within the current order board. There is a big carryover of pricing and cost and we would expect.

We've got a lot of work to do to finalize our plans for next year, but our intention is to make sure that that pricing is covering all of the cost.

Okay got it thanks, Andy and then respond to any question on the outlook for South American margins for the year can you also give us a sense of what you're thinking within the context.

Our full year guidance for North America for.

Europe.

Yes.

So Nicole for North America, we're looking at margins in the 6% to 7% range for the full year so that implies.

A nice.

I'm sorry, it closer to.

We're looking at 10% roughly for North America, which implies a nice step up in the fourth quarter.

Closer to 7% or 8%.

For Europe, we're looking somewhere between 11, five and 12% for the full year.

Which which takes into account some headwinds in the fourth quarter because of higher engineering expansion and some of that material inflation that Andy talked about.

Our Asia Pacific margins look to be in.

Kind of low to mid teens for the full year, which was about 150 basis points of improvement and that also implies some.

Cost headwinds in the fourth quarter.

Your next question is from Jamie Cook of Credit Suisse.

Hi, Good morning. This is colton Zimmer on for Jamie. Thank you for taking my question.

We were wondering if you could just give an update on some of the strategic initiatives, we laid out at the analyst day.

So we're in market share for the Fendt product line, how does that kind of trended relative to your.

Expectations and then also if you could just comment on the order book for some of the higher margin products that you outlined at the analyst day. Thank you.

<unk>.

Yes.

We're really pleased with how the strategy is being implemented all.

All of the initiatives that we talked about.

At the analyst day are on track, we highlighted some of our growth businesses those are all growing nicely.

Continuing the trend we had from 2020, where North America large AG fendt growth service parts and precision planting are all growth engines, and we intend to continue to invest to make them grow.

So sustainably and then we've got some improvement businesses.

South America, Massey Ferguson and Youre seeing the results there.

Three or four years ago, we were losing money in South America.

And now the questions about today or are we going to be above 10%.

Certainly all our target for all of our businesses to be above 10% in the in the mid terms. So.

We're very happy with how the strategy is coming together and we feel like both growth businesses and improvement businesses are on track.

Great. Thank you.

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

Hey, good morning, guys.

Hi, Ross.

I think your new guide implies that margins are down year on year in the fourth quarter.

How many quarters of year on year.

<unk> do you anticipate.

The way it stands now is it does it feel like your margins will be down in the first half of 'twenty two.

Well, we've got a little margin as you point out plan for the for Q4.

We don't have.

Any real guidance yet to give you 2022.

I think it's going to be an assessment based on.

How strong the demand is and Eric is already kind of cover that and then what our supply chain capabilities are and so we're still working through that.

But again, our long term ambition is to grow margins grow these strong.

Margin products.

And.

That will be.

Our goal for next year as well.

But Andy do you think you need to see real improvement.

In supply chain of margins up in the first half of next year.

Is it really more of a.

A timing issue.

With incremental price.

So for us yes.

Okay.

<unk>.

It's there's a growth opportunity if we can get the supply chain ramped up because we do have such a strong order board.

And then the other factors you mentioned is whereas how much of this.

Cost wave, that's coming how does that match up with the pricing that we can implement and so those are the key things that we'll be looking at to try to be able to answer your question I can't really answer it today, but.

Our intention obviously again is get that pricing and get it robust enough to cover these costs into to get margin improvement.

Okay. Thanks, a lot.

Your next question is from Jerry Revich of Goldman Sachs.

Hi, This is a show cause and then I'll hand on for Jerry Revich I understand you're not providing guidance on year over year margin trends, but I'm wondering if you have any thoughts on the margin cadence versus normal seasonality do you think we can expect normal seasonality next year in terms of the quarterly margin cadence.

Well I think.

There is nothing unusual to happen here.

In 2021, like 'twenty, where we had these products big long.

Disruptions in production that caused caused 20 to be kind of unusual year 'twenty one's more normal seasonality.

But again, they're these supply chain supply chain constraints, so that will be kind of the <unk>.

Part that we really continue to need to factor in to understand what is our production going to be what how much products are we able to ship each quarter and so we'll be we're looking at that right. Now obviously focused near term on what we can achieve this quarter, but we're also working on.

<unk> plans to try to improve prove the situation going forward as well.

Okay, and you mentioned the thousands of machines waiting on one or two components Im wondering if youre able to quantify the margin impact based on these manufacturing inefficiencies.

Well we are.

I really can't I mean.

There have been inefficiencies.

Our production because again as you just pointed out you run the equipment down the line and then you have to go touch it again and put new components on and so that takes us an extra amount of cost and labor to be able to achieve that.

And we're seeing that and we expect some of that and we've seen it in the third quarter and we expect to have some of that in the fourth quarter as well. So we're certainly not running.

As efficiently as normally we would these us this environment is causing us to be much more inefficient than normal.

It's not the highlight of the quarter or anything like that it's not causing huge amounts of additional cost, but it is it is adding up.

And everybody in our industry is facing the same thing we've been in this situation ever since Covid hit everybody has been challenged with that.

We will be in it for a little while yet until the supply chain Smoothes out.

Okay. Thanks for the color.

Your next question is from Adam Uhlman of Cleveland Research.

Hey, guys good morning.

I wanted to ask about demand trends in Europe.

And we've seen fertilizer costs spike over there and frankly here in North America as well.

Im wondering how youre thinking about that and how that might impact equipment demand at all.

Okay.

Yes, so fertilizer is tied to energy.

Energy prices, especially in Europe energy prices have gone up everywhere, but in Europe most acutely.

So that's why you're hearing a lot of talk especially from our European farmers about that challenge, but even in North America.

People are farmers are to some extent hoarding or pulling ahead seed and fertilizer purchases because of their concern of both pricing and availability.

So that may.

Cool things off a little bit which in the end may be a good thing it could make this demand cycle less spiky and spread it out over a longer timeframe.

But if so unpredictable at this stage, it's hard to give you an exact shape of what what's going to happen, we think that it's a real pressure on farmers.

And it may it may slightly cool their demand and spread it out over a longer period.

Okay Gotcha and then.

Just a clarification.

I think it was mentioned that.

Retail sales were lower in Germany, and France.

Quarter.

I assume it.

These delayed shipments.

Maybe something else is going on there because youre sure.

What youre seeing in the.

Industry stats.

Sure.

Keep in mind, you have to first go back and remember what last year was like in the third quarter. So we had those production shutdowns in the second quarter and then we were up in the third and we actually had.

Had our normal shutdown periods.

In the third quarter, we were producing last year. So for that reason it was kind of a catch up period. So the market was delivering a lot of product last year. This year, we're kind of in a normal shutdown period, we do have the supply chain issues and so that did affect.

The overall market.

In France, and the UK both markets, France was up slightly for the industry, Germany was down and so that affects us because those are two different markets for us, but I think it was more timing of shipments more than overall kind of inherent demand.

Your final question is from Chad Dillard with Bernstein.

Hi, good morning, guys.

Okay.

To follow up on production shutdown and just wanted to understand whether in the fourth quarter in your guidance.

Any are baked in and outside of the typical holiday shutdowns.

Much.

Maybe if you can just talk about.

What if any impact there is from an absorption perspective.

Yes, so we're really not cutting production too much because of these supply disruptions as we mentioned we won eight still utilize as much of the production capabilities. We have so we're going to run equipment down the line if possible and wait for those final component. So there is.

Probably some assembly hours, we've taken out but a lot of fabrication and other aspects are are still planned to be done in the fourth quarter. So that's one of the reasons why our inventory is up in the fourth quarter from what we what we said before so there is some impact to our production levels, but not.

Not a significant amount.

It's just more timing of when we can get the units shipped.

Got it okay.

And then.

Maybe if you could give us some early thoughts on <unk>.

How youre thinking about the farm economics equipment.

Equipment demand based on what you're hearing from dealers.

In North America, and South America.

For 'twenty two.

Yes.

So farmer sentiment is still very strong when you take a look at commodity prices.

They arent at their peak level that they were spring, but when you look at them relative to the last several years. There is still extremely strong in all cases.

And that.

Rejected a strong for quite some time.

The carryover inventories are in a position, where it's somewhat predictable what those commodity prices will be so farmers and then you combine that with the fact that.

We're still exiting a period of pent up demand, where the farmers had restricted the amount they've bought for the last several years and so theyre wanting to refresh their fleet as soon as they are able to afford it and they're able to afford it right now so you've got that situation combined with the fact that dealer inventories are lower now than they were.

For the last several years and in some cases lower than we've ever had them.

So you've got a farmer.

Interest and demand situation, you've got a thin pipeline between us and the farmers.

And then a commodity green situation that makes it somewhat sustainable having said all that we are in an unpredictable uncertain time period in terms of what happens week to week month to month, how it all plays out exactly it's hard to predict because of the supply situation.

So that's the main.

Summary of where we stand right now.

There are no other questions in queue I'd like to turn it back to Greg Peterson for any closing remarks.

I'll go ahead, and just wrap up and then turn it over to Greg.

Appreciate all the questions today.

We are very happy with the three quarters of performance for the year.

We saw we've turned in a strong quarter three and we're sitting on top of a very strong order bank strong pricing power where arm in arm with our dealers managing through this situation with our farmers to keep farmers farming.

And we have a strong market in front of us.

With very lean inventories in the pipeline in the marketplace.

We're managing through the supply chain. This is a situation that is specific to agco not specific to that industry is hitting all sectors.

What we're hearing inside the company is the same thing you are reading about across all the industrials and.

Because of that is getting a lot of attention from governments from private industry and so on to solve these problems solve these bottlenecks and get more capacity flowing more efficiently.

That's why we have.

Confidence and expectation that this will get solved and we will be able to get the product our customers are demanding to them.

Challenges is just predicting.

With the amount of uncertainty exactly how that will play out and so that's why we've signaled our guidance for the quarter, but big picture. We've got a very strong situation for the company overall, thanks for your investments in the past and our questions for today determined Greg. Thank you Eric and we appreciate you all's participation today and encourage you to follow.

Up with US later, if you have remaining questions. Thank you.

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

Okay.

Yes.

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Yes.

Ladies and gentlemen, thank you for standing by and welcome to the Agco 2021 third quarter earnings release Conference call.

At this time all participants are in a listen only mode.

After the speaker presentation, there will be a question and answer session.

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

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

You require any further assistance please press star zero.

I'd now like to hand, the conference over to Greg Peterson, Vice President Investor Relations. Thank you. Please go ahead.

Thank you Shelby and good morning, welcome to all of you that are joining us right because third quarter 2021, earning.

Earnings call. This morning, we're going to refer to a slide presentation that you can find posted on our website at www Dot <unk> dot com.

The non-GAAP measures that will be using in the presentation are reconciled to GAAP metrics in the appendix that presentation.

<unk> 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 Commission, including the company's Form 10-K for the year ended December.

31 2022.

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 agricultural industry, including those resulting from COVID-19, which might be which might include plant closings workforce availability and product demand. It also includes supply chain disruptions whether exchange rate volatility.

Commodity prices and changes in product demand, we disclaim any obligation to update any forward looking statements, except as required by law.

Play of this call will be available on our corporate website later today.

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

Thank you Greg and good morning, we appreciate everyone joining us on the call today, our third quarter results were highlighted by sales growth and earnings improvement against the backdrop of a very challenging supply chain environment.

We continue to experience significant component shortages that are impacting our production volumes.

These supply chain disruptions have intensified in recent weeks and we've reduced our fourth quarter revenue and earnings commitments to reflect our revised production plants in.

In addition material and freight cost inflation is increasing requiring additional pricing to offset its impact the.

The encouraging news is that despite the global supply chain bottlenecks and inflationary pressures.

Farmer economics are very very healthy.

And global end market demand remains strong.

I would like to strongly recognize and appreciate the entire global AG co team for their tireless and dedicated work to mitigate these challenging conditions serve our customers and maximize our full year results.

Which will feature strong margin and earnings improvement.

Let's start on slide three where you can see that net sales grew 9% compared to the third quarter of 2020.

Adjusted operating income increased nearly 13% while margins improved about 30 basis points.

Agco's precision AG sales are up over 33% so far this year with strong growth for both our precision planting business as well as our fuse suite of products.

Our healthy balance sheet supports our technology related investments as well as cash returns to our shareholders.

Slide four details industry unit retail sales by region for the first nine months of 2021.

The financial health of our farmer customers remains strong.

Global crop production in 2021 looks to be very good and agricultural commodity prices continue to support favorable farm income.

Results in increased demand for machinery.

These improved conditions are expected to generate industry growth across all the major equipment markets in 2021.

Row crop farmers are taking advantage of improved commodity prices and projected healthy income levels to upgrade their equipment.

Industry retail sales in Western Europe also increased in the first nine months of 2021 versus supply constrained levels a year ago.

In South America industry sales increased strongly during the first nine months of 2021.

Driven by improved demand in Brazil, as well as recovery in the smaller export markets health.

Healthy crop production as well as favorable exchange rates are supporting positive economic conditions for farmers, who continue to replace an aged fleet.

Agco's 2021 factory production hours are shown on slide five.

As I mentioned agco continues to face unprecedented supply chain and logistics challenges as well as material inflation freight cost inflation.

Supply chain constraints have intensified in the recent weeks limiting our ability to increase our production to match the strong end market demand.

The scarcity of parts has impacted the company's ability to produce and ship units and.

And contributed to labor inefficiencies as well as higher than anticipated raw material and work in process inventory levels.

While we expect to reduce our inventories before the end of the year from our current situation the.

The volatile supply chain environment is requiring us to carry more inventory.

Total company production was up approximately 14% for the third quarter versus the very high rate of production in the third quarter of 2020.

The largest increases were seeing in our north and South American factories.

Overall, we are projecting a 20% to 25% increase in full year 2021 production compared to last year.

Turning our attention to Agco's order board.

As of the end of September our order board for tractors and combines was significantly higher in North America, Europe, 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 third quarter results.

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

<unk> net sales were up about 8% compared to an extremely strong third quarter of 2020, excluding the positive impact of currency translation robust end market demand, particularly in South America as well as favorable pricing drove the increase the Europe Middle East segment reported an increase in net sales of approximately 3%.

Excluding the impact of currency translation compared to the high level of sales in the third quarter of the prior year, which benefited from the catch up deliveries of equipment. Following the factory shutdowns in the second quarter of 2020.

The largest increases occurred in Italy, Turkey, and the UK, which offset lower sales in Germany and France.

Net sales in North America increased approximately 9% excluding favorable impact of currency translation.

Compared to the levels experienced in the third quarter of 2020 increased yields of precision planting products and mid sized tractors produced most of the increase.

Third quarter net sales in South America grew 37% compared to the third quarter of 2020, excluding currency impacts <unk>.

Sales were up strongly across all of the South American markets high horsepower in mid sized tractors and grain and protein equipment showed the most increases.

Consolidated replacement part sales were approximately $443 million for the third quarter of 2020 compared to $391 million for the third quarter of 2020.

<unk> increase price increase of approximately 6% was able to offset the significant material and freight cost inflation that Eric discussed.

For the remainder of the year, we expect material cost inflation to accelerate and for net pricing to be approximately breakeven.

A weaker sales mix also contributed to the lower operating income.

Operating margins in our South America region reached 11, 6% in the third quarter and operating income improved nearly $28 million from the same period in 2020.

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

In our Asia Pacific segment operating margins expanded to 11, 9% in the third quarter, reflecting an improved sales mix.

Slide eight details grain and protein sales by region and product.

One with the strongest growth in the Asia Pacific Africa, and South American regions.

Grain equipment demand has been stronger supported by improved grain prices and profitability of farms. However, demand has been muted by significant price increases by manufacturers to cover surging steel costs.

The protein production equipment market remains challenged due to labor issues and higher input costs, such as grain protein prices our improved profitability is recovering.

We are expecting a recovery in the grain and protein sales in 2021 for the full year. Following week sales in 2020, which were heavily impacted by the pandemic.

Slide nine addresses agco's free cash flow for the first nine months of 2020, and 21, which represented cash used in operating activities less capital expenditures.

Additional working capital requirements this year related to higher inventory levels resulted in lower free cash flow for the first nine months of 2021 versus the same period last year, we expect our year end raw material and work in process inventory to remain elevated to help us manage through the difficult supply chain environment.

We have adjusted our full year free cash flow forecast to reflect an additional $200 million of working capital requirements due to increased inventory levels.

Annual variable special dividends.

Yes.

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

We maintained our market forecast for all regions as we believe production constraints will limit further retail demand upside.

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

Placement demand for aged fleets of larger equipment is expected to drive most of the increase demand for smaller equipment is expected to be more stable. After several years of increasing demand we project North American industry unit tractor sales to be up approximately 20% in 2021 compared to 2020.

European Union Farm Economics have remained supportive in 2021 higher commodity prices are expected to support healthy demand from the arable farming segment milk prices remain above the 10 year average and economics for positive are also positive for dairy producers western.

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

Slide 11 highlights the assumptions underlying our 2021 outlook.

Our priorities continue to be maintaining a safe working environment for our employees and providing proactive support to our customers and our dealers and.

In addition to focusing on meeting the robust end market demand. We will also make significant investments in the development of new solutions to support our farmer first strategy.

<unk> results are expected to be heavily influenced by supply chain performance for the balance of the year. Our outlook is based on current estimates of component deliveries and cause results will be impacted if the actual supply chain delivery performance differs from these estimates.

Engineering expenses are expected to increase by $50 million to $60 million on a constant currency basis compared to 2020.

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

From 27% to 29% for 2021.

Slide <unk> lists our view of selected 2021 financial goals.

The ability of our company's supply chain to deliver parts and components on schedule is currently difficult to predict falling outlook is based on AG because current estimates of component deliveries our results will be impacted if the actual supply chain delivery performance differs from these estimates we are projecting sales to be in the 10 now.

9% to 11 $1 billion range with two <unk> 21 earnings per share targeted in a range of $8 75 to.

To $9 a share.

Sure, we expect capital expenditures to be approximately $300 million.

And free cash flow to be in the $200 million to $300 million range.

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

As a.

Minder, if you'd like to ask a question. Please press star one that is star one if you would like to ask a question.

Your first question is from Joel <unk> of BMO.

Wow I never get to be first.

Yes.

It's kind of get Lumpier are going to get a little bit less reliable can you give us a little bit of insight.

And to what you guys are seeing what's changed thank you.

That's a good read on it first of all thanks for the question is that the heart of todays topics really that's that's really the situation a.

A quarter or two ago, we expected that by this time the supply chain would be healthier than we're seeing it actually to be and so it's over that time. The overall supply chain has gotten very liens essentially hand to mouth, so any disruption now.

Is causing problems.

And we have seen an increased rate of issues over the last few weeks.

There.

A lot of them are semiconductor chip related but not only those things there are still issues with tires plastics.

<unk> and other things.

It's the same issue here. This is not unique to our company, it's not unique to our industry.

It's hitting all industries.

It's the same thing we are hearing inside the company as you're reading in all the news journal is outside the company. So yes. It is more severe than we would have predicted a while ago.

It's fairly broad based and that's why we took the actions we did in terms of guidance.

Okay, and if I'm allowed a quick follow up I just wanted to ask Andy with only two months left in the year, how come we have such a wide range on the tax rate.

And then I'll go away. Thank you.

While the tax rate really is driven by profitability.

And so given a range of profitability that we're talking about.

We're sticking with that wide of a range so.

I think I think we'll be able to get within that but that's that's typically why we give such a wide range.

Your next question is from Stephen Volkmann of Jeffries.

Great Hi, guys.

I am curious I guess sort of in the third quarter or do you have equipment, that's sort of parked and waiting for parts, but pretty much ready to go that can shift as we move forward.

Yes, we are actually.

<unk> of machines that have been built.

And waiting for one two components and then and then ready to invoice to farmers.

Big picture here, we have a tremendous order bank we have.

We're dealing with and we feel they are particularly acute right now and we anticipate that those will ease over time. It's just it's just an unpredictable environment. We're in at the moment.

Okay, great and that was a perfect setup actually Eric because with so much backlog into 2022, what should we be thinking about in terms of the price impact in 'twenty. Two you probably have pretty good visibility there.

Yes, Steve.

We're still obviously.

Making estimates of what what we think pricing will require next year first of all to cover the <unk>.

Inflationary cost.

Carryover of the inflation that we're experiencing right now.

Along with what the market demand is going to be what pricing can we can we achieve.

This year, we as you see in our in our comments that we're expecting pricing to be about.

Five 5% I would see pricing next year to be at.

At least in that range as well.

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

Hi, good morning, guys.

Just wondering if you can just comment a little bit on how the supply chain issues are comparing globally.

You are calling these out.

Most of our margin assumptions for the rest of the world Aside from North America, and North America isolated issue or is that just more reflective of GSI, what we're seeing in margins there.

Just any comment on how it's impacting your production globally.

Yes, I think there's actually a couple of questions embedded in your question, So I'm going to Peel those apart a little bit one is supply chain disruptions in terms of material flow is not in North America topic, it's hitting us in all regions.

Perhaps Morris most acutely in Europe.

But it's a challenge all over especially because we are a global supplier base. So supplier may be located one region, but supporting factories in multiple regions. So disruption in terms of flow as global then the second point in your question was about GSI. The second issue is component price.

<unk>.

And because GSI uses so much steel.

That's right Andy called it out as.

They are getting hit by the inflationary impact of steel, which is up between 50 and 150% depending on where it is.

And that's why margins are challenged within GSI this year.

Okay, Great that's helpful.

Then maybe just on South America.

You guys got double digit margin. There. This quarter can you help us just think about what's the right longer term margin for that.

And market since I think we had historically thought of it as a.

Mid to high single digit.

Margin performer.

Sure Yeah, we obviously had a very strong.

Third quarter result, we had margins up because the stronger mix, our grain and protein business as we called out that had a really strong quarter with good margins. So there was a number of positive things that went on in the quarter. We also.

Still haven't really seen the biggest wave of cost increases hit our results yet that's coming and we expect that.

<unk> be part of what happens in the fourth quarter, where that high inflationary cost will hit the South America results a little more so for the full year, we're looking at our our margins in South America to be between.

In the mid 7% and so I think that's a good good target for us.

For the future. We have said before is that we don't see South America needing to.

We think it should be within the corporate average of our of our margin. So we would expect to drive margin improvement going forward like we like we expect in the rest of our business.

Your next question is from Kristen Owen of Oppenheimer.

Great. Thank you good morning, I wanted to follow up on the GSI commentary, there's obviously some strong seasonality to that business in the third quarter, but can you just parse out or put a finer point on the profitability impact on the quarter.

Talk about just where the backlog stands in that business today.

Yes.

Youre right. The GSI business is typically strongest in the second and third quarters of the year. So.

We.

Had sales increases as we talked about sales were up.

Nine or so percent in the third quarter up close to 20% for the year to date, we would expect their sales to be up probably 15% to 20% for the full year.

Our margins are going to be either in line or slightly below last year, all because of what Eric discussed in terms of the surging steel prices than we've had.

Some of those orders that we fulfill this year, we're locked in and we couldn't raise the price and so we have somewhat of a mismatch between.

The timing of these cost increases hitting us and the pricing and so we think that third quarter is kind of the worst that we'll have on that and they'll start to.

Be better in the fourth quarter and as we move into 2022.

Great. Thank you for that and as my follow up if I could just summarize the.

The change in guidance is really about.

Change in timing of deliveries not demand destruction.

You've talked about the favorable farming comes backdrop, but we've certainly seen some of the impact.

Higher input costs on farms.

So can you help us square the circle there.

Talk to us about what Youre hearing from your dealers and any potential from Nick Nick shift or precision application uptick. Thank you.

Okay. There is a couple of questions embedded in there too so let me let me.

Dress them separately the first one was about demand.

Absolutely I want to underlying we have extremely strong farmer sentiment leading to extremely strong demand, which has provided a huge order bank the highest in the company's history. So this is the demand is absolutely strong. In addition to that demand we've got strong pricing power we have had.

And we expect for it to continue.

The demand in the marketplace is strong and is able to.

They understand the situation.

We anticipate that's going to continue forward, we watch our order rate.

Sure.

It has not slowed down a bit yet so so that's that's explained by the demand side. The guidance is all about our ability in the short term to build all the orders and we are building in as fast as we can but thats. The situation. Then you also asked about precision AG.

And laying on top of the general strong market is a real success story around Agco's precision AG business.

The general business is up 24%, but inside of that as a precision AG business Thats up 33%.

Our smart planter Roes are up 42% alright.

Our ideal combines are up 80%.

And we've been you've seen us announce the acquisition of a company a couple of precision AG companies one in the protein segment and one in the harvesting business.

This is an area we continue to invest in and we're seeing successes from those investments in the eyes of our farmers. They like the technology. They see a real profit benefit to their operation. So I hope I touched on all the elements of your question.

Your next question is from Larry de Maria William Blair.

Okay. Thanks, good morning, everybody.

You noted there is price increases coming.

And you hope to have I think a similar level next year.

But you already have half of the year book and Youre sold out.

Some stuff as you noted so all else being equal can we still expect.

Pretty decent margin expansion next year or if backlog is not priced for today's material costs and we have to have further actions on the backlog to catch up maybe in the second half.

Yes, Larry that's a very natural questions.

Let me explain how we're thinking about it first of all we have two different kinds of orders one as our retail order Thats got a farmer name on it and the other kind of order is a dealer stock order that they would buy a machine to put it on there a lot to be sold later on.

We are treating those two different orders differently.

Dealer stock orders or a wholesale order.

Are not priced protecting.

And we are.

Taking them in but not confirming them, meaning we have some flexibility on timing and on pricing conditions.

In some situations. We may also applies surcharges on things like freight and other things too.

The order bank.

Those are those are some of the elements but.

During <unk> to the just the general order bank as we monitor.

We constantly monitor the pricing in the order bank compared to the expected inflation in the order bank and we feel that we're staying ahead of cost with the pricing. That's in the order bank that we have today, while retaining some of the flexibility through the tools I've talked about and maybe last comment in South America, where the inflation rate is the highest costs are moving.

Faster there.

We only open up orders about one quarter at a time.

So we are now ordering opening up quarter, one to receive orders.

And then we will fill up that quarter order slot such so that we don't get too far out in front of the headlights in the most volatile market.

Okay. Thank you very much for that and if I could ask a follow up you called out market share gains.

What you can do every quarter, but are there any specific areas.

Full year improvements ideal, it's up 80%, but.

Material to the overall industry market shares unclear.

Deere strike have any impact on how youre thinking about going after customers and I'll leave it there. Thanks.

Yes, I think where we're gaining market share is likely more in North America.

Right now, especially in large AG.

And then.

Let me see what was the <unk> plant and precision planting is certainly growing our precision AG business in North America is where we're having our largest success and then theres a second half of his questionnaires strength Deere strike. Thank you yes.

I'll leave that to for them to comment on I'll, just say a couple of brief discussion is that.

At this point, it's only been a strike for a few days.

The last one I think that they had was back in 1986 that one last 163 days, but that was in a very different market condition.

If it lasts a short amount of time, then I don't think there'll be a material impact if it lasts a long time, then there certainly would be.

But I'll leave that to them to comment on.

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

Yes, thanks, good morning, guys.

Good morning, good morning, good morning.

Maybe first just starting off with what Youre seeing from a pricing perspective relative to cost I.

I think you guys mentioned that you were still price cost positive in the third quarter. If you could confirm that and is the expectation that <unk> will be price cost positive and if you think about the carryforward of both inflation and pricing into 2022 is that the case.

Yes, so in terms of.

This third quarter, we were slightly positive.

And then the fourth quarter I think will be it will be fairly neutral.

What that does is result in a little bit of margin deterioration when it's that tight so we typically.

Want to see a wider range there, but right now what's happening is because of some of these.

As Eric mentioned, we've got some.

The levers that we can pull going forward into next year to get more pricing even within the current order board. There is a big carryover of pricing and cost and we would expect.

We've got a lot of work to do to finalize our plans for next year, but our intention is to make sure that that pricing is covering all of the cost.

Okay got it thanks, Andy and then.

Respond to any question on the outlook for South American margins for the year can you also give us a sense of what youre thinking within the context.

Our full year guidance for North America and for Europe.

Yes, so Nicole for North America, but we're looking at margins in the 6% to 7% range for the full year, so that implies a nice.

<unk>.

I'm sorry, it closer to.

We're looking at 10% roughly for North America, which implies a nice step up in the fourth quarter.

Closer to 7% or 8%.

For Europe, we're looking somewhere between 11, five and 12% for the full year.

Which which takes into account some headwinds in the fourth quarter because of higher engineering expansion and some of that material inflation that Andrew talked about.

Our Asia Pacific margins look to be in.

Kind of low to mid teens for the full year, which was about 150 basis points of improvement and that also implies some.

Cost headwinds in the fourth quarter.

Your next question is from Jamie Cook of Credit Suisse.

Hi, Good morning. This is colton Zimmer on for Jamie. Thank you for taking my question.

We were wondering if you could just give an update on some of the strategic initiatives, we laid out at the analyst day.

So we're in market share for the Fendt product line, how does that kind of trended relative.

Expectations and then also if you could just comment.

The order book for some of the higher margin products that you outlined at the analyst day. Thank you.

We're really pleased with how the strategy is being implemented all.

All the initiatives that we talked about.

At the analyst day are on track, we highlighted some of our growth businesses those are all growing nicely.

Continuing the trend we had from 2020, where North America large AG fendt growth service parts and precision planting are all growth engines, and we intend to continue to invest to make them.

Grow sustainably.

Got some improvement businesses.

South America, Massey Ferguson and Youre seeing the results there.

Four years ago, we were losing money in South America and now the questions about today or are we going to be above 10%.

Certainly all our target for all of our businesses to be above 10% in the in the mid terms. So.

We're very happy with how the strategy is coming together and we feel like both growth businesses and improvement businesses are on track.

Great. Thank you.

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

Hey morning, guys.

Hi, Ross.

I think your new guidance wise that margins are down year on year in the fourth quarter and just.

How many quarters of year on year.

<unk> do you anticipate.

The way it stands now does it does it feel like your margins will be down in the first half of 'twenty two.

Well, we've got a little margin as you point out.

<unk> for the for Q4.

We don't have.

<unk>.

Any real guidance, yet to give you too.

2022.

I think it's going to be an assessment based on.

How strong the demand is and Eric is already kind of cover that and then what our supply chain capabilities are and so we're still working through that.

So again are our long term ambition is to grow margins grow these strong.

Margin products.

And that.

That will be.

Our goal for next year as well.

But Andy do you think you need to see real improvement.

And supply chain of margins up in the first half of next year.

Is it really more of a.

A timing issue.

With incremental price.

So for us yes.

Okay.

<unk>.

It's there is a growth opportunity.

<unk>, if we can get the supply chain ramped up because we do have such a strong order board.

And then the other factors you mentioned is whereas how much of this.

Cost wave, that's coming how does that match up with the pricing that we can implement and so those are the key things that we'll be looking at to try to be able to answer to your question I can't really answer it today, but.

Our intention obviously again is get that pricing and get it robust enough to cover these costs into to get margin improvement.

Okay. Thanks, a lot.

Your next question is from Jerry Revich of Goldman Sachs.

Hi, This is <unk> and then I'll hand on for Jerry Revich.

Understand you're not providing guidance on year over year margin trends, but I'm wondering if you have any thoughts on the margin cadence versus normal seasonality do you think we can expect normal seasonality next year in terms of the quarterly margin cadence.

Well I think.

There is nothing unusual to happen here.

In 2021, like 'twenty, where we had these products big long.

Disruptions in production that caused caused 'twenty to be kind of unusual year 'twenty one's more normal seasonality, but again. They are these supply chain supply chain constraints. So that will be kind of the part that we really continue to need to factor in.

And to understand what is our production going to be what how much products are we able to shift each quarter and so we'll be looking at that right. Now obviously focused near term on what we can achieve this quarter, but we're also working on plans to try to improve prove this situation.

Going forward as well.

Okay, and you mentioned the thousands of machines waiting on one or two components I'm wondering if you're able to quantify the margin impact based on these manufacturing inefficiencies.

Well we are.

I really can't I mean.

There have been inefficiencies in our production because again as you just pointed out you run the equipment down the line and then you have to go touch it again and put new components on and so that takes us an extra amount of cost and labor to be able to achieve that.

And we're seeing that and we expect some of that in the.

We've seen it in the third quarter and we expect to have some of that in the fourth quarter as well. So we're certainly not running.

As efficiently as normally we would.

<unk>.

This environment is causing us to be much more inefficient than normal.

<unk>.

It's not the highlight of the quarter or anything like that it's not causing huge amounts of additional costs, but it is adding up.

And everybody in our industry is facing the same thing we've been in this situation ever since Covid hit everybody has been challenged with that.

We will be in it for a little while.

Yet until the supply chain Smoothes out.

Okay. Thanks for the color.

Your next question is from Adam Uhlman of Cleveland Research.

Hey, guys good morning.

I wanted to ask about demand trends in Europe.

And we've seen fertilizer costs spike over there and frankly here in North America as well.

Im wondering how youre thinking about that and how that might impact equipment demand at all.

Hello.

Yes, so fertilizer is tied to energy.

Energy prices, especially in Europe energy prices have gone up everywhere, but in Europe, most acutely and so that's why you're hearing a lot of talk especially from our European farmers about that challenge, but even in North America.

People are farmers are to some extent hoarding or pulling ahead seed and fertilizer purchases because of their concern of both pricing and availability.

So that may.

Cool things off a little bit which in the end may be a good thing it could make.

This demand cycle, less spiky and spread it out over a longer timeframe.

But if so unpredictable at this stage, it's hard to give you an exact shape of what what's going to happen, we think that it's a real pressure on farmers.

And it may it may slightly cool their demand and spread it out over a longer period.

Okay Gotcha and then.

Just a clarification.

I think it was mentioned that.

Retail sales were lower in Germany, and France this quarter.

Sumit.

These delayed shipments.

Maybe something else is going on there could you share what what youre seeing in the.

The industry stats.

Sure.

<unk> had.

Had our normal shutdown periods.

In the third quarter, we were producing last year. So for that reason it was kind of a.

Catch up period, so the market was delivering a lot of product last year. This year, we're kind of in a normal shutdown period, we do have the supply chain issues and so that did affect <unk>.

Overall markets are.

France and the U K.

Markets.

France was up slightly.

For the industry, Germany was down and so that affects us because those are two different markets for us, but I think it was more timing of shipments more than overall kind of inherent demand.

Your final question is from Chad Dillard of Bernstein.

Hi, good morning, guys.

Okay.

To follow up on on production shutdown and just wanted to understand whether in the fourth quarter in your guidance.

Any are baked in and outside of the typical holiday shutdowns.

How much.

Maybe if you can just talk about.

What if any impact there is from an absorption perspective.

Some assembly hours, we've taken out but a lot of fabrication and other aspects are are still planned to be done in the fourth quarter. So that's one of the reasons why our inventory is up in the fourth quarter from what we what we said before so there is some impact to our production levels, but not.

Not a significant amount.

Just more timing of when we can get the units shipped.

Got it okay.

And then.

Maybe if you can give us some early thoughts on how youre thinking about the farm economics.

Equipment demand based on what you're hearing from dealers.

In North America.

Okay.

For 2002.

Yes.

So farmer sentiment is still very strong when you take a look at commodity prices.

They arent at their peak level that they were in spring, but when you look at them relative to the last several years. There is still extremely strong in all cases.

And that.

Rejected stays strong for quite some time.

The carryover inventories are in a position, where it's somewhat predictable what those commodity prices will be so farmers and then you combine that with the fact that.

We're still exiting a period of pent up demand, where the farmers had restricted the amount they've bought for the last several years and so they are wanting to refresh their fleet as soon as they are able to afford it and they're able to afford it right now so you've got that situation combined with the fact that dealer inventories are lower now than they were.

For the last several years and in some cases lower than we've ever had them.

So you've got a farmer.

Interest and demand situation, you've got a thin pipeline between us and the farmers.

And then a commodity green situation that makes it somewhat sustainable having said all that we're in an unpredictable uncertain time period in terms of what happens week to week month to month, how it all plays out exactly is hard to predict because of the supply situation.

So that's the main.

Summary of where we stand right now.

There are no other questions in queue I'd like to turn it back to Greg Peterson for any closing remarks.

I'll go ahead, and just wrap up and then turn it over to Greg.

Appreciate all the questions today.

We are very happy with the three quarters of performance for the year.

And we have a strong market in front of us.

With very lean inventories in the pipeline in the marketplace.

We're managing through the supply chain. This is a situation that is specific to agco not specific to that industry is hitting all sectors.

What we're hearing inside the company is the same thing you are reading about across all the industrials and.

Because of that is getting a lot of attention from governments from private industry and so on to solve these problems and solve these bottlenecks and get more capacity flowing more efficiently.

That's why we have <unk>.

Confidence and expectation that this will get solved and we will be able to get the product our customers are demanding to them Chan.

Challenges is just predicting.

With the amount of uncertainty exactly how that will play out and so that's why we've signaled our guidance for the quarter, but big picture. We've got a very strong situation for the company overall, thanks for your investments in the past and our questions for today determined Greg. Thanks. Thank you Eric and we appreciate you all's participation today and encourage you to follow.

With US later, if you have remaining questions. Thank you.

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

Q3 2021 AGCO Corp Earnings Call

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