Q1 2022 AGCO Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Agco 2022 first quarter earnings release Conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one on your telephone keypad.
If you require any further assistance please press star zero.
I would now like to hand, the conference over to your speaker today.
Mr. Greg Peterson Agco head of Investor Relations.
Mr. Peterson. Please go ahead.
Thank you <unk> and good morning, welcome to all of US who are joining us for our Agco's first quarter 2022 earnings conference call.
This morning, we do have slides will referred to and those are posted on our website at www Dot <unk> Dot com.
The non-GAAP measures used in that presentation are reconciled to GAAP metrics in the appendix of the presentation.
We will also 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 crop production or supply chain inflation component deliveries retail revenue margins earnings cash flow tax rates and other financial metrics. We wish to caution you that these statements are predictions and that actual events may differ materially.
We refer you to the periodic reports that we file from time to time with the Securities and Exchange Commission, including the company's Form 10-K for the year ended December 31 2021.
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, including plant closings workforce availability and Prague.
Demand.
Supply chain disruption the war in the Ukraine, 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.
We will have a replay of our conference call 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.
With that Eric. Please go ahead.
Thank you Greg and good morning, we appreciate your interest in Agco and your participation on the call today the.
The headline this morning is that the financial health of our farmer customers continues to be very strong and demand for agco.
Agco's major end markets remains robust.
However, supply chain disruptions and inflationary cost pressures.
Further compounded by the Warren Ukraine have created an extremely challenging operating environment.
Despite these obstacles agco reported record first quarter sales and earnings resulting in sales growth and margin improvement as compared to the first quarter of the prior year.
You can see from slide three that our first quarter sales grew nearly 13% compared to what were record levels. The first quarter of 2021.
Adjusted operating margins improved by almost 80 basis points as favorable pricing helped to offset most of the material cost inflation in the first quarter.
However, we expect continued headwinds from higher material costs during the remainder of the year.
The market remains receptive to our strong product lineup and technology.
We have raised our pricing outlook for the full year.
Our customers growing interest in Agco's precision AG solutions is supporting strong order boards.
We expect healthy market conditions to continue.
And our new financial outlook for 2022 reflects this optimism.
We have increased our sales and earnings forecast and expect to generate significant free cash flow this year.
The strong performance.
Supports our technology related investments aimed at advancing our digital capabilities and growing our precision AG business.
We will also continue to return cash to our shareholders last week, we announced a variable special dividend of $4 50 per share as.
As well as a 20% increase in our regular dividend.
Slide four details industry unit retail sales by region for the first quarter of 2022.
Elevated green prices are supporting healthy farm income this year despite significant <unk>.
Significantly higher farm input costs.
The underlying demand for agricultural equipment remained strong.
Despite the favorable conditions supply chain constraints limited global industry production and the corresponding retail sales in the first quarter.
As you can see industry retail sales in the first quarter of 2022 were actually below last year's levels in Europe , and North America as a result of the restricted production.
North American industry retail tractor sales were down approximately 1% in the first three months of 2022 compared to last year.
Lower sales of smaller tractors, which declined from record levels. In 2021 were partially offset by increased sales of high horsepower tractors.
Despite continued strong demand retail sales of large row crop agricultural equipment. This includes tractors combines and sprayers.
It was 11% below the first quarter of 2021 due to supply chain constraints, which limited deliveries.
We still expect strong 2022 demand in North America.
Industry retail tractor sales in Western Europe , which also are restricted by supply chain challenges decreased by approximately 6% in the first three months of 2022 compared to strong levels in the first quarter of 2021.
Farmer sentiment has been negatively impacted by the war in Ukraine, as well as input cost inflation.
However, forecasts for healthy farm income in Western Europe are expected to support solid retail demand for equipment throughout 2022.
In South America industry sales increased during the first three months of 2022 in both Brazil and Argentina.
Strong crop production levels as well as elevated commodity prices are supporting positive economic conditions for farmers, who continue to replace an aged fleet.
Agco's 2022 factory production hours are shown on slide five.
As I mentioned, we continue to face supply chain and logistics challenges as well as material and freight cost inflation.
The supply chain issues have impacted our ability to produce and ship units as well as contributed to labor inefficiencies.
In addition, the volatile supply chain environment is still requiring us to keep higher than normal levels of raw material and work in process inventory on hand.
We are facing supplier bottlenecks and delays in all regions.
<unk> significant challenges in the quarters ahead, as we work to meet expected increases in end market demand.
Total company production hours were up approximately 6% for the first quarter of 2022 versus a high level of production in the first quarter of 2021.
For the full year of 2022, we currently project production hours to increase approximately 5% to 10% compared to 2021 levels.
At quarter end Agco's Order award remained extended.
Orders for tractors and combines were significantly higher in North America, and Europe and were down modestly in South America compared to a year ago.
Now remember we are continuing to truncate, our order board in Brazil at three months to give ourselves more pricing flexibility.
I want to take a few minutes to provide an update on our precision AG business, which is one of our more important growth opportunities.
We have been focused on building our precision AG capabilities over many years and have developed a broad and highly competitive offering with much more to come in the future.
In addition to the significant development work within our precision planting business and a few smart farming teams. We completed a number of targeted acquisitions in the past year to further our capabilities in key areas to help us meet our ambitious technology roadmap.
Yesterday, we announced the acquisition of <unk> industries, which specializes in electronic systems and software development to automate and control agricultural equipment.
<unk> will support Agco's delivery of machine automation and autonomous systems that improve farmer productivity.
We are seeing strong interest in our fuse OEM precision AG solutions as farmers are looking to capture increased yields and to contain the cost of expensive inputs like fertilizer and diesel.
More of our AG machines are leaving the factory with advanced precision AG features like our fendt one.
And our <unk> <unk> headwind.
Our precision planting business was impacted by supply chain issues in the first quarter.
However, we remain confident in the growth opportunities from our new product pipeline as.
As well as our unique retrofit approach.
Retrofit allows customers to utilize the latest technology with a lower investment.
Precision planting introduced a new family of retrofit sprayer products during the first quarter at our Winter conference.
We launched vision and application technologies that include vision guidance.
Scouting vision wheat.
And targeted spring technology.
They also launched two other retrofits smart spring options.
Reclaim boom priming in recirculation.
Symphony nozzle control system.
We're looking forward to showcasing our precision AG capabilities at our technology event in Germany in late June .
I'm going to close my comments by highlighting our progress with sustainability.
Last month, we published our sustainability report, which you can find on our website.
I Hope you will take some time to read through it and note the progress we've made.
We've put sustainability at the heart of our corporate purpose.
Farmer focused solutions to sustainably feed our world.
And are taking actions across our brands and regional operations to advance sustainability within our company as well as for our agriculture in general.
Sustainably shouldnt be a burden on farmers, but an enabler.
We are committed to helping farmers adopt tools and practices that are as good for the planet.
They are for our businesses.
We're also taking action with respect to governance.
We've established a sustainability committee on our board of directors in April .
The New committee will provide important oversight and guidance for our sustainability efforts.
Slide seven highlights some of our sustainability progress I am not going to go through all of these items, but we will mention a few.
We've converted 32% of our operations to renewable energy sources with the goal to reach 60% or more by 2025.
Energy intensity is another key area for us and for 2021 reported an 8% reduction in our intensity.
The health and safety of our employees has been a top priority for us, especially throughout the pandemic.
So we're pleased to announce that we have had a 12% reduction in our incident rate in 2021.
With that I'll hand, it over to Andy who will provide details on our first quarter results.
Thank you Eric and good morning to everyone I'll start on slide eight which looks at Agco's regional net sales performance for the first quarter of 2022.
<unk> net sales were about 18%.
Compared to the strong first quarter of 2021, excluding the negative impact of currency translation.
Robust end market demand as well as favorable pricing of approximately 8% drove the increase Europe Middle East segment reported an increase in net sales of approximately 15%, excluding the negative impact of currency translation compared to the high level of sales in the first quarter of the prior year.
Stronger growth in France, and Scandinavia were partially offset by lower sales in Russia and the Ukraine.
Net sales in North America increased approximately 15%, excluding the unfavorable impact of currency translation compared to the levels experienced in the first quarter of 2021.
The increase resulted from the impact of pricing to mitigate inflationary cost pressures along with increased sales of tractors as well as grain and protein equipment.
Partially offset by lower sales of precision planting products.
And because first quarter net sales in South America, Peru, approximately 42% compared to the first quarter of 2021, excluding favorable currency translation impacts.
Sales were up strongly across all of the South American markets high horsepower mid sized tractors and grain and protein equipment showed the most increase.
Net sales in our Asia Pacific Africa segment increased about 18% compared to the high levels high sales levels in the first quarter of 2021 on a constant currency basis higher sales in Australia Africa, and Japan were offset by lower sales in China.
Consolidated replacement part sales were approximately $446 million for the first quarter of 2022 compared to $399 million for the first quarter of 2021 part sales over the first quarter approximately 12% higher than the first quarter of 2021 on a reported on a reported basis.
Moving to slide nine we examine agco's sales and margin performance Agco's first quarter, 2022% adjusted operating margins improved by approximately 80 basis points versus the comparable period in 2021.
<unk> were supported primarily by improved operating leverage resulting from higher.
Levels of net sales in production, partially offset by the impact of higher material costs net of pricing.
While first quarter price increases of <unk>, 8% offset the significant material and freight cost inflation on a dollar basis. It was not sufficient to offset the impact on a margin basis for.
For the full year of 2022 were expect we expect pricing to be in the 9% to 10% range.
The Europe Middle East segment reported an increase in the.
Increase of approximately $18 million in operating income compared to the first quarter of 2021, resulting primarily from higher net sales and production.
North American operating income.
For the first three months of 2020 to decrease to approximately $20 million compared to the same period in 2021 our.
A weaker sales mix, primarily caused by chip related supply constraints related to the precision planting business as well as the impact of higher production costs resulted in lower first quarter operating results.
Operating margins on our South America region reached 12, 9% in the first quarter and operating income improved by nearly $30 million from the same period in 2021.
Significant increases in end market demand and a healthy sales mix supported the growth.
In our Asia Pacific Africa segment operating margins expanded to 15, 1% in the quarter, reflecting an improved sales mix.
Slide 10 details grain and protein sales by region and by product sales increased about 12% in the first quarter of 2022 compared to 2021 globally grain equipment sales increased approximately 38% with our South America and Asia Pacific Africa region.
The largest increases.
Protein production sales declined by approximately 15% in 2022 with the weakest demand in the Asia Pacific Africa region.
Grain equipment demand has been stronger supported by improved grain prices and profitability of farms. However, north American demand has been muted by the significant price increases by manufacturers to cover searching steel costs.
The protein production equipment markets remained challenged due to labor issues and higher input costs, such as grain protein prices are improved so profitability is recovering.
Slide 11 details free cash flow for the first quarter of 2022, and 2021, which represents cash used in or provided by operating activities less capital expenditures.
Additional working capital requirements caused by higher inventory levels resulted in lower free cash flow for the first quarter of 2022 versus the same period in 2021 for the full year 2022, we expect our raw material and work in process inventory to remain elevated to help us manage through the difficult supply.
Jane environment.
Our free cash flow forecast reflects a significant increase from 2021 due to projected earnings growth.
Agco's capital allocation property priorities include investments in our precision AG offerings and digital capabilities as well as opportunistically, adding bolt on acquisitions like the <unk> acquisition, Eric just discussed.
<unk> capital allocation framework includes regular quarterly dividends and annual variable special dividend, along with share repurchases to return cash to shareholders.
Following our strong free cash flow generation in 2021, and our favorable outlook for 2022, we were in a position to increase our quarterly dividend as well as announced an annual variable special dividend for the second consecutive year.
Last week, we announced a 20% increase in our quarterly dividend and a $4 $54 50 variable special dividend payable in June we will consider modest share repurchases in the second half of this year.
Future returns of cash to shareholders will be based on cash flow generation, our investment needs, which includes capital expenditures and acquisition opportunities as well as our market outlook.
Other details for the quarter include the losses on sales receivables associated with our receivable financing facilities, which are included in other expense net were approximately $7 $9 million for the first quarter of 2022 compared to $4 $6 million in the same period of 2021.
Turning to the full year market forecast for 2022, our outlook for the three major regional markets has not changed and is captured on slide 12, despite the slower than expected start in the first quarter due to supply chain limitations. We currently expect higher <unk>.
Retail industry demand across all three major regions in North America, higher commodity prices and healthy farm <unk>.
Farmer sentiment is expected to result in increased 2022 sales higher demand to replace an aged fleet of larger equipment is expected to be partially offset by modestly softer demand for smaller equipment. After several years of strong growth we.
We project North American industry unit sales to be up 5% to 10% in 2022 compared to 2021.
EU farm economics are expected to remain supportive in 2022 elevated commodity prices are expected to offset higher fertilizer and diesel costs economics are positive for dairy producers as well as milk prices remain above the 10 year average and are offsetting higher feed costs.
Western Europe industry demand is expected to be flat to modestly up compared to 2021 levels supportive.
Supportive commodity prices and favorable exchange rates are expected to produce additional growth in South America. During 2022 as farmers continue to replace aged equipment and planted acres are expected to expand into.
In total industry demand in South America is expected to improve 5% to 10% from 2021 levels.
On slide 13, we highlight the assumptions underlying our 2022 outlook our priorities continue to be maintaining a safe working environment for our employees and providing proactive support to our customers and dealers. In addition to focusing on meeting the robust end market demand we will make.
<unk> investments in the development of new solutions to support our farmer first strategy.
Agco's results are expected to be heavily dependent on its supply chain performance in 2022, our outlook is based on current estimates of component delivery levels, we expect in 2022.
And because the results will be impacted if the actual supply chain delivery performance differs from these estimates.
Our sales plan includes price increases of 9% to 10% aimed at offsetting higher material cost inflation during 2022.
At current exchange rates, we expect currency translation to be negative the impacting sales by about 6%.
Engineering expenses are expected to increase by approximately 15% to 20% compared to 2021. The increase is targeted at investments in smart farming in precision AG products as well as the continued rollout of our platform designs.
Operating margins margins are expected to improve driven by higher sales and production favorable pricing net of material costs and improved factory productivity, partially offset by increased investments are engineering and digital initiatives as well as inflationary cost pressures we are.
Targeting an effective tax rate ranging from 28% to 29% for 2022.
Yes.
Slide 14 lists our view of selected 2022 financial goals the ability of the company supply chain to deliver parts and components on schedule is currently difficult to predict the following outlook is based on AG, because current estimates of our supply chain capacity.
And because the results will be impacted if the actual supply chain delivery performance differs from these estimates.
We are projecting sales to be in the 12 five to $12 $7 billion range with 2022 earnings per share targeted in a range from $11 70.
To $11 90.
We expect capital expenditures to be approximately $325 million and free cash flow to be in the $600 million range.
For the second quarter of 2022, we project a modest improvement in operating income compared to the second quarter 2021, our second quarter operating income is expected to benefit from higher net sales in all regions with margins pressured by the impact of material cost inflation.
Higher engineering expenses.
Second quarter net income is expected to be negatively impacted by a higher tax rate compared to the second quarter of 2021.
As a result, our current estimate for the second quarter of 2022 is for earnings or earnings per share to be modestly below last year.
As you can imagine forecasting with accuracy is difficult in the current supply chain environment.
Estimate and our actual result results are highly dependent on component availability from suppliers and the resulting timing of production, which is difficult to predict.
With that I'll turn it back over to Greg for Q&A.
Thanks Sandy.
To encourage.
What our participation will ask that you limit your selves to one question and one follow up and solar ends with that we're ready to move into the Q&A session.
At this time, if you would like to ask a question. Please press star one on your telephone keypad again that is star one.
Your first question comes from the line of <unk> from Wells Fargo. Your line is open.
Hi, Thanks, good morning, everybody.
Wanted to ask you about the precision planting.
Pick up in the first quarter I'm, just trying to understand whether those sales do you think we will still happen later this year in the second quarter or later this year.
Or whether you think those sales are lost.
That's my first question. Thanks.
Yes, Seth so.
As we pointed out in our comments and you're pointing out our precision planting business was impacted by.
Supply chain issues, particularly around.
Chips and availability of chips and so our first quarter sales were down about 16% in the first.
Quarter, if you would have excluded the acquisition impact it would have been more like 25% so fairly significant impact.
As we look through the year, we're expecting to catch that up.
We'll be a little bit flatter in the second quarter and then in the back half we expect to.
Catch up with the rest of the sales and our target is that our sales would be.
Up about 10% to 15%.
For the full year with acquisitions and up about flat to up five without without the impact of those acquisitions are.
Order Board is very strong and precision planting the interest level is still extremely high and so although we're going to miss some of the season in some of these customers are not going to be able to use it for and the planning season for this year.
They are still anxious to get their hands on this technology and so we really think that we'll be able to catch up a lot of this in the second half of the year, our fourth quarter of last year was relatively weak we were already experiencing a lot of issues with chip availability and so we expect a lot of it has to be caught up in the fourth quarter.
Okay. Thanks, and then just my follow up question, Andy can you just talk a little bit about.
The cost of doing business in Europe today.
Just agco's operating costs for running factories.
Just.
Your ability to source.
What you need just to run the factories and things like that can you just talk about what youre expecting for the Europe footprint in particular for the balance of the year.
In general Seth I'll take that this is Eric.
Europe is typically not as cyclical as the rest of the other markets. So the demand is.
As more moderate in terms of its cycles.
Our ability to supply is really our main focus and then your question is also about inflation.
We have had challenges with our European supply base, and it's caused us to Miss a few shifts here and there.
But I think.
If im reading into your question here I think youre asking has it gotten significantly worse.
And we would say not really maybe we had a little bit of uptick in terms of challenge with the Ukraine crisis. There's a few suppliers that we had to work around but it's nothing significant.
It's really in line with all the comments Andy made about the overall challenges with supply chain globally.
And I wouldn't point to anything unique in Europe right now.
And maybe one other comment one other comment is that prior to the Ukraine invasion, we had a task force that we had launched maybe a month before.
<unk> looked at all of our energy sourcing to identify proactively.
Any alternatives that might be available in case, something did happen and were really thankful, we did that pre work.
For right now.
Knock on wood, but right now we're in a good position.
Relative to energy to the factories.
Yes.
So the question thanks, very much I appreciate it guys.
And your next question comes from the line of.
Keith Bachman from Jefferies. Your line is open.
Yes.
Hi, Good morning, guys. Thank you and I wanted to start off just on pricing I see you raised your pricing expectations, a couple of points and I guess I had sort of thought most of your backlog was probably kind of fixed price. So just what's the.
The dynamic where you can kind of push that extra pricing this quickly.
We saw we didn't expect it to be this severe but we saw inflationary pressure coming already last at the end of last year. So we put together a task force or a team cross functional team that was looking at our global pricing process.
<unk>.
Worked even with an outside partner to be able to really get data access quick analytics be able to move and then be able to create a whole menu of options of what to do with different levels of discounts what to do with topline pricing and in some cases, even what to do with some search.
Charges and so the pricing team now is being able to capture that data react very fast you. Some data analytics tools and then depending on the market select off of this menu, which tools to use into the marketplace that are appropriate for those conditions.
So far I think that proactive team has paid off.
And we stay ahead of the inflationary price challenges with the pricing we put into the market.
And we continue to keep that in place for the rest of the year for sure.
It's a tool it's working well and so we're just going to keep keep that in place.
Okay. Okay. That's helpful. Thanks, and then Eric maybe for you.
I just find it interesting that the sentiment indices that we all look at are pretty weak in the U S and in Europe , and it seems to fly in the face of what you guys are seeing relative to demand trends and I'm just curious as you think about.
Like looking sort of over the horizon of your current backlog.
Are you worried about the trends in the business or do you think something else is really accounts for those weak sentiment readings.
Well the sentiment I think is just a bit of a reflection of the high degree of uncertainty in the market you turn on the news and no matter, whether its farming or automotive or any industry. There's just an enormous amount of uncertainty and that gets repaid and replaced in the media and so I think at some point that ways.
Farmers perceptions now when it comes right down to it they are still ordering their order our order book Order book continues to go up they still accept the price increases so.
And why is that is because greens at record prices corn is over $8 soybeans over $16 wheats over 11, those are record high prices.
And farmers are able to lock those prices in for next year now Theyre also seeing higher input costs diesel fertilizer.
Our seed and other chemicals are going up but net net farmers are still in a very profitable situations. So I think it's a lot about the bombardment of.
Uncertain media pressure that they are surrounded by that has been an answer what they do but at the end of the day they still buy.
Okay. Good I hope, they're not reading sell side research to make that worse, but thank you for that.
You bet.
And your next question comes from the line.
The <unk>.
From UBS your line is open.
Hey, guys.
Thanks for taking the call. So just wanted to understand kind of.
$300 million raise to.
Revenue guidance.
It seems to be more on the volume side than on the pricing.
One thing of that rate.
And two is that the Q1 came in better than you expected or are you seeing improvement that's giving you more confidence for the rest of the year.
Yes.
As you pointed out we've raised the guidance a slight bit reflecting the increase in pricing, we upped that.
Two 200 300 basis points.
We did lose a little bit on exchange the with the euro dropping so there was some actual volume increases that we put in there I would say they were weighted primarily to South America, and a little bit to Europe .
Based on our order levels and what we foresee we can accomplish in terms of the supply chain again, our order boards are.
Our very strong.
And so it's really still all about what amount of supply chain performance can we achieved during the year and we're just tweaking those.
Those assumptions as we go throughout the year, our first quarter. The revenue was pretty close to what we thought it would be I wouldn't say, we outperformed there was more on the margin side than we did better in the first quarter.
Got it alright, I'll hop back in line thanks, guys.
Your next question comes from the line of Jamie Cook from Credit Suisse.
Your line is open.
Thank you Jason on for Jamie Thanks for taking my questions.
So I was wondering if you could share your thoughts around.
Greg, Russia, Ukraine situation, and what we think that our commodity prices longer term.
For like a stronger for longer cycle.
And then I have a follow up question.
Okay.
Yes, Theres two factors if you look at the macro sense of what's happening because of the Russia, Ukraine situation number one.
A lot of green came out of circulation.
That's a short term hit where something like 13% of the X portable calories.
No longer made it to the market.
That's one of the primary reasons, you've seen the green prices go up strongly.
In the short term, but then in the mid term to maybe two three years.
The other thing that came out of the marketplace is a lot of fertilizer.
They were a source of fertilizer not only to their own markets, but to Europe , and South America and North America.
So around the world in general farmers wont put on as much fertilizer as they should this year, which means yields will be lower than they otherwise could have been.
And therefore, the green stocks are just not going to get replenished like they could have benefit if there was more fertilizer available that's why you're seeing the projections out there in terms of the futures prices are remaining high short term green availability midterm fertilizer availability and the impact on yields.
So we think that this is going to push high prices.
For our farmers into the future and probably extend.
The top end of this business cycle or the strong business portion of the cycle that we're in right now.
For some some additional period.
Okay. That's helpful. Thank you.
<unk> is on the EPS guide.
Will you be.
Your line consensus by about.
More than 40 cents at the midpoint is up.
So I was wondering if you're seeing any incremental cost pressure last quarter and will that.
Yes.
I think in terms of.
Reconciling to the last guidance I think the real key factor. There is we did have to bring down our.
Sure.
The exchange rate impact so that's going to that's impacting us some extent as we just mentioned trying to offset that with some actual volume increases and then secondly.
As you pointed out the material cost.
The levels, we forecast them to increase more than what we had expected in the first.
Set of guidance, we gave and that's why we've had to increase our price guidance as well. So we're working hard to offset that but there is some.
Challenges as a result, and then lastly.
A little bit higher on the tax rate than where we thought we'd end up so those were the main things, but all in all.
Looking to increase we've increased our guidance.
Since the last guidance, we gave at the beginning of the year.
Helpful. Thank you.
Your next.
Question comes from the line of Tony Soccer, Ryan from BMO. Your line is open.
Hi, Thank you so much for taking my question.
I have one question, it's more of a longer term one.
How do you feel about your long term operating margin as you sit here today I think you wanted to be 10%.
Youre, probably going to be that by the end of this year.
So, especially in light of what you are.
And can you remind us what are the likely.
Leverage over the medium to long term.
Sure.
Absolutely want to continue to focus on operating margin improvement as you said.
Correctly, our first goal is to reach 10% and then we will establish new goals to exceed that going forward. The key drivers for margin improvement are.
Additional operating leverage through growth.
And we also want to grow our high margin businesses. So that means growing our precision AG businesses, which carry high margins growing our premium product brands like the fendt brand, we want to grow in North America, which we perceive as a.
An important high horsepower market the highest horsepower equipment.
<unk> improved margins as well and we're constantly looking to be more productive within our purchasing.
Capabilities and as well as.
Our efficiencies in our plants and then we have some businesses that were trying to improve like.
I think we've done a great job with South America, you see where Thats, where thats gone in the last few years and there is some other other ones like grain and protein that we believe there's margin expansion.
When opportunities there that we're that we're working on so we've got a lot on the list of opportunities there that we'll be working on very hard over the next few years too.
Keep those margins going up.
Great. Thank you and if I could ask a follow up I think you mentioned your volume outlook for Europe .
A bit better now.
<unk>.
To begin the year.
That.
Volume demand.
Demand driven or are you seeing some easing in the supply chain that mark.
Yes, I would say, that's mainly just a little bit of tweaking, what we think we're going to get out of our supply chain.
For the most part it's not really a change in our outlook in the market.
Understood. Thank you.
Your next question comes from the line of Stanley Elliott from Stifel. Your line is open.
Hey, good morning, everybody. Thank you all for taking the question.
Question on the precision side lots of acquisitions here recently.
The launch or now that you have the fendt one platform out there.
Now for all of these different businesses to be integrated in a much faster clip so that we.
Essentially see this part of the business accelerating even more so.
Yes Stanley. Thanks for the question I'd have you think about it in two ways. One is the <unk> platform is our customer portal and Thats the base for which new technology can be deployed either on the machine or off board and the customers to enjoy it that's for the OEM sales platform for our new technology.
But retrofit is the other one I want to make sure that we never lose sight of that I think agco is really really focused on.
The retrofit market precision planting as a market leader in that regard and we're continuing to add to that.
Ariel.
We closed on them in January they have a they had a retrofit channel GTA is going to be added to that so there'll be a two pronged.
<unk> approach to the market one is fast technology deployment through the retrofit for those early adopters willing to upgrade their machine make a dump machine into a smart Hy Tech machine that automates features and and as those technologies become mature then they migrate onto the OEM platform.
One being one of them.
Perfect that was it for me thanks, guys best of luck.
Yep.
Your next question comes from the line of John Joyner from BMO. Your line is open.
Hey, good morning, and thank you for taking my questions.
So Eric you briefly touched on higher inventory is being affected by lingering supply.
Hi chain constraints and then Andy you mentioned there are some tweaks to your outlook.
Or maybe supply chain I don't know if you can really start getting better, but maybe slightly but.
Can you reconcile that and maybe give more color on for example, if you look at your work in process inventory at almost doubled from year end. So.
When I looked at that I kind of assume that maybe the supply chain issue has actually gotten worse, but can you add a little bit more color around that.
Yes early in the year, we put together an aggressive plan for what we communicated to our suppliers and what we set our factories that we wanted to because we've got so many orders we've got our highest order bank in the history of the company. We're essentially sold out in almost all products for 2022, and we are selling into 'twenty three in many cases.
So the whole deal is build as much as we possibly can.
We are expecting that during the course of the year that the supply chain would heal.
It's not heald as fast as we had hoped and in fact in some cases because of the Russia, Ukraine thing It got a little worse.
So what's happened is 95% of suppliers are supplying on time.
It's those few percent that are hand to mouth in constraining our overall output.
So when you have a few suppliers not being able to deliver many times, we can build the machine.
Put it in our lot behind the factory and wait for that one last part to come in put that part on and then ship. It. That's why you see some increased work in process increase.
There's machines, partially mostly built.
But we've also got extra raw material on hand, because of these most of the suppliers supplying on time, we're going to pivot now.
We enter this phase of the year and consider how much inventory we have more strongly as we've placed the orders on the rest of the supply base and moderate that during the year and get our inventory back in line with where it should be.
For raw materials.
Okay.
Thank you. Thank you for that and just one quick one I guess.
Can you tell us what's baked into your <unk>.
I guess outlook for precision AG mix for the rest of the year.
R R.
John are you asking about sales for the rest of the year or what.
Correct, yes.
Yes.
We've got precision AG total sales if we include precision planting and our fuse business last year, our revenue was.
With a little over $540 million and we're looking for that with these acquisitions as well to be up about 10% to 15%.
Year over year.
Okay, great. Thank you so much.
And thats purely supply constrained the demand is red hot on these products it would be much much higher but if you think about our number one issue like everybody is semiconductor chips. The precision AG is loaded with semiconductor chip just about everything we sell has a chip in it and many of them have multiple chips. So.
It's constrained by supply in that at all by demand.
Got it yeah, that's kind of why I was asking the questions I appreciate the color.
Your next question comes from the line of Jeremy.
From Goldman Sachs. Your line is open.
Yes, hi, good morning, everyone.
Good morning.
Okay.
If you could just talk about the.
Two solutions, you folks outlined for crop protection fertilizer and just.
This through what's the order of magnitude of reduction in.
Both types of inputs.
Folks are piloting.
<unk>.
The improvement in yield.
<unk> are showing.
Can you just provide a bit more color on that if you don't mind.
Sure, there's a number of solutions and.
<unk>.
They're based on vision systems predominantly and then there's also the liquid logic system that we have on our sprayers already so let's talk about targeted spring. It's a vision system that identifies the difference between a weed and the plant sprays just the weed so.
Post emergence spring that means your spring wheat. After it's already come up we can see savings in the 70% to 80% of chemical application.
Now.
The reason I was careful about the wording on that is because there's still the need for pre emergent apt.
Application to a field, which is when you put chemical down to prevent the weeds to come up in the first place.
And so it's really the big advantages on post emergence spring wheat. After it's come up once you can see it.
And Theres a significant reduction that's available there where we are.
Also have the liquid logic system, we've got machine of the year Award.
This year at the farm shows in that new spray are able to go into high.
Hi clearance of our standard clearance.
And with this boom framing system, yes. It can go into the field and immediately productive because of the boom is already primed and have to dump chemical at the end of the field.
Waste chemical and have a sustainability issue.
So the combination of on machine application as well as these new targeted spring kits and as a reminder, precision planting as a retrofit solution. So these will go on all makes of sprayers.
Especially in North America.
To start off with that's our first target market.
So we've got to Echo OEM solution and a retrofit solution for all mix.
Thank you for the color, yes, So you mentioned.
Post emergent solution too when you look at it on.
Savings in chemicals per acre what level of savings is that 70% to 80%.
Equivalent to win how are you thinking about monetizing it.
Well we are.
<unk>.
The savings chemical applications are typically the largest cost for the farmer and depending on the farming application.
It's somewhere in the 30% of their total cost range.
If we think about.
The how we monetize it we're looking at selling this at a price where the farmer are all of our precision planning technologies, we aimed for one year payback, sometimes between one and two years, but we aim for a system solution price that can get enough savings.
On a typical size farm to be able to pay for this.
The system in one year.
And that's how we think about the targeted spring solution as well.
Okay terrific. Thanks.
And your next question comes from the line of Corey Courtney.
<unk> from Morgan Stanley Your line is open.
Great. Thanks, Good morning, guys.
I was wondering if you could expand a little bit I think you mentioned that <unk> EPS would be modestly below last year should we expect that.
Similar to this quarter really all of the margin pressure to show up in North America, and still have margin expansion in the remaining divisions or is there anything else that we should be considering as we're modeling that out.
Yes, coordinate youre very right on there. So most of the margin pressure is in North America, we expect to see those margins be down similar to what we saw in the.
In the first quarter.
Kind of slight improvements flattish to slight improvements in margin.
Europe and Asia Pacific Africa.
And then South America with some pretty solid margin improvements in the second quarter.
Overall, when we think about the margin impact we've got the sales going up but.
These material cost increases were again offsetting by pricing, but the margins are getting pressured because.
We're not offsetting them enough, we're offsetting them on just on a dollar basis, but not on a margin basis. So that's the real kind of big picture situation. We see in Q2, and then we expect that to get better as we move throughout the year and get more pricing in place.
Got it and then I think you mentioned a couple of times you would expect some of these deferred precision AG revs.
Revenues to flow through later in the year as you get shipped availability I think typically you'd see a sequential step down in Q2 sales should we be thinking about that a little bit differently. This year.
Given the issues with the supply chain.
No.
The seasonality is still similar so.
For this year, we expect Q2 to actually be the lowest.
Sales quarter for precision.
For precision planting and then <unk>.
Half of the year again, we.
We're looking to.
Catch up some of these lost.
Units that we missed in the first quarter and first half and so we're.
We see growth year over year in both third and fourth quarters.
Okay, sorry, and that was just for the precision planting business, yes for that was for total revenue.
Precision that was precision planting.
Okay, Okay great.
And then.
Sorry go ahead.
No thats it.
And sorry, just lastly on the pricing increase I think previously you had been taking more pricing in South America and some of the other parts of the world and a little bit less in Europe any change there given.
Sure.
The increase in pricing or should we think about that pretty evenly.
Yes, so according to your rate, Brazil still has the highest level of price increases and Thats just simply due to the level of inflation in the other markets are slightly less than what we've quoted in terms of company average not much but a little bit less from that company average.
Okay, great. Thank you.
Your next question comes from the line of Chad Dillard from Bernstein. Your line is open.
Hi, good morning, guys.
Thanks, Ed.
So how far out.
Order book.
2023 orders, yet and if you can just give some color if so.
How you're ensuring correct.
Price cost balance.
Just any sense on just what sort of pricing you would.
Taking there.
Yeah, we've changed how we think of our orders over the last year or two and that is that.
Okay.
Okay.
Okay.
Yeah.
Okay.
Okay.
Ladies and gentlemen, this is the operator I apologize for that.
A slight delay in today's conference. Please hold the conference solution momentarily.
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Yes.
Okay.
Okay.
Okay.