Q2 2022 AGCO Corp Earnings Call

July 28, 2022

Good day, everyone and welcome to the Ichor 2022 second quarter earnings release Conference call. Today's call is being recorded and now at this time I'd like to turn the call over to Greg Peterson Agco head of Investor Relations. Please go ahead Sir.

Thanks April and good morning, welcome to those of you joining us for Agco's second quarter 2022 earnings Conference call.

This morning, we will refer to a slide presentation that is.

Posted on our website at Www Dot <unk> dot com.

non-GAAP measures that we use in the slide presentation are reconciled to GAAP metrics in the appendix of the slides.

We'll also make forward looking statements this morning, including demand product development and capital expenditure brands production levels engineering expense exchange rates pricing share repurchases dividends 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. 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, including plant closings workforce availability and product demand supply chain disruption, whether exchange rate volatility commodity prices and changes in product demand we disclaim any.

<unk> to update any forward looking statements, except as required by law, we will have a replay of this call on our web on our corporate website later today.

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

Damon Audia senior Vice President and Chief Financial Officer, Excuse me and Andy Beck, our former CFO and now senior Vice President and senior adviser.

With that Erik Please go ahead.

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

Our second quarter results summarized on slide three exceeded our updated forecast.

I am really really proud of the strong effort our team put forth to mitigate the impacts of the cyber attack significant currency headwinds.

And a difficult supply chain environment.

Despite these challenges in the quarter, we maintained our full year financial targets that include strong revenue growth.

Margin expansion and absolute record earnings per share.

We expect to deliver these results even with the continued supply chain and logistics challenges as well as material and freight cost inflation, which are being muted by strong pricing.

For our markets, although commodity prices have pulled back from the extremely high levels earlier this year they.

They remain at levels still that's still support healthy farm income.

Overall demand in Agco's major end markets remains robust.

Our order boards are ahead of last year's high levels and our production plan to support sales growth in the balance of the year.

Interest in our precision AG solutions is strong very strong and we have increased our technology and digital investments to support further growth.

Slide four details industry unit retail sales by region for the first half of 2022.

Weather and geopolitical conflicts are pressuring crop production this year.

Estimates for lower year end grain inventories are supporting crop prices, resulting in healthy farm economics and elevated demand across all major markets.

Industry retail sales continued to be negatively impacted by supply chain constraints, which has limited equipment production during the first half of 2022.

We continue to believe that the weaker year to date industry sales on this slide are result of supply chain challenges and that softening end market demand.

North American industry retail tractor sales were down approximately 7% in the first six months of 2022 compared to last year.

Smaller tractors declined from their record levels of 2021, while increased sales of high horsepower units offset some of the decline.

Industry retail tractor sales in Western Europe , which also were restricted by supply chain challenges decreased by approximately 10% in the first half of 2022 compared to strong levels in the first six months of 2021.

Farmer sentiment has been negatively impacted by the conflict in Ukraine, as well as input cost inflation.

But forecast 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 six 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 continued to replace an aged fleet.

Agco's 2022 factory production hours are shown on slide five.

As a consequence of the cyber attack, we suspended production in the majority of our production facilities for up to two weeks during the month of May while we successfully restored our systems.

This caused our second quarter production hours to be down about 8% compared to the second quarter of 2021 and resulted in lower sales in the quarter than our original targets.

We expect to recover the second quarter production losses by increasing production in both the third and fourth quarter for.

For the full year of 2020 'twenty two we currently project production hours to increase approximately 5% to 7% compared to the 2021 levels.

Our current July production rates are solidly on track to deliver the higher production plan in the months ahead.

The supply chain issues have impacted our ability to complete and ship units as well as contributed to labor inefficiencies.

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.

And although trending slightly better in some markets. We expect continued challenges in the quarters ahead.

However, the combination of increased production in the second half of the current and the current volume of semi finished products.

It gives us strong confidence in our full year sales outlook.

At quarter end <unk> order board remains extended orders for tractors and combines are higher in North America, and Europe and were down modestly in South America compared to a year ago, but please note.

We are continuing to limit our order board in Brazil at three months to give ourselves more pricing flexibility.

Many of you were with us for our sustainable technology event in Germany, a few weeks ago, where we showcased our precision AG capabilities slide.

Slide six highlights one of the key themes from the event our focus on high margin growth.

The first focus area is taking our fendt full line brand global.

Now historically <unk> has been a very strong tractor business in Europe .

We are working to grow the business along two vectors.

First expanding fendt product line beyond tractors in the second taking the full line products global.

Interest is growing and our premium fendt product lines in both North and South America.

<unk> branded sales in the first half of 2022 have increased over 20% compared to the first half of 2021 and.

And we expect these growth rates to improve in the second half based on our current production plans are.

Fenton Challenger sales in North and South America are expected to double in 2022 as compared to 2020.

Our ambitious target is to double them again over the next five years to seven years.

The second focus area involves precision agriculture at.

At <unk>, we addressed the precision AG market in two ways first is through our precision planting business, which has become one of the fastest growing AG tech companies in the world.

Susan planting has been successful in providing automation and intelligence to planters and now they are growing well beyond planters into other parts of the crop cycle late spring harvesting and even others.

In addition to their impressive technology precision planting successes generated through their unique retrofit approach, which reduces the farmers upfront investments and increases their ROI.

By offering solutions through a retrofit approach, we expand the addressable market beyond AG co brands to all industry brands.

The other way, we address the precision AG opportunity as our business called fuse.

Which provides OEM solutions for our AG equipment.

Options like telemetry guidance field mapping and other precision AG capabilities make our AG co machines smarter and more productive for the farmer.

Fuse is also on an accelerated growth curve as farmers are looking to add features to become more capable more intelligent and more productive.

I'll touch on the financial impacts of Agco's precision AG in a minute.

For the third high margin focus area is our global parts and service business.

<unk> is already in a leading position relative to having the part there when the farmer needs. It we call out parts, Phil We're building from a solid foundation to capture more of the dealer and farmers business, we're helping dealers become better and more proactive with their service and parts offering with our smart solutions.

And expanding our digital capabilities.

As a result, we expect after sales and parts business to grow and have higher penetration.

Combined these three opportunities provides significant growth potential at higher margins and less variability during cyclical downturns, it's a real win win win for farmers.

<unk> and <unk>.

Slide seven covers another key message from our meeting in Germany.

A big part of our growth story is the significant expansion of our addressable addressable market.

Thanks to a precision AG capabilities.

As we focus on delivering value to farmers, we see the opportunities to add value across all aspects of the crop cycle.

We are now focused on delivering value to customers to help them improve yield while reducing input costs like labor fuel seed and fertilizer.

Why we are investing in precision AG and why we see this as a significant growth opportunity for agco.

By addressing solutions across the crop cycle Agco's, leading precision AG solutions will allow us to expand our reach and capture a larger share of the value created from our innovations.

Slide eight details how this comes together with our growth ambitions for our precision AG business.

At our analyst meeting in early 2021.

We talked about doubling our precision AG business by growing our precision planting and our fuse businesses. We are committed to growing from $400 million in sales per year to $800 million per year by 2025.

So far we are ahead of schedule to reach the original goal.

Through strong execution and the great reception, our products are receiving from our farmer customers. We have delivered a compound annual growth rate of over 20% and our precision AG business since 2018.

With that strong performance, we are now targeting over $900 million in revenue from our precision AG portfolio by 2025, while maintaining the strong margin performance.

I continue to be very very excited about the future of our precision AG business not only for us, but for our farmers as well.

And now it's my pleasure to introduce our new CFO Damon Audia, who is replacing Andy who has decided to retire from agco. After 28 years of Fantastic service with the company.

As many of you already know Damon comes to us from Kennametal.

We are very excited to have David joining our management team and meet with you over the coming many months Andy.

Andy is helping with the transition and will be on hand to help with Q&A today with that David. Please go ahead.

Thank you, Eric and good morning, everyone.

I am very excited to be joining <unk> at such a great time, because we continue to execute our farmer first strategy.

I look forward to meeting with many of you over the coming months.

So I will start on slide nine with an overview of AG <unk> regional net sales performance for the second quarter and the first half of 2022.

Net sales were up approximately 10% in the quarter compared to the strong second quarter of 2021, when excluding the negative effect of currency translation.

Pricing in the quarter, which was around 9% contributed to higher sales, which dampened the impact of the cyber attack that resulted in lower production sales, particularly in North America and Europe .

By region, the Europe Middle East segment reported an increase in net sales of approximately 3%, excluding the negative impact of currency translation compared to the sales in the second quarter of the prior year.

The sales growth was primarily the result of pricing, which offset slightly lower volumes, resulting from the effect of lower production and supply chain challenges.

Net sales in North America increased approximately 1%, excluding the unfavorable impact of currency translation compared to the second quarter of 2021.

The increase resulted primarily from the effect of pricing to mitigate inflationary cost pressures, mostly offset by lower sales of combines and sprayers.

In South America net sales grew approximately 77% compared to the second quarter of 2021, excluding favorable currency translation, driven by significant pricing as well as volume and mix effects sale.

Sales were up strongly across the South American markets with high horsepower in mid sized tractors as well as sprayers showing the largest increases.

Sales to dealers outpaced retail sales in the quarter in advance of government subsidized financing, which will reopen for the farmers in the third quarter.

Net sales in our Asia Pacific Africa segment increased about 2% compared to high sales in the second quarter of 2021 on a constant currency basis.

Higher sales in Australia, and Japan were partially offset by lower sales in China, mainly related to COVID-19 related lockdowns in the quarter.

Finally consolidated replacement part sales were approximately $450 million for the for the second quarter, approximately 6% lower than the second quarter of 2021.

Unfavorable currency effects were approximately 8% during the second quarter.

Turning to slide 10.

The second quarter adjusted operating margin declined by approximately 120 basis points versus the comparable period in 2021.

Margins in the quarter were affected largely by lower production and cost inefficiencies associated with the cyber attack and supply chain disruptions as well as higher operating expenses as a percent of sales.

Second quarter price increases of approximately 9% offset the significant material and freight cost inflation on a dollar basis. However, although strong the price increases were not sufficient to offset the impact on a margin basis.

For the full year, we're expecting pricing in the 10% range to offset material cost inflation on a dollar basis.

By region Europe Middle East segment reported a decrease of approximately $40 million in operating income compared to the second quarter of 2021, primarily from currency translation of the weaker euro.

Operating income was also affected by lower production and cost inefficiencies.

North American operating income for the second quarter of 2022 decreased approximately $53 million year over year.

Lower sales volume and production as well as production inefficiencies, coupled with the weaker mix and higher operating expenses resulted in the lower second quarter operating results.

Operating margins in our South American region reached nearly 16, 5% in the second quarter and operating income improved over $62 million versus the same period in 2021.

Continued significant increases in end market demand, along with strong pricing and a healthy sales mix supported the year over year growth.

Finally in our Asia Pacific Africa segment operating margins expanded to over 14% in the second quarter, reflecting mainly an improved sales mix.

With the margin expansions in the last two years in our North American South American and Asia Pacific Africa regions from our strategy execution and disciplined pricing, we expect the margin profile will be more balanced across the globe in the years ahead.

Slide 11 provides an overview of our grain and protein sales by region and byproducts.

Sales decreased about 1% in the first six months of 2022 compared to 2021.

Globally grain equipment sales increased approximately 19% with our south American and North American regions, showing the largest increases.

Protein production sales declined approximately 24% in the first half of 2022 with the weakest demand in the Asia Pacific Africa region, mainly related to swine related equipment sales.

Overall grain equipment demand has been strong supported by improved grain prices and profitability of firms. However, the north American demand has been muted due to industry wide price increases to cover the increased cost of steel.

The protein production equipment market remains challenged due to labor issues and high input costs, such as green. However, as protein prices are improving so as protein producer profitability, which should lead to further investment.

Slide 12 details Agco's free cash flow for the first half of 2022 and our outlook for the full year as a reminder, free cash flow represents cash used in or provided by operating activities less capital expenditures.

For the first six months of 2022 free cash flow was a use of $710 million, which is just over $460 million higher than the first six months of 2021.

The primary driver for the change is the additional working capital requirements caused by higher inventory levels related to the continued supply chain challenges.

For the full year of 2022, although we expect our raw material and work in process inventory to continue to remain elevated to help us manage through the difficult supply chain environment. We do expect to see significant improvements in the second half of 2022 to generate approximately $600 million of free cash flow for the full year.

Which is up significantly from 2021.

Our capital allocation priorities remain unchanged and we will continue to include investment in our precision AG offerings and digital capabilities as well as opportunistically, adding bolt on acquisitions to help position <unk> for long term success.

In addition, we are focused on direct returns to our investors. This year with our regular quarterly dividend that was increased 20% last quarter to 24 per share and this year's variable special dividend of $4 50 per.

Per share given our expectations of our strong free cash flow generation.

Future returns of cash to shareholders will be based on cash flow generation, our investment needs, which include capital expenditures and acquisition opportunities as well as our market outlook.

Slide 13 provides our full year market forecast by region.

Despite the slower than expected start in the first half of 'twenty two.

Due to the supply chain issues, we still expect higher retail industry demand in total.

For North America, with higher commodity prices and healthy farmer sentiment, we continue to expect higher demand to replace an aged fleet of larger equipment being partially offset by modestly softer demand for smaller equipment. After the several years of strong growth.

Overall, we expect the north American market to be up 5% to 10% year over year.

For South America, we now expect the industry to be near the higher end of our previous range at around 10% growth.

The year over year growth is driven by the supportive commodity prices and favorable exchange rate, which is allowing farmers to continue replacing aged equipment as the number of planted acres continues to expand.

EU farm economics are expected to remain supportive in 2022.

Elevated commodity prices are expected to offset higher fertilizer and diesel cost economics.

Economics are positive for dairy producers as milk prices have moved to record levels and our offsetting higher feed cost as such western Europe industry demand is expected to be flat compared to the 2021 levels.

Slide 14 highlights the key 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 significant investments in development of new solutions to support our farmer first strategy.

Our second half results are dependent upon our supply chain performance.

Our outlook is based on the current estimates of component delivery levels for the remainder of the year and our results will be affected if the actual supply chain delivery performance differ from these estimates.

Our sales plan includes price increases of approximately 10% aimed at offsetting higher material cost inflation during 2022.

With the significant weakening of the euro versus the US dollar we expect currency translation to negatively impact sales by about 7% based on the current exchange rates.

Engineering expenses are expected to increase by approximately 15% to 20% compared to 2021. The increase is targeted investments in smart farming in precision AG products as well as the company's digitalization initiatives.

For the full year operating margins are expected to improve compared to 2021 as a result of higher sales and corresponding production favorable pricing net of material cost and improved factory productivity, partially offset by increased engineering and digital investments as well as inflationary cost pressures.

Finally, we are targeting an effective tax rate ranging from 28% to 29% for 2022.

Slide 15 provides our outlook for 2022, which continues to be based on the current estimate of our supply chain capacity.

<unk> will be affected if the actual supply chain delivery performance differ from these estimates.

We currently project 2022 sales to be in the range of 12, 4% to $12 6 billion in.

And corresponding earnings per share to begin the range of 11 70 to $11 19.

The current sales outlook is modestly lower reflecting the effect of foreign currency exchange, most notably the weaker euro. However, despite this headwind we still expect to deliver full year earnings per share in line with our original estimate given the strength of our markets, our pricing actions and solid execution of our strategy.

We still expect capital expenditures to be approximately $325 million and free cash flow to be in the $600 million range.

For the third quarter, we projected year over year increase in sales and improvement in operating income.

We expect our production levels to remain at the higher levels, Eric talked about earlier, and we will help offset a portion of the production shortfall, we incurred in the second quarter.

Operating margins are expected to be higher in the third quarter of 2021 with continued strong market conditions and pricing offsetting the effects of material cost inflation and increased engineering expenses.

As a result, we estimate our earnings per share for the quarter to be approximately $3 per share.

With that I'll turn the call back to Gregg for Q&A.

Thanks, Damon as we move into Q&A and to expand participation. We're going to ask you to limit yourselves to one question and one follow up Amy. Please go ahead and get started.

Thank you if you'd like to ask a question simply press the star key followed by the digit one on your telephone keypad also if youre using a speakerphone. Please make sure. Your mute function is turned off to a lighter signal to reach our equipment.

Once again press star one at this time.

<unk> pumped on your phone line will indicate when your line is open and we ask that you. Please state your name and company.

Posing your question.

We will take our first caller. Please go ahead.

Hi, Good morning, Jamie Cook from Credit Suisse, and I guess before I ask my question. Congrats Andy Thanks for all the help over the years with feedback and Damien welcome welcome aboard.

I guess.

My first question.

Margins in South America were very strong obviously.

<unk>.

Helps a lot, but I'm just trying to wonder.

Trying to understand is there anything else structural going on on the margin Bryan that we can get more optimistic about south American margins.

Longer term and perhaps getting back to sort of prior level and then my second question obviously.

Thank you Scott.

Eric can you talk about sort of your.

In your view.

What youre seeing on the order book potentially that building into 2023, and how you're preparing for.

Danielle.

Energy or gas shortages next year. Thanks.

I can cover the South America margin question, and then maybe turn it over to Eric on the Europe question. So in terms of our second quarter margins as you pointed out in South America are very strong.

First of all production was up about 7% and that helped us.

We had.

Favorability in terms of pricing in relation to material costs.

And then obviously the strong growth helped us in terms of operating leverage but I think the other key factor is that we really had a strong mix our high horsepower equipment is growing much faster than our overall growth that includes tractors and implements and sprayers and knows.

I'll carry much stronger margin profiles and we're also seeing still very good results in our grain and protein business.

The market is very strong and we're taking advantage of that so overall really is strong.

Mix.

And again, the pricing I think as <unk>.

Driving on the favorability that we're seeing so.

We're really pleased with the development of the margins in South America and.

A little bit dependent obviously on volume to some extent, where these margins will go but we think we've made step changes in our in our overall margin profile in South American and thank those who will be consistently delivered in the future.

Eric do you want to go over to Europe , Yes, sure and just to reinforce the things that Andy just said about South America that was all by design, we've talked to you a few years back saying, we intend to turnaround the South America business, we are not happy with the results there and so we moved from a small tractor company in the southern part of Brazil to a full <unk>.

<unk> cycled planters sprayers combines large tractors focused also up in the in the Cerrado region and the Midwest, where the big farms are and we just took our whole board there to that region and when visited several of those big farmers. So it's on purpose that it's a fundamental shift in our distribution strategy fundamental shift in our product strategy.

<unk> and overall that brings with it a very different margin profile that we expect to carry us forward.

Relative to <unk>.

You are asking a couple of dimensions. There one is Hollywood the orders look our order board is up 30% in <unk>, we're well into 2023, we're continuing to get strong order rates there and so the.

Farmers, although there's concerns that we mentioned they still have good farmer profitability and they are still buying and they really like the new technology, we're bringing to the market there.

Now some of the challenges that we're managing some of the risks that we're managing.

You've highlighted the energy issue.

32% of our energy is already renewable.

In Europe , we use a lot of electric or renewable and not a lot of natural gas, where we do use natural gas, we're putting in place changes to add LLP storage and things like that when we went through the Covid crisis, many of our plants redeemed or essentially all of our plants redeemed essential industry.

Don't know if that will play out again during the energy if something were to get worse with the energy supply.

But at least that's how we reviewed last time and with with the global food shortage.

There is a chance that would happen again, so a lot of demand we're trying to manage the risks.

And anticipate them before they come but were very bullish on our European business.

Thanks, so much.

Yeah.

Youre welcome.

Next caller. Please state your name prior to posing your question Layman company.

Yes, hi, good morning. This is Jerry Revich of Goldman Sachs.

Good morning can you hear me okay.

Hi.

Sure.

Great.

Said really strong performance in the quarter I think better than you expected.

Five six weeks ago can you just talk about the decision not to increase the earnings guidance given the <unk> feed and also just in terms of the shape of the guidance $4 implied earnings in the fourth quarter pretty robust.

Quarter as well can you just talk about.

What's driving the higher earnings weighting.

As well.

Yes, Gary this is Damon and I'll, let Andy jump in as well I think when we had the <unk>.

Announcement related to the cyber attack and we took the second quarter down I think our comments were that we would expect to recover most of that in the balance of the fiscal year.

Obviously, we recovered a little bit stronger than what we had originally expected here in the second quarter. So no real significant change to the overall full year.

We look forward for the balance of the year here. There obviously, the euro has weakened relative to the dollar putting some pressure.

<unk> seen we've taken down the EMEA market, a little bit those two things are being offset by strong pricing and overall strong demand so sort of bringing us back to that that full year estimate that we gave you guys. This morning.

Anything you'd add.

I mean, obviously as you say we.

We're in a situation, where we lost some production and had to make an estimate of what that impact would be we did catch up a little bit in the month of June . So we had a better June than we originally thought but this is mainly just timing of when we will get the production through.

And as we allow our increased rates are going to help us catch this production up not only in the third quarter, but the fourth quarter. So it's spreading over both both quarters and.

And so that's going to be key to our success in the second half is.

Getting the production up there are other factors that will help us.

Reached those sales targets in the second half we ended the month of June with a lot of unfinished tractors and other equipment, where we've run them down the assembly line, but still waiting on one or two parts before we can ship them to our customers and we had.

Fairly high level at the end of June . So we have teams that are going to be working through shutdown periods in.

Overtime and things like that to try to get these units out the door.

So that will help us also with our.

Meeting our sales forecast in the second half.

Okay Super and precision planting.

Because of the chip shortage.

Didn't ship as much as you want to do this year, how much are you stockpiling.

Stockpiling chips over the balance of this year in terms of what's your ability to ramp up precision planting deliveries.

As you think about the 23 planting season.

Yes.

The only word I would modify on your question, we'll be stockpiling chips were pretty much as we get them we use them.

You talked about a lot of our products are waiting for a component many of those are waiting for a semiconductor chip. So that's.

Thats still a constraint for us and precision planting because of it's a lot of electronic.

Intelligence componentry, but our projection for precision planting for the year is going to be up 20% to 25%.

From last year, and so we've got a lot of order rate, we've actually been managing demand in that turning on ordering as strongly as we would have because we're trying to just manage market expectation and when we can actually ship.

<unk> business is still continuing strong this year, we're going to launch some more new products and we expect 2023 to also be up from this year and we've been on a growth rate of over 20% no reason for that.

Slow down.

Perfect I appreciate the discussion Andy David Congratulations.

Thank you.

Hi.

Next caller please state your name and company.

Hi, it's Steve Volkmann with Jefferies.

STM and welcome from my side as well I just wanted to ask you about tungsten prices.

That's a joke.

So.

I do have a couple of follow ons, if I could.

Around South America, because that was obviously impressive and I think Damian in your prepared remarks, you said something that sounded like a channel fill happening down there any way to quantify that.

Yes.

If you look at what happened in the in the second quarter. Some of that sales growth that you see I would probably estimate at about 20% of that related to some channel fill that occurred it's industry wide where the.

If you look at the industry from a shipment standpoint, it was about 20% different than what happened at the retail level and the reasoning behind that is.

<unk>.

Crop plan for Brazil, which also includes the phenomenon.

Financing.

Starts back up in the month of July and so it was the funding had run out in the second quarter and so all of those units have customers associated with them, but they've got to get through the financing process with the <unk> program. So we expect to see that from a retail.

Standpoint, those flushing back through in the third quarter. So.

And so youll youll see I think retails exceed wholesales in the third quarter most likely.

History wide.

Yes.

Understood. Thanks, and then on the margin down there.

Historically, we had sort of thought that a key driver was going to be.

Getting some different sort of localized supply chain in place and so forth and my understanding is those kind of difficult in this environment. So has that happened yet or is that still sort of upside to margin as we go through the next several quarters or whatever.

Yes, Steve It has happened to some extent, but I don't think.

We have completed everything that we targeted a while back obviously with the market picking up so dramatically and all of the supply chain challenges Reese.

Resourcing at this point is not one of our top priorities.

Getting the parts back from our core suppliers, but the margins it picked up because of our ability to price in.

And also this mix change so we've we've.

Haven't forgotten about those.

Those projects and initiatives, but right now, they're a little bit on the back burner.

Understood. Thank you.

Yes.

Next caller please state your name and company.

Hi, This is Chad Dillard from Bernstein.

Good morning, Janet Chen.

Good morning, guys.

So I just wanted to dig a little bit further into your plans to catch up on production because of the cyber attack.

I think about the cadence between <unk> and <unk> and then I think David you had mentioned that.

You are work in progress inventories.

A little bit higher.

Yes.

Just wanted to figure out just what the Delta was between <unk> versus <unk>.

And how to think about the cadence in the third quarter and fourth quarter.

Yes, our production rates in the second half are going to be.

In order to meet our sales targets need to be 10, plus percent youll see a little heavier weighting in the third quarter versus the fourth quarter, but both up.

Double digits versus versus last year. So.

I think thats the.

As we mentioned in our comments right now our run rates in our factories are sufficient to meet those those targets.

And so we plan on maintaining those rates as long as our supply chain cooperate. So that's our that's our plan for the second half.

And then in your prepared remarks, you talked about.

Challenger brands.

Being able to double over the next five to 10 years.

So just to level set what.

Are your revenues in 2022, and then can you just provide a little more color on bridging to that growth.

Yes, so when we talked about that doubling growth.

In our North and South America markets, Thats, where the geographic expansion is happening with fendt.

As we said we've doubled since R. 22 estimates are will double from 2000, and then where our target is to double again in the revenue associated with that is somewhere about $750 million. That's tractors planters combines included in that amount.

Great. Thank you.

Next caller again state your name and company.

Yes.

Kristen Kristen <unk> from Oppenheimer.

Wanted to ask a follow up question on <unk>.

Shannon.

Thank you for outlining that at that 10% Boston second half but.

Making up a lot of the downturn in Q2, not quite back to the 10% that you are anticipating for the full year.

I'm just wondering what does that set up for you in terms of backlog entering into 2023.

Yes, just from a retail level.

Any propensity to see some cancellations.

Maybe Nick delivery.

No I would say that.

Our customers understand the issues right now with the supply chain, it's not unique to agco or even to our industry. So.

Certainly our customers are anxious to get their products and we are anxious to get them to them.

But we're working with our dealers and our and our customers very closely trying to manage their expectations and they understand.

Our challenges and when these products can be delivered we're not seeing any cancellations of orders or anything like that so our order boards extend well into 'twenty three now which is unusual typically at this point in time, we wouldn't be.

Having orders in 'twenty three but this year we do.

And so.

If we're taking orders they know it's not until next year at this point.

Just to underline that at the foundation of this the world doesn't have enough green.

Theres drove significant drought and heat issues in Europe and in North America. The latest forecast just came up with the European drought may drop yield by 9%. There. So there is just not going to be enough green in the market for quite some time, which is going to keep prices supported and that just means farmer profitability and so what.

We are seeing is just like what Andy said, we're not seeing any cancellations to the contrary our order bank is going up it's at the highest level in the history of the company and its got a higher mix of retail.

In that order Bank, then as usual so.

The demand is still very strong.

Appreciate that color and then I wanted to just ask a clarification on the mix impact in North America.

In the prepared comments there was some mention of mix.

Q1, you had the precision planting sort of headwinds on the chip side.

Quarter, I think you mentioned combines and sprayers is there.

Bill maybe to deliver on some of those seasonal products outside of the normal seasonal windows that youll see a mix benefit moving into the second half of the year. Thank you.

Yes.

We do expect to see the mix pickup in the second half in North America.

You rightly pointed out that the mix was a little weaker in the second quarter and were also impacted just by the volume sales volumes being being lower than expected.

But in the second half we see.

A better mix of high horsepower equipment some of these.

And finished tractors that we talked about in Europe .

Come in Theyre coming our way into North America, we have a new sprayer that we'll be releasing in introducing in the second half of the year, which we're very excited about.

And then the precision planting business.

It's also going to see some higher growth typically their sales are very front end loaded in the year. So first quarter with the planting season, and then things drop off.

Customers have we werent able to really meet all the demand in the first quarter. So customers are ready to take it even out out of season now and so we're going to see better.

Sales in the second half than we typically do from a kind of a weighting of of the quarter. So.

All of that will contribute to some better margins that we've seen so far in North America in the second half.

Next caller please state your name and company.

Hi, Steve Fisher from UBS. Thanks, Good morning.

You said your order boards are up and good morning, I know you said your order boards are up in grain prices remain supportive even after the recent decline in prices, but I guess I'm curious if that decline has had any.

Any impact on customer behavior as youre seeing it or is it really just kind of too soon to tell I am curious just maybe about the order trends year over year in.

In July if you could offer some color there.

Well you look at some of the sentiment indexes and the sentiment is cooling off for farmers, but they're buying is that their profitability is still strong we continue to get orders. The retail portion of the orders are still strong.

And so.

There is lots of things to be concerned about relative to watching the news.

But when they when they get through all of those concerns and they look at their economic situation. There is still in a position to buy in.

Green doesn't drop out of the Sky.

It happens through harvest and we're getting our ability to project with the wet northern hemisphere harvest is going to be in this green gap is not going to get solved. This year. So now we're into next year to try and solve it in and that means supportive pricing through a pretty lengthy time.

In front of us and that's what the farmers are watching.

Okay, and then just curious what youre seeing on used values.

How is that affecting your ability to kind of continue to tack on used tech on higher new pricing from here.

Used values are still extremely strong used inventory is.

Extremely extremely low.

The returns on leases are down.

Everything is showing a hot market the amount of inventory in the pipeline is low.

So pricing is high inventory availability is low that al is just.

<unk>.

Softening in any of those indicators, we watch all of them.

To make sure that we're on top of things and.

When something does soften someday, we want to make sure we're right on top of it but it's not happening now.

Okay. Thanks, a lot Andy and welcome David.

Thank you.

Next caller state your name and company.

Hi, Good morning, this is tami zakaria from Jpmorgan.

Thanks, so much for taking my question.

So my first question.

And then my finished connectors.

When we look at your inventory is up about 4% sequentially, which seems to be roughly in line with where you would have been sorry.

Alright.

Where is this.

Got it.

Good evening.

And can you quantify that.

Yes.

It is.

All of that to do that.

Thank you.

I think I got all of that.

<unk>.

<unk> finished equipment as you call it any unfinished equipment is.

Our inventory is.

Work in process category of the inventory.

Now, we had unfinished equipment a year ago as well. So this isn't all of this is it.

Pure increase from the prior year, but.

I would say probably at least over $100 million more than the unfinished inventory than we had a year ago and in both last year, we brought that got it down by the end of the year and Thats, what we expect to do as well.

It won't all get pushed through in the third quarter it will be a gradual improvement.

Throughout the second half of the year, but we do expect to get and plan for that in our in our.

In our planning that comes way down by the end of the year.

Got it that's super helpful and then more of a.

Longer term question going back to your South American margins it.

It seems like Latin America is on track to become your most profitable market this year.

How sustainable is that and Ken the other region.

<unk> operating margin.

By design.

All right.

Uh huh.

Hello.

Highlight a couple of points and one is that every market is a little different place relative to their historical demand.

Europe is our least <unk>.

Volatility market they have.

Peak as high but they don't have as nearly as low troughs, either they kind of are closer to flat than any of the other markets, whereas South America has more volatility and right now they are enjoying.

Our strong industry and so we're further above the historical the historical average than in other markets. So that's.

One dimension.

Exchange rates is a second dimension, but the recipe that we're applying in South America generically is the recipe that I highlighted on our high margin growth business slide.

Our focus on large AG production machines.

And taking fendt global.

Focus on precision agriculture, and improving parts and service business. That's the same recipe, we're applying to all the regions and all of these bring both higher margin better mix as well as less cyclicality as we go through the business cycle.

Got it thank you.

Youre welcome.

Next caller please state your name and company.

Hi.

Seth Weber from Wells Fargo Good morning.

I just can.

Can you hear me okay.

Yes, we can <unk> alright.

Alright.

I just wanted to go back.

To circle back to a couple of other questions and answers. So just with this precision planting.

The timing shift to the second half delivery ships in the second half of the year. So is it fair to think that North American margins.

Into the double digits here for the back half of the year.

The operating margin.

Yes.

We're looking for double digit margins in the back half of North America.

Okay. Thanks, Andy and then.

I just wanted to make sure I'm understanding the messaging around the GSI business because it does look like that business came off.

Like nine or 10% here in the second quarter and I'm trying to understand if that's really just a production issue I think I heard you say something about.

Pushback against pricing or how much of that is really a function of farmers.

Farmers getting more cautious with the.

Relative to somewhat softening in crop prices.

Okay.

Yes for our grain and protein business, if I just hit the punch line first and then I'll give you explanation, we expect sales for the year to be up 10% and margins to be up 200 to 300 basis points.

Now why is that different in quarter two the cyber attack played a larger impact on grain and protein than many of our other businesses and some of that was because of the business itself and some of that was a choice. We made as returning systems back on turning factories back on prioritizing things, we prioritize some of our other sites and so they had some.

The longer shutdown periods compared to the rest of the company and so there are quarter two is impacted a little bit more strongly.

But fundamentally we see.

Grain demand is still strong and protein demand coming back.

Steel is softening a little bit.

And so we and then our transformation program our business improvement program for grain and protein is staying on track. So that's why we expect.

Little higher sales and a notable increase in margins.

Got it okay. Thank you guys I appreciate it.

Thanks Seth.

Next caller please state your name and company.

Great. Good morning. This is Dylan coming from Morgan Stanley just a first one on channel inventories maybe at the dealer level in North America and Europe .

Obviously the focus this year is still seems to be on meaning retail demand, but just curious as you're looking into 'twenty. Three do you feel like that's a year, where you could potentially start to begin to restock the channel and I guess, if so do you feel like you could restock the channel on one year or Alex ended you kind of spoke to that opportunity.

Yeah, I don't think we've gotten that far yet too.

Really make plans about 'twenty three in channel inventory I think the one area where.

We're seeing that will we will probably see some channel rebuild is in the small tractor area.

Need to carry more inventory there that's impulse buy type business and so we need to.

Have the appropriate level of inventory, there and now that the markets cooling off as we as we described there is a little more opportunity with some of the orders that we have to get that inventory at the right levels.

And so that's the only area right now that we see in.

Kind of our current view of anything changing.

Obviously, as we get more into that planning for 'twenty three in and determine what our production capabilities are that will certainly dictate what we'll do with the channel inventory so little.

Early to say I think we can probably update you.

As we get into a real planning for next year.

Okay got it thanks, Andy and maybe its a longer term question on the precision business. You. Obviously took that target up for 25 I'm. Just curious how much of that is kind of coming from more accelerated uptake around technologies in the near term versus any kind of incremental product that you have in the pipeline that should be kind of coming over the next few years.

Well.

We're sold out on many of our products. So the demand is continuing very strong in precision planting.

We already signaled this spring that we're getting into the sprayer business with targeted spring and vision systems, we're going to have some more launches a really exciting one coming up here.

Next few weeks that will be another exciting one and then we've got more products coming in the Winter Conference next January so that's precision planting but as a reminder, we bought six companies last year too.

Accelerate the precision planting journey and so we've clustered them all around precision planting following the same approach in terms of innovation and farmer focus.

And our mindset of the retrofit business and we call that our precision AG co business and.

And so there is also a incremental growth from the acquisitions as they contribute.

A second engine within the precision AG business.

Within Echo.

Got it sounds good thanks, Eric.

You bet.

Next caller.

Hi, Good morning, Tim Thein from Citigroup.

Just the.

Two together if I may.

The first is on parts sales.

I think if I heard Brian and down I think some of the high single digits.

Quarter on.

I would imagine in a in a normal environment, where supply for new equipment is tight.

And then you'd have folks.

Running stuffs existing machines hardware, so that should be tailwind for parts demand.

So I would assume that there's a fair amount of pricing in the channel. So maybe you could just.

Maybe touch on that.

Presumably that's more on the supply and demand factor, but the center.

The first is on parts and then second on North America.

Obviously, you are not the largest player in the market.

Just your confidence level.

Industry forecast for the 5% to 10% for the year.

Given that that implies a pretty big back half.

We're in where we are.

So and maybe just touch on those two things. Thank you very much.

Yeah in terms of the terms of parts sales.

Were impacted as well by the cyber attack we had to.

<unk> really focused just on.

Shipping parts.

Two on down units and things like that rather than normal building dealer restocking of dealer inventories and things like that so we will see we saw in Q2 kind of a lighter sales than we expected.

And hopefully that will pick back up in the second half of it. We don't think we lost too much of that with just its just a matter of timing with.

With building and maintaining dealer inventory levels.

And then in terms of.

The North American industry.

It really all of these industry forecasts or is dependent on forecasting supply chain.

Demand. So we believe again that there's very strong demand out there because of farmer income levels commodity price levels those kinds of things. So it's about <unk>.

Trying to understand what's going to happen with not only our supply chain, but the industry supply chain and how much product is going to get delivered in the back half so were kind of basing our industry forecast and what we see for R. R.

Our business and projecting that forward and Tim the only thing I would add on the parts sales talked about the constraints but.

What I quoted for you was on absolute dollar and if you look at the currency effect as I said it was around 8% in the quarter. So we actually did grow on a constant currency basis, but again that 2% growth was limited as Andy alluded to earlier.

Understood Alright, thank you.

And that does conclude the question and answer session for today at this time I'd like to turn the call back over to Eric <unk> for any additional or closing comments.

I'll close this morning, with just saying thank you very much for your participation in the call a lot of good questions and I appreciate the discussion.

Despite the additional foreign exchange headwinds and the impact of the cyber attack, we had a really solid first half of 2022.

We've got a lot of work still in front of us and the balance of year is it.

The challenge, but we are solidly on track for strong sales growth margin expansion and a record full year earnings per share.

Like to leave you with.

As a reminder of that growth slide that I talked about earlier that we also showed in Germany, and we reiterate our plans to grow our business, we're very convinced.

With the continuing development of our farmer focused solutions that solve critical farmer problems and right now there is more pressure on farmers than there probably ever has to both grow more yield.

Close the screen gap and also do so with fewer inputs. So there are thirsting for these technologies that we're developing.

And it also greatly grows our expandable expands our addressable market, which will bring more sales growth over the long term.

We're engaging also in sustainability and helping our farmers make the transition to not only more productive farms, but more sustainable farms are we've got a good track record so far we expect for the year.

Precision planting to be up 30% smart nozzles to be up 26% ideal combines to be up 60%.

The strategy is showing up in the numbers and we look forward to talking to you more directly but all of this at farm progress on August 30th Thanks, and have a great day.

That does conclude today's conference. Thank you all for your participation you may now disconnect.

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Good day, everyone and welcome to the Agco 2022 second quarter earnings release Conference call today's call is being recorded and now at this time.

I would like to turn the call over to Greg Peterson Agco head of Investor Relations. Please go ahead Sir.

Thanks April and good morning, welcome to those of you joining us for Agco's second quarter 2022 earnings Conference call.

This morning, we will refer to a slide presentation.

It's posted on our website at Www Dot <unk> dot com the non-GAAP measures that we use and the slide presentation are reconciled to GAAP metrics in the appendix of those slides will also make forward looking statements. This morning, including demand product development and capital expenditure brands production level.

<unk> engineering expense exchange rates pricing share repurchases dividends 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.

Supply chain disruption, 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 this call on our web on our corporate website later today.

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

Damon Audia senior Vice President and Chief Financial Officer, Excuse me and Andy Beck, our former CFO and now senior Vice President and senior adviser.

With that Erik Please go ahead.

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

Our second quarter results summarized on slide three exceeded our updated forecast them.

I am really really proud of the strong effort our team put forth to mitigate the impacts of the cyber attack significant currency headwinds and.

In a difficult supply chain environment.

Despite these challenges in the quarter, we maintained our full year financial targets that include strong revenue growth.

Margin expansion and absolute record earnings per share.

We expect to deliver these results even with the continued supply chain and logistics challenges as well as material and freight cost inflation, which are being muted by strong pricing.

For our markets, although commodity prices have pulled back from the extremely high levels earlier this year.

They remain at levels still that's still support healthy farm income.

Overall demand in Agco's major end markets remains robust.

Our order boards are ahead of last year's high levels and our production plans to support sales growth in the balance of the year.

Interest in our precision AG solutions is strong very strong and we have increased our technology and digital investments to support further growth.

Slide four details industry unit retail sales by region for the first half of 2022.

Weather and geopolitical conflicts are pressuring crop production this year.

Estimates for lower year end grain inventories are supporting crop prices, resulting in healthy farm economics and elevated demand across all major markets.

Industry retail sales continued to be negatively impacted by supply chain constraints, which has limited equipment production during the first half of 2022.

We continue to believe that the weaker year to date industry sales on this slide are result of supply chain challenges and Matt softening end market demand.

North American industry retail tractor sales were down approximately 7% in the first six months of 2022 compared to last year.

Smaller tractors declined from their record levels of 2021 will increase sales of high horsepower units offset some of the decline.

Farmer sentiment has been negatively impacted by the conflict in Ukraine, as well as input cost inflation.

But 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 six 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 continued to replace an aged fleet.

Agco's 2022 factory production hours are shown on slide five.

As a consequence of the cyber attack, we suspended production and the majority of our production facilities for up to two weeks during the month of May while we successfully restored our systems.

This caused our second quarter production hours to be down about 8% compared to the second quarter of 2021 and resulted in lower sales in the quarter than our original targets.

We expect to recover the second quarter production losses by increasing production in both the third and fourth quarter.

For the full year of 2020 'twenty two.

We currently project production hours to increase approximately 5% to 7% compared to the 2021 levels.