Q2 2023 AGCO Corp Earnings Call
Good day and welcome to the <unk> second quarter 20 twenty-three earnings call.
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I would now like to turn the conference over to Greg Peterson Agco head of Investor Relations. Please go ahead.
Thanks, and good morning, welcome to those of you joining us <unk> second quarter of 2023 earnings call. We will refer to a slide presentation. This morning. This posted to our website at www Dot <unk> Dot com.
non-GAAP metric choosed in the presentation of reconcile the GAAP measures in the appendix of the presentation will also make forward looking statements. This morning with respect to strategic plans demand product development and capital expenditure planes production levels engineering expense exchange rate inbox pricing <unk>.
And interest rates future commodity prices crop production farm income supply chain disruption inflation component delivery sales margins earnings inventories.
Astro tax rates and other financial metrics, we wish to caution you that these statements are predictions in that actual events may differ materially we refer you to the periodic reports that we file from time to time with the Securities and Exchange Commission, including the company's Form 10-K for the year ended December 31 2022.
Documents discuss important factors that could cause the actual results to differ materially from those contained and are forward. Looking statements. These factors include but are not limited to adverse developments in the agricultural industry, including those resulting from COVID-19.
Supply chain disruption, whether exchange rate volatility commodity prices and changes in product demand, we disclaim any obligation to update forward looking statements, except as required by law.
A replay of this call will be available on our corporate website later today.
On the call with me. This morning is Eric and soda or Chairman, President and Chief Executive Officer, and Damon Audia, Our senior Vice President and Chief Financial Officer with that Eric. Please go ahead.
Thanks, Greg Good morning, we appreciate your interest in <unk> and your participation on the call today. This.
This morning, we reported another record quarter in terms of sales operating margin and earnings.
The continued execution on our farmer first strategy yielded second quarter sales growth of almost 30% with adjusted operating margins expanding by 420 basis points to 13%.
This makes four consecutive quarters with operating margins above 10.5%, which is evidence of how we have structurally transformed our business and further demonstrates the progress we're making towards our midcycle, 12% operating margin target.
We are seeing excellent demand for our technology rich <unk> tractors are precision eggs solutions.
And replacement parts.
North and South American fence sales are ahead of our growth targets as we expand our distribution networks into the regions to give them more farmers access to the industry's best equipment.
Compared to June year to date 2022 acres precision egg sales were up 23% and ideal combined sales increased 76%.
We've also made significant progress with our efforts to optimize our south American operations and improved margins there.
This quarter marks the fourth consecutive quarter with South American operating margins over 19%, which is a testament to the team's execution and industry leading products.
Our customers growing interest in <unk> precision eggs solutions is supporting extended order boards we.
We expect solid market conditions to continue.
Are improved financial outlook for 2023 reflects this optimism.
As we look at the second half of the year, we have increased our full year sales operating margin earnings and free cash flow forecast.
Slide for details industry unit retail sales by region for quarter to 2023.
Supportive farm economics resulted in robust demand for large agricultural equipment as farmers continued to replace aging machines.
While dealer inventory of smaller equipment has increased versus 2022 levels Lara.
Larger machinery is still at or below targeted levels.
North American industry retail tractor sales were down approximately 2% through June year to date versus 2022.
Smaller tractor sales continue to decline from the higher levels in 2022.
As increased interest rates and overall economic conditions have slowed demand.
Strong demand and increase sales of greater than 100 horsepower units helped partially offset that decline.
Industry retail tractor sales in Western Europe decreased approximately 1% through June year to date 2023 compared to 2022.
Farmers sentiment continues to be negatively influenced by the ongoing war in Ukraine, as well as input cost inflation.
However, forecasts for healthy farm income in Western Europe are expected to continue to support solid retail demand for equipment throughout 2023.
In South America industry retail tractor sales decreased 3% through the first six months of 2023 compared to 2022.
Retail demand in Brazil was negatively affected by the depletion of the subsidized loan program prior to the June 30th fiscal year and <unk>.
With new funding recently announced positive farmer economics supportive exchange rates and continued expansion and planted acreage, we're still anticipating modest growth for the South America tractor industry in 2023 compared to the very strong levels of last year.
The Columbine industry was up in North America, 57% and in Western Europe by 44% through junior year to date versus 2022.
Due primarily to improved supply chains.
Combines in South America declined slightly in the first six months of 2023 compared to the prior year.
We remain positive about the underlying egg fundamentals supporting strong industry demand in 2023.
Stocks to use levels are a bit higher than the recent lows, but they remain at a level that supports profitable commodity prices.
Well, there's been recent volatility in commodity prices over the last quarter related to weather and uncertainty they are still above the historical averages and favorable for farmers.
As the world demand for clean energy grows the demand for vegetable oil based diesel will grow strongly.
This is a demand driver for our farmers that will be supportive of commodity prices.
Equivalent in the field is aged and due for replacement by.
By our calculations the current average age of high horsepower tractors in the U S is approximately seven and a half years old.
Which is a year older than the historical average.
Across all regions, new dealer inventory of large egg equipment remains at or below targeted levels, while small egg dealer inventory is up from last year.
Input costs like fuel and fertilizer are down significantly from their peaks last year.
We expect farm income to be down modestly in 2023 from record levels in 2022.
However, we believe that it will remain at very good levels in 2023 and be supportive for industry demand assuming that normal crop production continues.
The team has continued to do a great job managing supply chain challenges over the last few years.
We are no longer using brokers to acquire semiconductors.
This is not only a cost savings, but it also allows us to move products to finished goods inventory and on the customer's faster.
Well the supply chain has improved from where we were a year ago. There are still components that are affecting our production volumes.
The encouraging news is that even with these hurdles capacity is improving.
At the same time farmer economics remain healthy and global end market demand remains strong, especially in the large firms segment.
<unk> 2023 factory production hours are shown on slide five.
We grew our production quarter to by approximately 18% versus 2022.
Part of this increase is due to the cyber event, we experienced in quarter to 2022, which depressed production volumes last year and shifted production to.
To the second half of 2022.
Because of this phasing in our focus on managing inventories, we're planning for a relatively flat production level in the back half of this year versus 2022.
Based on our industry and market share forecast for 2023, we are projecting a 4% to 5% increase in production numbers for the year.
As of the end of June 2023 demand for our farmer focused products remains very strong and our order boards remain elevated across all regions.
In Europe tractors have order coverage into the first quarter of 2024 with large egg orders up double digits and small egg orders down double digits compared to last year.
In South America, we have order coverage through September of 2023.
Where we continue to limit our orders to around one quarter in advance to give ourselves more pricing flexibility.
We plan to begin accepting fourthquarter orders in Brazil in mid August .
In North America are orders for track tractors combines an application equipment extend well into 2024 is the demand in big farm market continues to be strong.
As we outlined last quarter orders remain below last year's levels as we have elected to limit order intake to improve our on time delivery rates. We currently have around nine months of order coverage for both large and small egg.
Moving to slide six.
Over the last several years, we've been providing insight into our recent acquisitions and where they fit into our tech stack.
For those that were present at a recent of 2023 technology event in Kentucky.
You saw many of the cutting edge advancements that these companies have helped to accelerate and enable here to echo.
With the products and technologies, we demonstrated that the event, we showcased how we have been able to execute on integrating these companies by giving them the opportunity to be entrepreneurial and creative while leveraging echo scale and go to market expertise.
Among some of the highlights where precision planting starting the journey with us in 2017.
And they are the cornerstone of our technology stack.
They have perfected planters.
Which we have leveraged into the industry leading momentum planter.
And now they're taking their knowhow beyond planting to areas like sprayers and soil testing.
J C was acquired a year ago and its technology is on full display at our technology event with the autonomous Green card running next to defend combine.
We are excited to launch this product into the market in 2025.
Slide seven recaps the key messages from a recent technology event.
The event highlighted all three of our key growth levers.
The global full line.
Growing our parts and service business and drawing our precision egg business.
And that Kentucky farm, we demonstrated a number of our technology rich sent products from our momentum planter to around Baylor to an ideal combine.
We discussed the ways, we are meeting the farmer, where they want to do business through our egg Revolution dealership model, which blends a brick and mortar presence with over 30 mobile service trucks capable of performing most services right on the farm.
This mobile service model will help us further grow our parts penetration by utilizing the telemetry data coming off of our machines.
And proactively performing maintenance before it becomes a problem.
We are bringing parts and service to the farmer instead of requiring them to always come into the dealer store.
We also showcase much of our precision AG portfolio and how we're helping to sustainably feed our world.
While also helping farmers increase their net farm income by at least 20% across the entire crop cycle.
Our new radical agronomics automated soil sampling lab got a lot of attention at the tech days for how it is revolutionizing the entire soil sampling value chain and lowering farmer cost.
We also reiterated the target dates of when we will be having cutting edge products in the market.
For autonomy solutions, we demonstrated how we will audit have automated many of the tasks in the cab on our path to full autonomy.
We demonstrated examples of the full crop cycle from the teaching headlamp feature on the tractor pulling the momentum planter to.
The ideal drive on the combine.
The ideal combine automates more tasks and the other in the industry, resulting in less fatigue for the operator, and a cleaner harvest with improved yield.
We will have <unk> autonomy retrofit solutions by 2025, supporting tillage and Green card applications.
We'll follow that with fully autonomous solutions across the crop cycle by 2030.
We're talking about spring, we demonstrated precision plantings Symphony vision.
Retrofits solution.
Which will be available for any brand of equipment starting in 2024.
Will follow it up with an <unk> solution by 2026.
And for cleaning missions, we highlighted the pads were taking to reduce emissions by investing in electric tractors and launching the E 100 model in 2024 with more electrified platforms to follow.
We also highlighted some of our other paths were exploring like Biomethane and hydrogen.
When you look at at all there's just never been a more exciting time to be in the egg space.
For those of you that were with US we want to thank you for your attendance at the event and your interest in Echo.
We hope that you saw how we are driving innovative solutions that are focused on helping improve our farmers profitability.
And if that will hand, it over to David.
Thank you Eric and good morning, everyone I will start on slide eight with an overview of regional net sales performance for the second quarter.
Net sales were up approximately 31% in the quarter compared to the second quarter of 2022, when excluding the negative effect of currency translation.
Pricing in the quarter, which was over 14% contributed to higher sales.
The strong year over year performance was partially influenced by the lower sales in the second quarter of 2022 that were negatively affected by the cyber attack, we experienced particularly in our European and North American operations.
By region.
Middle East segment reported an increase in the second quarter net sales proximately, 36%, excluding the negative effect of currency translation compared to the prior year.
The improvement was driven by increased sales of mid and high horsepower tractors and combines along with favorable pricing actions.
From South America net sales in the second quarter grew approximately 16% year over year, excluding the negative effects currency translation driven by the continued strong sales growth in Brazil, partially offset by lower sales in Argentina.
Higher sales of tractors and momentum planters as well as favorable pricing effects drove most of the increase.
Net sales in North America increased approximately 35% in the quarter, excluding the unfavourable impact of currency translation compared to the second quarter of 2022.
The growth resulted primarily from increased sales of high horsepower tractors combines an application equipment, along with the positive effects of pricing that more than offset inflationary cost pressures.
On a constant currency basis net sales in our Asia Pacific Africa segment increased about 14%.
The lead shipments from our European factories in late 2022 cop back up in the second quarter, resulting in the higher sales in Australia and China.
Finally, consolidate a replacement part sales were approximately $492 million for the second quarter.
9% year over year or 10%, excluding the effects of negative currency translation.
Turning to slide nine.
The second quarter, adjusted operating margin improved by 420 basis points versus 2022.
Margins in the quarter benefit from higher sales and production Ah Richard mix and positive net pricing compared to the second quarter of 2022.
Price increases in the quarter of over 14% more than offset significant material and free concentration on a one dollar basis and we're also positive on a margin basis.
For the full year, we are projecting approximately 8% pricing.
By region, the Europe Middle East segment reported an increase of approximately 134 million in operating income compared to the second quarter of 2022 and margins improved over 380 basis points.
Higher sales stronger net pricing and a healthy products mix contribute to the improvement.
North American operating income for the quarter increased approximately 86 million year over year, while margins improved by approximately 690 basis points.
Operating income benefited from higher sales and production positive net pricing and a favorable mix based on the significant growth instant products year over year.
Operating margins in South America exceeded 20% in the quarter of 380 basis points increase over the same period in 2022.
Operating income improved almost 36 million versus the second quarter last year the.
The improved South American results reflect the benefit of higher sales and production as well as a favorable sales mix.
Continued market strength in Brazil has resulted in continued price resiliency in the quarter, helping deliver very strong results once again.
Finally in our Asia Pacific Africa segment operating income declined approximately $10 million in the quarter due primarily to a weaker mix of sales the negative transactional effects of imported products and higher logistics cost.
With the margin expansion the last two years in our North American and South American regions from our strategy execution and discipline pricing, we expect <unk> margin profile to be more balanced across the globe in the years ahead.
Slide 10 summarizes our precision AG business.
As we highlighted before we are focused on expanding our addressable market from just traditional agricultural machinery spin, which today is in the low to mid teens as a percentage of total farm spin <unk>.
With our precision add portfolio, our sights are set to impact around 70% were effectively all non land areas.
We believe that the investments and precision add positions as well as it plays a major role in achieving the global sustainability targets that are being established while simultaneously, helping our farmers improve their profitability.
Through June year to date, we recorded $384 million and precision AG revenue approximately a 23% increase from the same period in 2022.
Anticipate continued strong growth in the back half of 23, which takes us to our previously communicated target of $800 million to $850 million in sales.
Our current run right puts a solidly on track to hit the 1 billion dollar sales targets by 2025 that we announced during our December 2022 Investor day.
Slide 11 details our year to date free cash flow for 2022 in 2023 as.
As a reminder, free cash flow represents cash used in or provided by operating activities less capital expenditures and free cash flow conversion is defined as free cash flow divided by adjusted net income.
Through June year to date, we abuse $602 million of cash 15% less than 2022 at supply chains have improved in the second quarter last year was affected by the cyber attack. The use of cash falls are seasonal inventory build in the first half of the year for the spring selling season, and the cell down over the back.
Half of the year.
The year over year improvement reflects higher earnings, partially offset by almost $100 million, an increase capital expenditures and year to date.
For 2023, we still expect our raw material and work in process inventory remains somewhat elevated given supply chain challenges, but we still expected to be a modest source of cash versus a use in 2022.
We expect our free cash flow conversion to continue to range from 75% to 100% of adjusted net income a significant increase from 2022 consistent with our improved financial outlook.
We remain focused on direct returns to our investors during 2023 with a regular quarterly dividend that we increased last quarter by 21% to 29 cents per share and the payment of a special variable dividend of $5 per share.
Future returns of cash to shareholders, we based on casual generation, our investment needs, which include capital expenditures and acquisition opportunities as well as our market outlook.
Slide 12 highlights are 2023 retail market forecasts for our three major regions.
Globally, driven by elevated commodity prices, we expect healthy farm economics supports strong and market demand.
For North America, we continue to expect similar demand compared to the healthy levels. In 2022, we expect continued growth and high horsepower row crop equipments segment to be offset by softer demand for smaller equipment. After several years of robust growth.
Current interest rates are expected to continue to slow the smaller equipment segment of the market.
In South America, we still expect industry sales to be flat to up 5%. We expect the recently announced funding for the subsidized loan program to stimulate demand, especially for smaller equipment in the second half of 2023.
This region remains one of the stronger and markets, especially in Brazil, where the farm footprint is increasing we expect another year of healthy firmer profitability, which we expected to drive demand for large aggro equipment beyond 2023.
For Western Europe , we continue to expect the industry may be relatively flat compared to 2022 <unk>.
<unk> fundamentals in the region are generally healthy with green prices continued to outpace input inflation.
Meanwhile, supply chain constraints over the last two years are extending equipment replacement.
Slide 13 highlights a few key assumptions underlying R 2023 outlook.
In addition to focus on meeting the robust and the market demand. We will also make significant investments and the development of new solutions to support our farmer first strategy.
Although we see strong market demand <unk> results will still be dependent upon our supply chain performance in 2023.
Our sales plan include market share gains along with price increases of approximately 8%.
More than offsetting material cost inflation.
We currently expect currency translation to positively affect sales by about 2%.
Engineering expenses are expected to increase by approximately 20% compared to 2022, the increases targeted investments and smart farming and precision AG products.
Given our first half performance and our outlook for the second half, we now expect our operating margins to improve to around 11.7% versus our prior outlook of 10, 9% driven by sales favorable pricing net of material costs and.
An improved factory productivity, partially offset by increased investments in our engineering and digital initiatives as well as inflationary cost pressures.
We now expect other expenses to increase approximately 90 million year over year, most of which was incurred in the first half of 2023.
Half of this increase is tied to the sale of receivables to add co finance, we were being affected by higher sales volume and higher interest rates compared to 2022 that we've been forecasting.
The other half is related to the increased volatility in the Turkish lira and the Argentinean peso.
We are continuing to targeted effective tax rate of 27% to 28% for 2023.
Turning to slide 14.
We've raised our sales and earnings per share targets from what we highlighted on our first quarter call.
We now expect net sales to be in the 14.7 billion dollar range based on our first half performance and the stronger Euro adjusted earnings per share should now be approximately $15.25.
In 2023 versus our prior target of $14.40.
We've also modestly increased our capex target to $400 million to include additional investments in our CBT capacity into further enable precision add growth.
As I mentioned earlier free cash flow conversion should be in the range of 75% to 100% of adjusted net income consistent with our long term target and.
And based on our improved outlook should deliver an additional $75 million to $100 million in free cash flow.
With that I'll turn the call back to Greg for Q&A.
Thanks statement.
To maximise participation in the Q&A session today will ask you to the limit yourselves to one question and one follow up.
Gary without we're ready to go ahead and start Q&A.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If you're using a speaker phone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then too.
<unk>, please limit yourself to one question and one follow up.
The first question is from Jamie Cook with Credit Suisse. Please go ahead.
Hi, good morning, and congratulations on a nice climber.
I think you know my first question, obviously nightclub very nice raise to guidance, but I'm just trying.
Guidance, and particularly the operating margin assumption in the back half.
Can serve it and you know given what we put up the margin performance in the first half of the year I think margins in the back half firm pie down about 150 basis points from the first half. So just trying to understand the driver supply Martins.
Great that can have versus the first half.
And whereas the conservatism there and then my second question just understanding you have a strong.
Yeah order bucking.
Some visibility to 2024, what's your approach for the order book for 2024, and one of the orders that are there what's going to reach out versus dealer. Thank you.
Jamie I'll start with the the margins first half second half and then maybe a better talk about the order board.
I think if we think about the first half again, we had a very strong performance here as you alluded to for the for the second half I think about that sequential change there was really a couple of drivers influencing the second half one is the engineering spent so as we've been talking about this year, we are increasing our engineering spend over $100 million year over year. If you look at.
My first half engineering versus second half you know you're going to see that increasing so that will be a little bit of a tractor on the second half second is material costs dug and even though we're seeing the underlying fundamentals of things like steel come down we are still seeing sequential increase in material cost so that would be the second big.
Driver.
Third would be I would say a little bit of pricing first half versus second half you've heard us talk about the lower horsepower segment in South America as we think about some of the incentives to spur the retail delivery there.
We do see potentially some further some incentives there again that we didn't have to use in the first half in South America. So I would tell you those are the big three drivers first half versus second half may be a little bit of mix as well as you know planters are a big first half product for us, which is a rich mix and then that south American low horsepower tractors, which.
Lower than expectations in the first half as they ramp back up in the second half that'll be sort of a negative mixed to the to the Brazilian or the South American margins first half versus second half.
And Jamie your question on order Board, we expect to continue to manage the place where we're managing the overboard most tightly as in South America, and we continue to plan to roll that out one quarter at a time to.
To to be able to handle both pricing and market volatility.
It's been really effective for us and we think will keep that into next year. We've got strong order books in terms of quantity, but also those books are loaded with retail orders.
Already it today.
Remaining a high percent retail order well over 40% and we think that'll continue to strengthen in the next year, probably over 50% <unk>.
Retail order percentage of the order bank.
Okay. Thank you I appreciate the caller.
The next question is from Tim signed with Citigroup. Please go ahead.
Hi, Good morning, maybe just first question on Europe .
And maybe Eric you can even speak to you know some of the.
They don't always have a perfect track record in terms of their.
Predictability, but some of the.
Sentiment indicators, there sauce and in one of the one of the points raised is some concern around.
You can pick up an inventory, so which is counter to the message that use conveyed. This morning from what you guys are saying, so maybe just speak to the feedback.
And what you're hearing from the database I know, it's not a uniform on our country.
Countries that you can.
Moving different trajectories.
Trajectories, but maybe just speak to Europe , as a whole and how you're thinking about that and and 24.
Okay Yeah.
<unk>, there's a couple of dynamics going on they have a little more inflation than some of the other markets. So that's a negative.
But the Ukrainian is bad for the world as the Ukrainian Grange stoppage was.
In some ways. It was good for farmers because we most expect that that's going to drive prices up somewhere in the 10% to 15% range.
For most commodities because you have substitution is not just wheat substitution across all Greens.
So that you know that helps profitability for the farmers, especially in Europe .
So although the sentiment indicator came down a little bit it's still pretty strong relatively it's trending towards.
More towards neutral from Red Hot but.
That doesn't concern us at this moment, we're still seeing strong order rates coming in and we're growing share and most of our brands across Europe .
So the business industry is pretty healthy and we think with this screen restriction it'll remain healthy.
And we continue to grow sure.
Global reach stocks are down global wheat stocks are down for the fourth straight year, which is the primary crop in Europe . So that just gives you an overall sense for.
Is that is that commodities tight any further restrictions really pushes price up.
Okay, and then just kind.
Mechanically from a quarterly earnings perspective historically.
Historically.
Seasonality has kind of gotten mixed up a little bit here recently, but historically fourth quarter.
In the in the highest you still expect that this year. The way you have the the plan laid out.
Yeah, I think Tim as we think about the seasonality the business again, we will see how the second half unfolds I think is Jamie asked a question revenue wise Q2, and Q4 tend to be our strongest quarters if.
If we think about the margin wise Q2 has been exceptionally strong quarter here at 13.1% for all the reasons, we articulate on the call. If I look forward here to the back half in the fourth quarter, we do have a little bit of a we had a very strong fourth quarter last year, given the sort of the supply chain challenges in the <unk>.
Very rich mix that we saw that product portfolio last year. So as I think about the second half between engineering spent increasing a little bit of a mix I'm not sure will necessarily have it is our strongest margin quarter, but I think it will still be one of our top two quarters for sure.
The design.
Design by design last year, we were running the catch up all through the year and we had a big surge at the end of the year last year by design, we aim to be much more building to demand through the course of this year and we're doing that so far. So we don't want to have this this kind of spike at the end of the year that is.
Catch up mode, we Wanna be building to customer demand and that's with supply chain Thesing, we're doing a way better job of that this year than other years.
Mmm.
Thanks for that time.
The next question is from Larry Jamario with William Blair. Please go ahead.
[noise]. Thanks.
Two and related questions first.
Being highlighted.
Knowing strength there can you just earn a little bit between.
Channel fill in retail sales here cause I know, you're obviously building out the distribution, which you've talked about but you know how much of that growth is going to fill the channel versus fell through and second part an ideal I think up 75%. If you put that in perspective, just to kind of understand the materiality of that kind of thing is from a small base in terms of.
That's neato moving or.
Just from a small base that night for now and more poignant a coupla years. Thank you.
Yeah, Okay. Okay, I think Larry if you think about sent for US again as we look to very strong performance here. So I think about it in the North American market. It was up several hundred units.
<unk> over a year.
Sales, so I think we're up over 150%.
In North America, I would tell you a high percentage of that is actually retail. So our retail was was up right around 100% as well so you're seeing a little bit of that channel expansion that you're talking about as we fill and bring on new dealers, but we're seeing high retail concentration as well, they're so good getting it out to the farms and word of mouth Bill.
Getting the momentum as we talk to the farmers you know as you saw on that Tech field day. The farmer he heard about <unk> and word of mouth as his neighbor had one so again part of our fence experience really helping grow the brand recognition out there and getting it into the ultimate farmers.
Deal to your point I would tell you it's more lower numbers. So we are seeing good growth good percentage, but it's still a smaller numbers that we're building off of here on the ideal combine.
You know just to put a few numbers behind that if you go back to 2018, when I really started globalizing. The <unk> business, we had in North America coverage something in the 40% range now it's up to 75 and South America, We had essentially zero. We've just we weren't in that market with fence and now we are at 70%. So we've we've gotten to the point where we've got.
Much of the important market covered we still want to go to that to about 90 in both cases, but.
We've got a lot of good dealers in the areas, where it is important and so it's channel fill isn't I mean, we still have lower inventory than we want at those dealers, but a lot of it's going right through the retail is Damon said.
Okay very good caller, thank you very much mhm.
The next question is from Tammy Zachariah with J P. Morgan and please go ahead.
Hi, good morning. Thank you so much for taking my question.
So I was hoping to get some more color on the flat production outgrows advil for the back half.
<unk> what is expected to what is it expected to look like for small versus large that gives you could give some details.
Yeah, I think Tammy.
Just a couple of comments on the production again.
Reflecting are forecasting relatively flat production year over year and again as a reminder, we had the cyber events in the second quarter, which took our production out we really increase production in the second half of last year to recover. So we didn't do the normal summer shutdowns preventative maintenance as we were trying to recover on that loss production. This.
Here again, you're seeing a relatively flat production based off of the higher capacity the higher demand, but we are still implementing some of these preventative maintenance periods. The the European holiday if I look at it large versus small egg I would tell you large egg is running strong.
Probably more capacity CBT related capacity coming on large egg, where you are seeing some of the production coming down is going to be on the smaller AG part of the of the business there.
Got it says this large egg production should.
It should be positive into backups.
Yeah.
And that would be cool.
Got it. Thank you so much that's helpful and if I could ask one more.
What's the pricing expectation again for the backup for large fries, a small <unk>. It seems like for the back half low to mid sandwich typing is what's embedded but it is it gonna be similar <unk>.
Yeah, I don't we don't really break it down that way Tammy I think your assessment for the second half in the low single digits is right, but it's gonna be product by product and we really don't break it out large egg versus small leg.
Okay. That's it thank you so much.
The next question is from Seth Webber with Wells Fargo Securities. Please go ahead.
Hey, guys. Good morning, [noise] I wanted to just ask about your nine months of coverage nine months of coverage comment for.
The North American backlog can you just frame that for us is that like on a relative basis versus historical is that about where it typically say it says it.
You know better a better than average worse than average just any kind of framework for that nine months number or even versus last year. Thanks.
Well, it's interesting to decide what typical is anymore, if we say it and during COVID-19 it would be less but there prior to COVID-19. It's.
Probably twice what we would normally have so that's that's what we're seeing.
Seeing as we still.
Actually would like to get that backlog down.
And not have to have farmers' wait as long as they are waiting right now for their demand.
There's a lot of thirst for the new technology, we're bringing out on the products and we'd like to be able to get that to them faster. So it's still probably twice as high as we'd like it to be.
And have historically been.
Okay. Thanks, and then just done that.
<unk> revenue up 9% I I assume you're pushing pricing on parts as well. So I'm just trying to understand was his parks volume up was.
Was parts volume up and a quarter or is it down.
Yes at the pricing isn't too much different whether you're talking about whole goods or parts.
We're saying, 8% for the full year with double digits in the first half.
Probably not as much on the park side. So we do have modest volume growth year over year, but not not to the extent that we're having.
Whole goods growth now.
That's normal I mean.
Parts typically are more stable over over the cycle. So in times when demand for equipment is stronger you don't see that St. Paul Theron parts are they're typically steadier similarly, when demand softens for big equipment or equipment in general.
<unk> tend to stay more stable. So it's just kind of the nature of the Beast.
Oh, Okay. Thank you guys I appreciate it.
The next question is from Steve involvement with Jeffries. Please go ahead.
Great Good morning, everybody.
Nothing that question has been answered so maybe I'll try a big broad brush, Eric I guess the elephant in the room. It's just a cycle question right and a curious if you have any updated thought then just where you think we are on the cycle ear and and you've given some sort of qualitative thought I guess going forward.
About market share gains and precision and Biofuels <unk>.
<unk> can 24 be an up year for the industry or is it too early to tell.
It's too early to tell but it still can be a very good year, we see a lot of indicators that are tailwind indicators. We've had a couple of good years in a row, but the average just a couple more to give you. If you look in the U S and the high horsepower area, that's still growing smaller egg is cooling off.
We said that but high horsepower still growing.
The average age of the high horsepower tractor in the U S is about seven and a half years based on our data.
The historical norm, if you look on or a number of years is more like six and a half. So it's still a tale it's still.
Pool of equipment that needs refreshment.
Not to mention all of the technology the rate at which we're bringing up technology on the new products and the artificial intelligence features on those products is is bringing new productivity enhancements to the farmers that even if they didn't have to refresh there's new features that give them a good Roy.
Use the equipment levels are still about.
50% of below what they were in 2018 or 19.
So those are kind of things that were watching that say does this market have room to still be a good market next year and they they look like they are when you look at the machinery. When you look at the Green I've already talked about.
The impact of the of the Russian blockade of Ukraine.
All indicators, we've seen a prices will go up on dreams about 10% to 15% because of that and we're starting to see especially on wheat, we've moved up a lot.
We're seeing record heat waves going through much of the growing portions of the World North America, Europe , and although August is an important months, we gotta get through that.
It has not been good for crops and there's there's there's a potential downside coming on that so lots of indicators that say 2024 kids there'll be a very good year.
Great. Okay. Thank you and then maybe a damning question I think we've talked in the past about.
Some productivity challenges due to the supply chain volatility that we've been seeing and I guess, that's improving but.
Is there still some productivity to come as supply chains kind of finally get normal again or are we sorted through that already.
So Steve we are we are still experiencing supply chain challenges here, we're a lot better now than what we were a year ago and I mean, just to put it in perspective, and and you sort of seen it in our performance and Eric alluded to that fourth quarter Spike last year, but if I look at our semi finished inventory that we had.
At the end of last Q2 last year.
We've reduced that by about 60% year over year with that semi finished product again, a lot of that is due to the supply chain improvements and is Eric said trying to get a better cadence of our sales that you saw it in Q2 and Q2 Q3 and Q4, so we're seeing significant imp.
<unk>, we are not where we want to be what I would tell you. If we were dealing with 10 suppliers per factory last year. This time, we're still dealing with one or two and so we still have disruption in the flow in the factory, we still have the rework to get things onto the tractors when they show up where the combines so there's still opportunity for further.
What activity further volume output as the as the supply chain continuous continues to normalize, but it's getting better.
Great. Thank you guys.
The next question is from Christian Owens with Oppenheimer. Please go ahead.
Hi, Good morning, Thank you for taking my question.
I wanted to ask you specifically about some of the outlet for the back half in South America. I mean, you you did previously call out some of the financing had glanced at the small horsepower tractor and Sanchez.
But specifically around like Argentina, being and all sat there there's an election coming up in that region and just any central electric hearing on the ground that could influence deliveries in the back half of the year.
Yeah, I think Christian for US you know as we've alluded to in the last couple of quarters here. The we've been very strong with our pricing and that the demand that we've been seeing is allowed our team to really hold on to some of the more traditional discounts or incentives. They would provide dealers as we think about the <unk>.
Changes that have come out with the financing plan here, we're optimistic that the small horsepower tractors uhm will start to pick back up but it again, we just look at the overall market conditions. There, we sort of expect to see the teams getting back to that more traditional level of discounts here that they would have sent the dealers within the back half of the year Argentina.
Definitely continues to be a little bit more of a challenging market as being more than offset by the strength in Brazil, but overall, we still feel good about the south American market, it's still our strongest market as we look at 2023 here, we're probably a little bit weaker from a margin perspective, as we move into the back half of the year.
That's really helpful and then if I could follow up on the.
Nine nine coverage in in high horsepower and just any indication as pricing in that order book, how much of that is.
That that normalized clabaugh in 3% to 4% or if you're able to see something a little bit better than that in the yard you're welcome. Thank you.
So Christian most most of those or 20.
2003 orders, so we've talked about kind of the level of pricing for this year and this year that implies kind of mid single digit pricing in the back half of the year. So.
Yeah, so going into next year will have some carryover from the back.
Back have pricing and then will.
Likely add some incremental pricing on that based on market conditions for the new orders that will get under the 24 order program.
Alright, thank you so much.
The next question is from Steven Fisher with UBS. Please go ahead.
Thanks, Good morning, just to follow up on South America now that the financing situation. There has been clarified in Brazil have you seen already a pick up in the activity there.
And was that financing uncertain feeling the impact on the the smaller egg peace in the second quarter, because it seems like you've filled more big Yang equipment than you expected.
Right. So steeped away the there's a couple of different pieces of that program. One this geared towards the smaller farmers that ran out of money.
In January and those guys tend to use their very heavy users of that program, a 90% roughly of the equipment.
Just by small farmers go through that goes for that phenomena program. So they definitely waited as we got into really first quarter in here in the second quarter and we have seen pick up one of the things that are sales folks locally in Brazil have been doing is to.
Help.
With co finance folks process those applications because the administrative process in Brazil is not smooth. So one of the things. We're trying to do is facilitate the rapid.
Fulfilling of those loans and so that that's going on as we speak but our expectation is damaged said is to see some improvement for the small stuff now the bigger stuff or the bigger farmers.
Caps out at about.
The threshold is about $9 million of gross sales for farmers, So thats still somewhat big but those guys only use the program, it's about 60 or 70% of the purchases that happened go through that the phenomena program for the bigger farmer. So a lot of those guys were still using or are and will continue to still use commercial.
<unk> funding and then if you get into the bigger kind of the Mega farms in the amount of groceries and a lot of those guys have not use the program. So they've continued to order. So it's really a mixed bag as we think about Brazil, and I think steep as we alluded to I think it was unchanged question. The first half versus the second half margins part of our expectations are as Greg alludes.
With this funding now available these lower horsepower tractors should pick up volume wise, which is a little bit margin dilutive for the South American region, given the strength of what we saw here in the first half.
Alright, Thank you very much.
The next question is from Jerry ravaged with Goldman Sachs. Please go ahead.
Hi, This is clay on <unk> congrats on the strong for Susan egg sales in the quarter I was just curious on how we should think about.
And capacity and the precision egg product lines and.
Hey, here now and then moving forward towards the at the 2025 targets. Thanks.
Yeah, we've got a huge factory coming on line at the precision planting it's 500000 square feet.
We're putting the equipment into it right now the buildings done.
It looks fantastic and it's going to be.
It'll be way more than we need in the short term, but we expect to grow into it and in short order. After we acquired those six other companies and can consolidate into it. So that's coming on line. This fall and we don't see capacity constraints. There in terms of our internal capacity. The big issue that we've had in the last couple of years of semiconductor chip.
And thats moderated significantly so relative to precision AG we have.
We have a good run way ahead for growth.
Yeah, and I think like just for US we still expect to be up in the range of 800 $850 million in sales. This year. So we were 700 last year on our precision egg our goal right. Now is eight 850, so we feel as well well on path to deliver that billion dollars target by 2025.
Or maybe even sooner.
Sounds great. Thanks.
And our last question today comes from Chad Dillard with Bernstein. Please go ahead.
Hi, guys. Thanks for choosing me and I just had a question for you guys on small egg first of all can you just clarify what share of the business that represents and then can you just talk about where you are on your destock and why do you expect to be done by the end of the year.
So.
Small egg definition chat is a little flexible, but we would typically somewhere said between 25 and a third of our business.
As small lag, it's a little bit different in the U S and that there are there is a distinct category of <unk>.
Compact tractors, which is sub 40 horsepower tractors.
Not a very much not a fag related kind of part of the business, but globally kind of outside of North America.
The small midsized stuff is tied a lot of times to dairy and livestock, but but globally. The number has come down over time I'd say go back five to 10 years that number was probably closer to 40%, but with a lot of a new product introductions and a lot of the focus on technology.
That are mix, especially in South America, but globally.
Kind of away from the small egg into the bigger farms.
Think I'm Chad to your question on the inventory Destocking again, we were watching the dealer inventory levels very closely around the world here and as we talked we know that those inventory levels are up to what we would consider the more optimal level two things that we're doing here. One is I think Tammy would ask a question we are slowing the production for what we <unk>.
Use those low horsepower tractors, we are sort of slowing that down just to make sure that we don't build up dealer inventory stock in that particular segment and I think you know we also buy a lot of these low horsepower tractors from third party manufacturer. So we don't actually produce some but we source them. We've slowed the the order board for those is.
Well, you know, helping a continuing to adjust the inflow of productivity to try to keep that dealer inventory at the at the optimal level.
That's helpful and just one last question on your engineering expense Uhm.
One term I guess like how should we think about the appropriate level spend should be taking it shouldn't be thinking about the second half of the year like that should be a good run right on the Gulf War basis, Yeah, I mean, we.
<unk> to increase our our engineering expense annually as we are focused on increasing the technology development here as I said earlier. This year, we're going to be up $100 million I think the rule of thumb going forward is around 4% of sales you know we've been training a little bit lower than than at the last coupla years, given we've been trying to hire as fast as we could but.
As everyone no surprise, it's hard to get a lot of these top tier engineers, but we're ramping that up but I would tell you sort of rule of thumb for the outer uses around 4%.
Great. Thanks.
This concludes our question and answer session I would like to turn the conference back over to arrogant soda for any closing remarks.
Ah close today by saying Thank you very much for your participation in your supportive <unk> is it really good call again today, we're very proud of how we've started 2023.
As a record quarter in many ways and we're setting ourselves on a trajectory to deliver another record year, and we have higher and higher confidence that we're going to deliver on all of the commitments that we've made to over this last year or two.
The key to our success is the continued execution of our farmer first strategy.
Our focus is on growing our margin rich businesses like Fent parts and service and our precision eggs smart machine business.
We've been investing heavily in the last few years like David was just talking about in in 2023 were making even bigger investments to continue to the development of these forever focus solutions that are solving critical farming problems. Many of them with very short paybacks and I was glad to see many of you on the farm being able to see those in live live in in action.
We demonstrated.
The overall strategy in these products that are technology event, and we were using precision egg tools to really engage strongly and sustainability.
Putting more and more of our technology efforts, there capturing a lot more data and helping our farmers make the transition to not only more productive farming, but also more sustainable farming.
Lastly, the large egg markets continue to be strong globally farm fundamentals are healthy and supporting farmer investments.
The last few quarters, we've touched on many factors supporting our markets, including growing populations changing diets low stocks to use levels healthy commodity prices and more <unk>.
All of these trends give us confidence that our industry could stay strong for some time.
We look forward to seeing many of you at the farm progress meeting in August 29th indicated, Illinois. Thanks again for a good session today.
Thank you for joining the <unk> second quarter 20 twenty-three earnings call. The call has concluded have a nice day you may now disconnect.
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Good day and welcome to the Agco second quarter 2023 earnings call.
Participants will be in listen only mode.
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Please note this event is being recorded.
I would now like to turn the conference over to Greg Peterson Agco head of Investor Relations. Please go ahead.
Thanks, and good morning, welcome to those of you joining us for Agco's second quarter 2023 earnings call. We will refer to a slide presentation. This morning is posted to our website at Www Dot Agco Corp, <unk> com.
non-GAAP metrics used in the presentation are reconciled to GAAP measures in the appendix of the presentation.
Also make forward looking statements. This morning with respect to strategic plans demand product development and capital expenditure plans production levels engineering expense exchange rate impacts pricing dividends interest rates future commodity prices crop production farm income supply chain disruption.
Inflation component delivery sales margins earnings inventories 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 Companys.
Form 10-K for the year ended December 31, 2022. These documents discuss important factors that could cause actual results to differ materially from those contained in our forward looking statements. These factors include but are not limited to adverse developments in the agricultural industry, including those resulting from <unk>.
COVID-19.
Supply chain disruption, whether exchange rate volatility commodity prices and changes in product demand, we disclaim any obligation to update forward looking statements, except as required by law.
A replay of this call will be available on our corporate website later today.
On the call with me. This morning is Eric <unk>, Our chairman, President and Chief Executive Officer, and Damon Audia Senior Vice President and Chief Financial Officer with that Eric. Please go ahead.
Thanks, Greg and good morning, we appreciate your interest in Agco and your participation on the call. Today. This morning, we reported another record quarter in terms of sales operating margin and earnings.
The continued execution on our farmer first strategy yielded second quarter sales growth of almost 30% with adjusted operating margins expanding by 420 basis points to 13%.
This makes four consecutive quarters with operating margins above 10, 5%, which is evidence of how we have structurally transformed our business and further demonstrates the progress we are making towards our mid cycle, 12% operating margin target.
We are seeing excellent demand for our technology rich fendt tractors, our precision AG solutions.
And replacement parts.
North and South American fence sales are ahead of our growth targets as we expand our distribution networks into the regions to give more farmers access to the industry's best equipment.
Paired to June year to date, 2022, <unk> precision AG sales were up 23% and ideal combine sales increased 76% we.
We've also made significant progress with our efforts to optimize our south American operations and improve margins there.
This quarter marks the fourth consecutive quarter with South American operating margins over 19%, which is a testament to the team's execution and industry leading products.
Our customers growing interest in Agco's precision AG solutions is supporting extended order boards, we expect solid market conditions to continue.
Our improved financial outlook for 2023 reflects this optimism.
As we look at the second half of the year, we have increased our full year sales operating margin earnings and free cash flow forecast.
Slide four details industry unit retail sales by region for quarter two 2023.
Supportive farm economics resulted in robust demand for large agricultural equipment as farmers continue to replace aging machines.
While dealer inventory of smaller equipment has increased versus 2022 levels larger machinery is still at or below targeted levels.
North American industry retail tractor sales were down approximately 2% through June year to date versus 2022.
Smaller tractor sales continued to decline from the higher levels in 2022.
As increased interest rates and overall economic conditions have slowed demand.
Strong demand and increased sales of greater than 100 horsepower units helped partially offset the decline.
Industry retail tractor sales in Western Europe decreased approximately 1% through June year to date 2023 compared to 2022.
Farmer sentiment continues to be negatively influenced by the ongoing war in Ukraine, as well as input cost inflation.
However, forecasts for healthy farm income in Western Europe are expected to continue to support solid retail demand for equipment throughout 2023.
In South America industry retail tractor sales decreased 3% through the first six months of 2023 compared to 2022.
Retail demand in Brazil was negatively affected by the depletion of the subsidized loan program prior to the June 30 fiscal year end.
With new funding recently announced positive farmer economics supportive exchange rates and continued expansion in planted acreage. We are still anticipating modest growth for the South America tractor industry in 2023 compared to the very strong levels of last year.
The combine industry was up in North America, 57% and in Western Europe by 44% through June year to date versus 2020 to.
Due primarily to improved supply chains.
Combines in South America declined slightly in the first six months of 2023 compared to the prior year.
We remain positive about the underlying AG fundamentals supporting strong industry demand in 2023.
Stocks to use levels are a bit higher than the recent lows, but they remain at a level that supports profitable commodity prices.
Well theres been recent volatility in commodity prices over the last quarter related to weather and uncertainty they are still above the historical averages and favorable for farmers.
As the world demand for clean energy grows the demand for vegetable oil based diesel will grow strongly.
This is a demand driver for our farmers that will be supportive of commodity prices.
Equipment in the field is aged and due for replacement.
By our calculations the current average age of high horsepower tractors in the U S is approximately seven five years old.
Which is a year older than the historical average.
Across all regions, new dealer inventory of large AG equipment remains at or below targeted levels, while small AG dealer inventory is up from last year.
Input costs like fuel and fertilizer are down significantly from their peaks last year.
We expect farm income to be down modestly in 2023 from record levels in 2022.
However, we believe that it will remain at very good levels in 2023 and be supportive for industry demand assuming that normal crop production continues.
The team has continued to do a great job managing supply chain challenges over the last few years.
We are no longer using brokers to acquire semiconductors.
This is not only a cost savings, but it also allows us to move products to finished goods inventory and on the customers faster.
While the supply chain has improved from where we were a year ago.
<unk> components that are affecting our production volumes.
The encouraging news is that even with these hurdles capacity is improving.
At the same time farmer economics remain healthy and global end market demand remains strong, especially in the large farm segment.
Agco's 2023 factor production hours are shown on slide five.
We grew our production in quarter, two by approximately 18% versus 2022.
Part of this increase is due to the cyber event, we experienced in quarter, two 2022, which depressed production volumes last year and shifted production to the second half of 2022.
Because of this phasing and our focus on managing inventories we are planning for a relatively flat production level in the back half of this year versus 2022.
Based on our industry and market share forecast for 2023, we're projecting a 4% to 5% increase in production hours for the year.
As of the end of June 23 demand for our farmer focused products remains very strong and our order boards remain elevated across all regions.
In Europe tractors have order coverage into the first quarter of 2024 with large AG orders up double digits in small AG orders down double digits compared to last year.
In South America, we have order coverage through September of 2023, where we continue to limit our orders to around one quarter in advance to give ourselves more pricing flexibility.
We plan to begin accepting fourth quarter orders in Brazil in mid August .
In North America, our orders for track tractors combines and application equipment extend well into 2024 as the demand in big pharma market continues to be strong.
As we outlined last quarter orders remain below last year's levels as we have elected to limit order intake to improve our on time delivery rates. We currently have around nine months of order coverage for both large and small AG.
Moving to slide six.
Over the last several years, we have been providing insight into our recent acquisitions and where they fit into our tech stack.
For those that were present at our recent 2023 technology event in Kentucky, you saw many of the cutting edge advancements that these companies have helped to accelerate and enable here at agco.
With the products and technologies, we demonstrated at the event, we showcased how we have been able to execute on integrating these companies by giving them the opportunity to be entrepreneurial and creative while leveraging <unk> scale and go to market expertise.
Among some of the highlights where precision planting starting that journey with us in 2017.
And they are the cornerstone of our technology stack.
They have perfected planters.
Which we have leveraged into the industry leading momentum planter.
And now they are taking their knowhow beyond planting to areas like sprayers and soil testing.
<unk> was acquired a year ago and its technology was on full display at our technology event with the autonomous Green card running next to defend campaign.
We are excited to launch this product into the market in 2025.
Slide seven recaps the key messages from our recent technology event.
The event highlighted all three of our key growth levers the.
The global Fendt full line.
Growing our parts and service business and growing our precision AG business.
And that Kentucky farm, we demonstrated a number of our technology rich fendt products from our momentum planter to around Baylor to an ideal combine.
We discussed the ways, we are meeting the farmer, where they want to do business through our AG Revolution dealership model, which blends of brick and mortar presence with over 30 mobile service trucks capable of performing most services right on the farm.
This mobile service model will help us further grow our parts penetration by utilizing the telemetry data coming off of our machines and proactively performing maintenance before it becomes a problem.
We are bringing parts and service to the farmer instead of requiring them to always come into the dealer store.
We also showcased much of our precision AG portfolio and how we're helping to sustainably feed our world. While also helping farmers increase their net farm income by at least 20% across the entire crop cycle.
Our new radical agronomics automated soil sampling lab got a lot of attention at the tech days for how it is revolutionizing the entire soil sampling value chain and lowering farmer cost.
We also reiterated the target dates of when we will be having cutting edge products in the market.
For autonomous solutions, we demonstrated how we will audit have automated many of the tasks in the cab on our path to full autonomy.
We demonstrated examples of the full crop cycle from a teach in head land feature on the tractor pulling the momentum planter to.
The ideal drive on the combine.
The ideal combine automates more tasks than any other in the industry, resulting in less fatigue for the operator, and a cleaner harvest with improved yield.
We will have bottomed autonomous retrofit solutions by 2025, supporting tillage and Green card applications will follow that with fully autonomous solutions across the crop cycle by 2030.
For targeted spring, we demonstrated precision planting symphony vision, a retrofit solution.
Which will be available for any brand of equipment starting in 2024.
We will follow that up with an OEM solution by 2026.
And for cleaning missions, we highlighted the paths, we're taking to reduce emissions by investing in electric tractors and launching the E 100 model in 2024 with more electrified platforms to follow.
We also highlighted some of our other paths, we're exploring like Biomethane and hydrogen.
When you look at it all there's just never been a more exciting time to be in the AG space.
For those of you that were with US we want to thank you for your attendance at the event and your interest in Agco.
We hope that you saw how we are driving innovative solutions that are focused on helping improve our farmers' profitability.
And with that I'll hand, it over to David.
Thank you Eric and good morning, everyone I will start on slide eight with an overview of regional net sales performance for the second quarter.
Net sales were up approximately 31% in the quarter compared to the second quarter of 2022, when excluding the negative effect of currency translation.
Pricing in the quarter, which was over 14% contributed to higher sales.
The strong year over year performance was partially influenced by the lower sales in the second quarter of 2022 that were negatively affected by the cyber attack, we experienced particularly in our European and North American operations.
By region.
Middle East segment reported an increase in second quarter net sales of approximately 36%, excluding the negative effect of currency translation compared to the prior year.
The improvement was driven by increased sales of mid and high horsepower tractors and combines along with favorable pricing actions.
South America net sales in the second quarter grew approximately 16% year over year, excluding the negative effects of currency translation driven by the continued strong sales growth in Brazil, partially offset by lower sales in Argentina.
Higher sales of tractors and momentum planters as well as favorable pricing effects drove most of the increase.
Net sales in North America increased approximately 35% in the quarter, excluding the unfavorable impact of currency translation compared to the second quarter of 2022.
The growth resulted primarily from increased sales of high horsepower tractors combines and application equipment, along with the positive effects of pricing that more than offset inflationary cost pressures.
On a constant currency basis net sales in our Asia Pacific Africa segment increased about 14%.
Delayed shipments from our European factories in late 2022 caught back up in the second quarter, resulting in the higher sales in Australia and China.
Finally consolidated replacement part sales were approximately $492 million for the second quarter up over 9% year over year or 10%, excluding the effects of negative currency translation.
Turning to slide nine.
The second quarter, adjusted operating margin improved by 420 basis points versus 2022.
Margins in the quarter benefited from higher sales and production a richer mix and positive net pricing compared to the second quarter of 2022.
Price increases in the quarter of over 14% more than offset significant material and freight cost inflation on a dollar basis and we're also positive on a margin basis for.
For the full year, we are projecting approximately 8% pricing.
By region the Euro.
Europe Middle East segment reported an increase of approximately $134 million in operating income compared to the second quarter of 2022 and margins improved over 380 basis points.
Higher sales stronger net pricing and a healthy product mix contributed to the improvement.
North American operating income for the quarter increased approximately $86 million year over year, while margins improved by approximately 690 basis points.
Operating income benefited from higher sales and production positive net pricing and a favorable mix based on the significant growth in scent products year over year.
Operating margins in South America exceeded 20% in the quarter of 380 basis point increase over the same period in 2022.
Operating income improved almost $36 million versus the second quarter last year.
The improved South American results reflect the benefit of higher sales and production as well as a favorable sales mix. The continued market strength in Brazil has resulted in continued price resiliency in the quarter, helping deliver very strong results once again.
Finally in our Asia Pacific Africa segment operating income declined approximately $10 million in the quarter due primarily to a weaker mix of sales the negative transactional effects of imported products and higher logistics cost.
With the margin expansion in the last two years in our North American and South American regions from our strategy execution and disciplined pricing, we expect agco's margin profile to be more balanced across the globe in the years ahead.
Slide 10 summarizes our precision AG business.
As we highlighted before we are focused on expanding our addressable market from just traditional agricultural machinery spend which today is in the low to mid teens as a percentage of total farm spin.
With our precision AG portfolio, our sights are set to impact around 70% or effectively all non land areas.
We believe that the investments in precision AG positions as well as with plays a major role in achieving the global sustainability targets that are being established while simultaneously, helping our farmers improve their profitability.
Through June year to date, we recorded $384 million in precision AG revenue approximately a 23% increase from the same period in 2022.
We anticipate continued strong growth in the back half of 'twenty, three which takes us to our previously communicated target of $800 million to $850 million in sales.
Our current run rate puts us solidly on track to hit the $1 billion sales target by 2025 that we announced during our December 2022 Investor day.
Slide 11 details our year to date free cash flow for 2022 and 2020.
As a reminder, free cash flow represents cash used in or provided by operating activities less capital expenditures and free cash flow conversion is defined as free cash flow divided by adjusted net income.
Through June year to date, we have used $602 million of cash 15% less in 2022 and supply chains have improved in the second quarter last year was affected by the cyber attack.
S. A cash follows our seasonal inventory build in the first half of the year for the spring selling season, and the sell down over the back half of the year.
The year over year improvement reflects higher earnings, partially offset by almost $100 million and increased capital expenditures year to date.
For 2023, we still expect our raw material and work in process inventory to remain somewhat elevated given supply chain challenges, but we still expect it to be a modest source of cash versus a use in 2022.
We expect our free cash flow conversion to continue to range from 75% to 100% of adjusted net income a significant increase from 2022 consistent with our improved financial outlook.
We remain focused on direct returns to our investors during 2023 with a regular quarterly dividend that we increased last quarter by 21% to 29 per share and the payment of a special variable dividend of $5 per share.
Future returns of cash to shareholders, we based on cash flow generation, our investment needs, which include capital expenditures and acquisition opportunities as well as our market outlook.
Slide 12 highlights our 2023 retail market forecast for our three major regions.
Globally, driven by elevated commodity prices, we expect healthy farm economics to support strong end market demand.
For North America, we continue to expect similar demand compared to the healthy levels. In 2022, we expect continued growth in high horsepower row crop equipment segment to be offset by softer demand for smaller equipment. After several years of robust growth.
Current interest rates are expected to continue to slow the smaller equipment segment of the market.
In South America, we still expect industry sales to be flat to up 5%. We expect the recently announced funding for the subsidized loan program to stimulate demand, especially for smaller equipment in the second half of 2023.
This region remains one of the stronger end markets, especially in Brazil, where the farm footprint is increasing we expect another year of healthy farmer profitability, which we expected to drive demand for large AG equipment beyond 2023.
For Western Europe , we continue to expect units to be relatively flat compared to 2022.
<unk> fundamentals in the region are generally healthy with green prices continue to outpace input inflation.
Meanwhile, supply chain constraints over the last two years are extending equipment replacement.
Slide 13 highlights a few key assumptions underlying our 2023 outlook.
In addition to focus on meeting the robust and the market demand. We will also make significant investments in the development of new solutions to support our farmer first strategy.
Although we see strong market demand <unk> results will still be dependent upon our supply chain performance in 2023.
Our sales plan include market share gains along with price increases of approximately 8% aimed at more than offsetting material cost inflation.
We currently expect currency translation to positively affect sales by about 2%.
Engineering expenses are expected to increase by approximately 20% compared to 2022. The increase is targeted investments in smart farming in precision AG products.
Given our first half performance and our outlook for the second half, we now expect our operating margins to improve to around 11, 7% versus our prior outlook of 10, 9% driven by sales favor.
Favorable pricing net of material cost and improved factory productivity, partially offset by increased investments in our engineering and digital initiatives as well as inflationary cost pressures.
We now expect other expenses to increase approximately $90 million year over year.
Most of which was incurred in the first half of 2023.
Half of this increase is tied to the sale of receivables to Agco finance, we were being affected by higher sales volume and higher interest rates compared to 2022 that we've been forecasting.
The other half is related to the increased volatility in the Turkish lira and the Argentinian peso.
We are continuing to targeted effective tax rate of 27% to 28% for 2023.
Turning to slide 14.
We've raised our sales and earnings per share targets from what we highlighted on our first quarter call.
We now expect net sales to be in the $14 $7 billion range based on our first half performance and the stronger Euro adjusted earnings per share should now be approximately $15 25.
In 2023 versus our prior target of $14 40.
We've also modestly increased our capex target to 400 million to include additional investments in our CVT capacity.
As I mentioned earlier free cash flow conversion should be in the range of 75% to 100% of adjusted net income consistent with our long term target.
And based on our improved outlook should deliver an additional $75 million to $100 million in free cash flow.
With that I'll turn the call back to Gregg for Q&A.
Thanks Damon.
To maximize participation in the Q&A session. Today, we'll ask you to limit yourselves to one question and one follow up.
Gary with that we're ready to go ahead and start Q&A.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If you were using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two again, please limit yourself to one question and one follow up.
The first question is from Jamie Cook with Credit Suisse. Please go ahead.
Hi, good morning, and congratulations on a nice quarter.
I think my first question, obviously, a nice quarter and nice raise to guidance, but I'm just trying.
Guidance and particularly the operating margin assumption in the back half seems conservative given what we put up the margin performance in the first half of the year I think margins in the back half for implied down about 150 basis points from the first half. So just trying to understand the drivers of why margins with great second half versus the first half.
And where is the conservatism there and then my second question just understanding you have a strong.
Order bookings are some.
Some visibility to 2020 for what's your approach for the order book for 2024.
The orders that are there, what's going to retail versus dealer. Thank you.
So Jamie I'll start with the margins first half second half and then maybe I'll, let Eric talk about the order board.
I think if we think about the first half again, we had a very strong performance here as you alluded to for the second half I think about that sequential change. There is really a couple of drivers influencing the second half one is the engineering spend so as we've been talking about this year, we are increasing our engineering spend over $100 million year over year.
Look at my first half engineering versus second half youre going to see that increasing so that will be a little bit of a detractor on the second half second is material cost again, even though we're seeing the underlying fundamentals of things like steel come down we are still seeing sequential increase in material costs. So that would be the second.
Biggest driver <unk>.
<unk> would be I would say a little bit of pricing first half versus second half you've heard us talk about the lower horsepower segment in South America as we think about some of the incentives to spur the retail delivery. There we do see potentially some further some incentives there again that we didn't have to use in the first half in South America.
So I would tell you those are the big three drivers first half versus second half, maybe a little bit of mix as well as you know planters are a big first half product for us, which is a rich mix and then that south American low horsepower tractors, which were lower than expectations in the first half as they ramp back up in the second half that will be sort of a negative mix too.
To the Brazilian or the South American margins first half versus second half.
Jamie Your question on order Board, we expect to continue to manage the place where we're managing the order board most tightly as in South America, and we continue to plan to roll that out one quarter at a time.
To be able to handle both pricing and market volatility.
It's been really effective for us and we think we'll keep that into next year.
Strong order books in terms of quantity, but also those books are loaded with retail orders.
Already today.
Meaning high percent retail order well over 40% and we think that will continue to strengthen into next year probably over 50%.
Retail order.
Percentage of the order bank.
Okay. Thank you I appreciate the color.
The next question is from Tim Thein with Citigroup. Please go ahead.
Hi, Good morning, maybe just first question on Europe .
And maybe Eric you can even speak to.
Some of the.
We don't always have.
Perfect.
In terms of there.
Predictability, but some of that.
Sentiment indicators there have softened.
One of the one of the points raised.
Some concern around.
Can pick up in inventory so.
Which is counter to the message that we've conveyed this morning from what you guys are seeing so maybe just speak to the feedback.
And what you are hearing from the dealer base I know, it's not a uniform. There's a lot of countries that you can move in different <unk>.
Trajectory, but maybe just speak to Europe , as a whole and how youre thinking about that into 2004.
Okay.
There's a couple of dynamics going on they have a little more inflation than some of the other markets. So that's a negative.
But the Ukrainian is bad for the world as the Ukrainian Grange stoppage was.
In some ways. It was good for farmers because we most expect that that's going to drive prices up somewhere in the 10% to 15% range.
For most commodities because you have substitution is not just wheat substitution across all screens.
That.
That helps profitability for the farmers, especially in Europe .
So although the sentiment indicators came down a little bit it's still pretty strong relatively it's trending towards.
More towards neutral from Red Hot but.
That doesn't concern us at this moment, we're still seeing strong order rates coming in.
And we're growing share in most of our brands across Europe . So the business the industry is pretty healthy and we think with this green restriction that will remain healthy.
And we continue to grow share.
Global grain stocks are down global wheat stocks are down for the fourth straight year, which is the primary crop in Europe . So that just gives you an overall sense for.
Is that is that commodities tight any more further restrictions really pushes price up.
Okay and then just.
Mechanically from a quarterly earnings perspective.
Historically.
And seasonality is kind of gotten mixed up a little bit here recently, but historically the fourth quarter.
We're getting the highest do you still expect that this year. The way you have the plan laid out.
Yes, I think Tim as we think about the seasonality of the business again, we'll see how the second half unfolds I think as Jamie asked the question.
Revenue wise Q2, and Q4 tend to be our strongest quarters.
Think about the margin wise Q2 has been an exceptionally strong quarter here at 13, 1%.
For all the reasons, we articulated on the call if I look forward here to the back half in the fourth quarter, we do have a little bit about we had a very strong fourth quarter last year, given the sort of the supply chain challenges in the very rich mix that we saw that fendt product portfolio last year. So as I think about the second half between.
The engineering spend increasing a little bit of a mix I'm not sure we'll necessarily have it is our strongest margin quarter, but I think it will still be one of our top two quarters for sure.
The design by design last year, we were running to catch up all through the year and we had a big surge at the end of the year last year by design, we aimed to be much more building to demand through the course of this year and we're doing that so far so we don't want to have this.
This kind of a spike at the end of the year.
As a catch up mode, we want to be building to customer demand and thats with supply chain easing, we're doing a way better job of that this year than other years.
Okay.
Thanks for the time.
The next question is from Larry de Maria with William Blair. Please go ahead.
Hey, thanks.
Two unrelated questions first.
Obviously highlighted.
Ongoing strength, there can you sort of just turn a little bit between.
Channel fill in retail sales here, because I know, you're obviously, you're building out the distribution, which you've talked about but how much of the growth is going to fill the channel versus sell through and second part on ideal I think up 75% can you put a little bit of that in perspective, just to kind of help us understand the materiality of that because I think it's from a small base in terms of.
That's needle moving or if thats just from a small basis Nitro now in more pointed a couple of years. Thank you.
Yeah got it okay.
I think Larry if you think about fendt for US again, as we alluded to very strong performance here, if I think about it in the North American market It was up.
100 units.
Year over year.
Of sales, so I think we're up well over 150%.
In North America, I would tell you a high percentage of that is actually retail so our retail was up right around 100% as well so youre seeing a little bit of that channel expansion that youre talking about as we fill and bring on new dealers, we're seeing high retail concentration as well there so getting it out to the farms and word of mouth Bill.
<unk> the momentum as we talk to the farmers.
So on that Tech field day that farmer, he heard about and word of mouth as his neighbor had one so again part of that fence experience really helping grow the brand recognition out there and getting it into the ultimate farmers ideal to your point I would tell you. It's more lower numbers. So we are seeing good growth good percentage, but it's still a smaller numbers that we.
We're building off of here on the ideal combine.
And just to put a few numbers behind that if you go back to 2018, when it really started globalizing. The fendt business, we had in North America coverage something in the 40% range now it's up to 75% and South America, We had essentially zero, we just werent in that market with fendt and now we're at 70%. So we've gotten to the point, where we've got.
Much of the important market covered we still want to grow that to about 90 in both cases, but.
We've got a lot of good dealers in the areas, where it's important and so.
Channel fill isn't I mean, we still have lower inventory than we want at those dealers, but a lot of it is going right through to retail as Damon said.
Okay very good color. Thank you very much.
The next question is from Tami Zakaria with Jpmorgan. Please go ahead.
Hi, good morning. Thank you so much for taking my questions.
So I was hoping to get more color on the flat production our growth outlook for the back half.
What is expected to what is it expected to look like for small versus large I guess you could give some details.
Yes, I think Tammy just a couple of comments on the production again.
Reflecting our forecasting relatively flat production year over year and again as a reminder, we had the cyber event in the second quarter, which took our production out we really increased production in the second half of last year to recover. So we didn't do the normal summer shutdowns preventative maintenance as we were trying to recover on that loss production.
Based off of the higher capacity the higher demand, but we are still implementing some of these preventative maintenance periods. The European holiday, if I look at it large versus small AG I would tell you large AG is running strong.
Probably more capacity CVT related capacity coming on large AG, where you are seeing some of the production coming down is going to be on the smaller AG part of the business there.
Got it this large AG production hour.
Should be positive in the back half.
Yes.
And flat.
Flat.
Got it. Thank you so much that's helpful and if I could ask one more.
The pricing expectation again towards the back half for large versus small lag it seems like for the back half low to mid single digit pricing is what's embedded.
But is it going to be similar for large versus small.
Yeah, we don't really break it down that way Tammy I think your assessment for the second half in the low single digits is right, but it's going to be product by product and we really don't break it out large AG versus small AG.
Okay. That's fair. Thank you so much.
The next question is from Seth Weber with Wells Fargo Securities. Please go ahead.
Hey, guys good morning.
I wanted to just ask about your.
Our nine months of coverage nine months of coverage comment.
For the North American backlog can you just frame that for us is that like on a relative basis versus historical is that about where it typically is.
Better.
Better than average worse than average just any kind of framework for that nine month number or even versus last year. Thanks.
Well, it's interesting to decide what typical us anymore, if we sit and during the COVID-19 it would be less but.
Prior to Covid.
It's probably twice what we would normally have so that's what we see.
Seeing as we still.
Actually would like to get that backlog down.
And not have to have farmers wait as long as they are waiting right now for their demand.
There's a lot of thirst for the new technology, we are bringing out on the products and we'd like to be able to get that to them faster. So it's still probably twice as high as we'd like it to be.
And have historically been.
Okay. Thanks, and then.
Just on the parts revenue up 9% I assume you're pushing pricing on parts as well. So I'm just trying to understand was this parts volume up.
Parts volume up in the quarter or is it down.
Yes.
<unk> set the pricing isn't too much different whether you're talking about whole goods or parts.
We're saying, 8% for the full year with double digits in the first half probably not as much on the part side. So we do have modest volume growth year over year, but not now.
Good growth now.
That's normal.
<unk> parts typically are more stable over over the cycle. So in times when demand for equipment is stronger you don't see that same pull through on parts are there.
Typically a steadier similarly, when demand softens for big equipment or equipment and general parts tend to stay more stable. So it's just kind of the nature of the Beast.
Helpful. Okay. Thank you guys I appreciate it.
The next question is from Stephen Volkmann with Jefferies. Please go ahead.
Great Good morning, everybody.
Most of my questions have been answered so maybe I'll try a big broad brush Eric.
I guess the elephant in the room is just the cycle question right and I'm curious if you have any updated thoughts on just where you think we are on the cycle here and you've given some sort of qualitative thoughts I guess going forward about market share gains and precision and biofuel.
<unk>.
Ken Ken 24 be an up year for the industry or is it too early to tell.
It's too early to tell but it still can be a very good year, we see a lot of indicators that are tailwind indicators we have.
Had a couple of good years in a row, but just a couple more to give you.
If you look in the U S and the high horsepower area. That's still growing small AG is cooling off we've said that but high horsepower still growing the.
The average age of the high horsepower tractor in the U S is about seven and a half years based on our data the.
The historical norm, if you look at them over a number of years is more like six five so it's still a tail it still.
<unk> pool of equipment that needs refreshment.
Not to mention all of the technology the rate at which we're bringing up technology on the new products and the artificial intelligence features on those products is.
Bringing new productivity enhancements to.
To the farmers that even if they didn't have to refresh theres new features that give them a good ROI.
Used equipment levels are still about 50.
50% of below what they were in 2018 or 19.
So those are kind of.
Things that we're watching that say does this market have room to still be a good market next year and.
Look like they are when you look at the machinery when you look at the Green I've already talked about.
The impact of the of the Russian blockade of Ukraine. All indicators, we've seen say prices will go up on Greens about 10% to 15% because of that and we're starting to see especially on wheat, we've moved up a lot.
We're seeing record heat waves going through much of the growing portions of the World North America Europe and.
Although August is an important months, we've got to get through that.
It has not been good for crops and Theres, a potential downside coming on that so lots of indicators that say 2024 could still be a very good year.
Great. Okay. Thank you and then maybe a damning question I think we've talked in the past about.
Some productivity challenges due to the supply chain volatility that we've been seeing and I guess, that's improving but is there still some productivity to come as supply chain kind of finally getting normal again or are we sort of through that already.
So Steve we are we are still experiencing supply chain challenges here, we're a lot better now than what we were a year ago and I mean, just to put it in perspective, and you've sort of seen it in our performance and Eric alluded to that fourth quarter Spike last year, but if I look at our semi finished inventory that we had.
At the end of last Q2 last year, we've reduced that by about 60% year over year with that semi finished product again, a lot of that is due to the supply chain improvements and as Eric said trying to get a better cadence of our sales that you saw in Q2 and in Q2.
Q3, and in Q4, so we're seeing significant improvement we are not where we want to be yet what I would tell you. If we were dealing with 10 suppliers per factory last year at this time, we're still dealing with one or two.
So we still have disruption in the flow and the fact that we still have the rework to get things onto the tractors when they show up with a combined so there is still opportunity for further productivity further volume output as the as the supply chain continues to continues to normalize, but it's getting better.
Great. Thank you guys.
The next question is from Christian Owen with Oppenheimer. Please go ahead.
Hi, Good morning, Thank you for taking the question.
Wanted to ask you specifically about some of the outlook for the back half in South America.
You did previously call out some of the financing headwinds that the small horsepower tractor incentives.
But specifically around like Argentina, being an offset there there's an election coming up in that region.
Just any sense of what youre hearing on the ground that could influence deliveries in the back half of the year.
Yes, I think Christian for us.
As we've alluded to in the last couple of quarters here.
We've been very strong with our pricing and that the demand that we've been seeing has allowed our team to really hold on to some of the more traditional discounts or incentives. They would provide dealers as we think about the.
The changes that have come out with the financing plan here, we're optimistic that the small horsepower tractors, we will start to pick back up but it's again, we just look at the overall market conditions. There, we sort of expect to see the teams getting back to that more traditional level of discounts here that they would have sent the dealers within the back half of the year.
Tina definitely continues to be a little bit more of a challenging markets being more than offset by the strength in Brazil.
But overall, we still feel good about the South American market, it's still our strongest market as we look at 2023 here, but probably a little bit weaker from a margin perspective, as we move into the back half of the year.
That's really helpful. And then if I could follow up on the <unk>.
Nine months coverage and higher horsepower.
Just any indication of pricing in that order book, how much of that is sort of resuming that normalized level of 3% to 4% or if you are able to see something a little bit better than that in the order book. Thank you.
So Christian most most of those are.
23 orders, so we've talked about kind of the level of pricing for this year and this year that implies kind of mid single digit pricing in the back half of the year. So.
<unk>.
So going into next year.
I'll have some carryover from the <unk>.
Back half pricing and then we will.
Likely add some incremental pricing on that based on market conditions for the.
New orders that were getting under the 24 order program.
Great. Thank you so much.
The next question is from Steven Fisher with UBS. Please go ahead.
Thanks, Good morning, just to follow up on South America now that the financing situation. There has been clarified in Brazil have you seen already a pickup in the activity there.
And was that financing uncertainty on the impact on the smaller AG piece in the second quarter because it seemed like you sold more big AG equipment than you expected right. So Steve the way, there's a couple of different pieces of that program.
One that's geared towards the smaller farmers that ran out of money.
In January and those guys tend to use they're very heavy users of that programs are 90% roughly of the equipment purchased by small farmers go through go through the economic program. So they definitely weighted as we got into really first quarter and here in the second quarter and we have seen pick up.
One of the things that our sales folks.
<unk> in Brazil have been doing is to.
Help with Agco finance folks process those applications because the administrative process in Brazil is not smooth. So one of the things. We're trying to do is facilitate the rapid.
Fulfilling of those loans and so thats going on as we speak but our expectation as Damon said is to see some improvement for the small stuff now the bigger stuff are the bigger farmers.
Caps out at about.
The threshold is about $9 million of gross sales for farmers. So that's still somewhat big but those guys only use the program, it's about 60 or 70% of the purchases that happen to go through that the phenomenon program for the bigger farmers. So a lot of those guys were still using our R&D will continue to still use commercial bank.
Funding and then if you get into the bigger kind of the Mega farms in the Mato Grosso region. A lot of those guys have not used the program. So they've continued to order. So it's really a mixed bag as we think about Brazil.
Steve as we alluded to I think it was unchanged question in the first half versus second half margins part of our expectations are as Greg alluded to with this funding now available. These lower horsepower tractors should pick up volume wise, which is a little bit margin dilutive for the South American region, given the strength of what we saw here in the first half.
Yes.
Great. Thank you very much.
The next question is from Jerry Revich with Goldman Sachs. Please go ahead.
Hi, This is clay on for Jerry Congrats on the strong precision AG sales in the quarter.
I'm curious on how we should think about.
Production capacity in the precision AG product lines.
Here now and then and moving forward towards the 2025 target. Thanks.
Yes, we've got a huge factory coming online at precision planting it's 500000 square feet.
We're putting the equipment into it right now the building is done.
It looks fantastic and it's going to be.
It'll be way more than we need in the short term, but we expect to grow into it and in short order. After we acquired those six other companies and can consolidate into it. So that's coming online. This fall and we don't see capacity constraints. There in terms of our internal capacity. The big issue that we've had our last couple of years of semiconductor chip.
And that's moderated significantly so relative to precision AG we have.
We have a good runway ahead for growth.
I think like just for US we still expect to be up in the range of $800 million to $850 million in sales. This year. So we're 700 last year on our precision AG.
Our goal right now with 8% to $2 50, so we feel well.
On path to deliver that $1 billion target by 2025.
Or maybe even sooner.
Sounds great. Thanks.
And our last question today comes from Chad Dillard with Bernstein. Please go ahead.
Hi, Good morning, guys. Thanks for squeezing me in.
Just had a question for you guys on small AG first of all can you just quantify what share of the business that represents and then can you just talk about where you are on your destock and why do you expect to be done by the end of the year.
So.
The small egg definition Chad.
A little flexible, but we would typically somewhere between 25 and a third of our business.
In the U S and that there are distinct.
Distinct category of <unk>.
Compact tractors, which is sub 40 horsepower tractors.
Not very much not a tag related kind of part of the business, but globally kind of outside of North America.
The small mid sized stuff is tied a lot of times to dairy and livestock, but globally. The number has come down over time I'd say if you go back five to 10 years that number was probably closer to 40%, but with a lot of new product introductions and a lot of the focus on technology, we've shifted our mix, especially in South America.
Globally.
Kind of away from the small AG into the bigger farms.
Income Chad to your question on the inventory of the Destocking again, we're watching the dealer inventory levels very closely around the world here and as we've talked we know that those inventory levels are up to what we would consider the more optimal level two things that we're doing here. One is I think Tammy had asked the question we are slowing the production for what we.
Those low horsepower tractors, we are sort of slowing that down just to make sure that we don't buildup dealer inventory stock.
And that particular segment and I think you know we also buy a lot of these low horsepower tractors from third party manufacturers. So we don't actually produce some but we source them we've slowed the.
The order board for those as well, helping our continuing to adjust the inflow of product here to try to keep that dealer inventory at the at the optimal level.
That's helpful. And then just one last question on the engineering expense.
Near term I guess, how should we think about.
Corporate level spend taking you shouldnt be thinking about the second half of the year that should be like a good run rate on a go forward basis, Yes, I mean, we continue to increase our engineering expense annually as we are focused on increasing the technology development here as I said earlier this year, we're going to be up $100 million I think the rule of thumb.
Going forward, it's around 4% of sales, we've been trending a little bit lower than that the last couple of years, given we've been trying to hire as fast as we could but.
Everyone No surprise, it's hard to get a lot of these top tier engineers.
But we're ramping that up but I would tell you sort of rule of thumb for the outer years is around 4%.
Great. Thanks.
This concludes our question and answer session I would like to turn the conference back over to Eric <unk> for any closing remarks.
I'll close today by saying Thank you very much for your participation and your support of Agco is it really good call again today.
We're very proud of how we've started 2023.
As a record quarter in many ways and we're setting ourselves on a trajectory to deliver another record year, and we have higher and higher confidence that were going to deliver on all of the commitments that we've made to you over this last year or two.
The key to our success is the continued execution of our farmer first strategy.
Our focus is on growing our margin rich businesses like fendt parts and service and our precision AG Smart machine business we've.
We've been investing heavily in the last few years like David was just talking about and in 2023, we're making even bigger investments to continue the development of these pharma focused solutions that are solving critical farming problems. Many of them with very short paybacks and I was glad to see many of you on the farm being able to see those in live live and in action.
We demonstrated.
The overall strategy and these products at our technology event.
We were using precision AG tools to really engage strongly and sustainability.
Putting more and more of our technology efforts, there capturing a lot more data and helping our farmers make the transition to not only more productive farming, but also more sustainable farming.
Lastly, the large AG markets continue to be strong globally farm fundamentals are healthy and supporting farmer investments.
Over the last few quarters, we've touched on many factors supporting our markets, including growing populations changing diets low stocks to use levels healthy commodity prices and more all of these trends give us confidence that our industry could stay strong for some time we.
We look forward to seeing many of you at the farm progress meeting in August 29th indicator, Illinois. Thanks, again for a good session today.
Thank you for joining the Agco's second quarter 2023 earnings call. The call has concluded have a nice day you may now disconnect.