Q2 2024 AGCO Corp Earnings Call
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Operator: Good day, and welcome to the AGCO second quarter 2024 earnings call. All participants will be in a listen only mode.
Operator: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. In consideration of time, please limit yourself to one question and one follow-up. To ask a question, you may press the star key, then one on your touchtone phone.
Speaker Change: Good day and welcome to the AGCO second quarter 2024 earnings call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
Speaker Change: After today's presentation, there will be an opportunity to ask questions. In consideration of time, please limit yourself to one question and one follow-up. To ask a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press star, then two.
Operator: To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Greg Peterson, AGCO's Head of Investor Relations. Please go ahead.
Speaker Change: Please note, this event is being recorded.
Speaker Change: I would now like to turn the conference over to Greg Peterson, AGCO Head of Investor Relations. Please go ahead.
Greg Peterson: Thanks, and good morning. Welcome to those of you joining us for AGCO's second quarter 2024 earnings call. This morning we'll refer to a slide presentation that's posted on our website at www.agcocorp.com. The non-GAAP measures used in that slide presentation are reconciled to GAAP measures in the appendix of the presentation.
Greg Peterson: Thanks and good morning. Welcome to those of you joining us for AGCO's second quarter 2024 earnings call.
Greg Peterson: This morning we'll refer to a slide presentation that's posted on our website at www.agcocorp.com.
Greg Peterson: The non- GAAP measures used in that slide presentation are reconciled to GAAP measures in the appendix of the presentation. We'll also make forward-looking statements this morning about our strategic plans and initiatives, as well as their financial impacts.
Greg Peterson: We'll also make forward-looking statements this morning about our strategic plans and initiatives as well as their financial impact, discuss demand, product development, and capital expenditure plans and timing of those plans and our expectations concerning the costs and benefits of those plans and the timing of those benefits. Future revenue, crop production, and farm income will also be discussed as well as production levels, price levels, margins, earnings, operating income, cash flow, engineering expenses, tax rates, and other financial metrics.
Greg Peterson: We'll discuss demand, product development, and capital expenditure plans, and timing of those plans, and our expectations concerning the costs and benefits of those plans.
Greg Peterson: and Timing of those Benefits, Future Revenue, Crop Production and Farm Income will also be discussed as well as Production Levels, Price Levels, Margins, Earnings, Operating Income, Cash Flow, Engineering Expense, Tax Rates and other Financial Metrics.
Greg Peterson: Our expectations with respect to the sale of our grain and protein business will be discussed. However, all of these are subject to risks that could cause the actual results to differ materially from those suggested by those statements.
Greg Peterson: Our expectation
Greg Peterson: with respect to the sale of our grain and protein business will be discussed.
Greg Peterson: All of these are subject to risks that could cause the actual results to differ materially from those suggested by those statements.
Greg Peterson: These include, but are not limited to, adverse developments in the agricultural industry, supply chain disruption, inflation, weather, commodity prices, changes in product demand, interruptions in the supply of parts and products, and the possible failure to develop new and improved products on time, including premium technology and smart farming solutions, within budget and with the expected performance and price benefits. Difficulties in integrating the PTX Trimble business in a manner that produces the expected financial results, reactions by customers and competitors to the transactions, including the rate at which PTX Trimble's largest OEM customer reduces purchases of PTX Trimble equipment and the rate of replacement by the joint venture of those sales.
Greg Peterson: These include, but are not limited to, adverse developments in the agricultural industry, supply chain disruption, inflation, weather, commodity prices, changes in product demand,
Greg Peterson: Interruptions in the supply of parts and products, the possible failure to develop new and improved products on time, including premium technology and smart farming solutions,
Greg Peterson: within budget and with the expected performance and price benefits.
Greg Peterson: Difficulties in integrating the PTX Trimble business in a manner that produces the expected financial results.
Greg Peterson: Reactions by Customers and Competitors to the Transactions
Greg Peterson: Including the rate at which PTX Trimble's largest OEM customer reduces purchases of PTX Trimble equipment and the rate of replacement by the joint venture of those sales.
Greg Peterson: Introduction of New or Improved Products by Our Competitors and Reductions in Pricing by Them, The War in the Ukraine, Difficulties Integrating Acquired Businesses, and Completing Expansion and Modernization Plans on Time and in a Manner That Produces the Expected Financial Results The need to fulfill closing conditions, including obtaining required governmental approvals in connection with the sale of our grain and protein business and adverse changes in the financial and foreign exchange market.
Greg Peterson: Introduction of New or Improved Products by our Competitors and Reductions in Pricing by Them.
Greg Peterson: The war in the Ukraine, difficulties integrating acquired businesses, ended in completing expansion and modernization plans on time and in a manner that produces the expected financial results.
Greg Peterson: The need to fulfill closing conditions, including obtaining required governmental approvals, in connection with the sale of our grain and protein business, and adverse changes in the financial and foreign exchange markets.
Speaker Change: Actual results could differ materially from those suggested in these statements.
Speaker Change: Further information concerning these and other risks is included in AGCO's filings with the SEC, including its Form 10-K for the year ended December 31, 2023, and subsequent Form 10-Q filings.
Speaker Change: AGCO disclaims any obligation to update any forelooking statements except as required by law.
Speaker Change: We will make a replay of this call available on our corporate website.
Speaker Change: On the call with me this morning is Eric Hansotia, our Chairman, President, and Chief Executive Officer, and Damon Audia, Senior Vice President and Chief Financial Officer.
Greg Peterson: Actual results could differ materially from those suggested in these statements. Further information concerning these and other risks is included in AGCO's filings with the SEC, including its Form 10-K for the year ended December 31st, 2023, and subsequent Form 10-Q filings. AGCO disclaims any obligation to update any foregoing statements except as required by law.
Speaker Change: With that, Eric, please go ahead.
Greg Peterson: We will make a replay of this call available on our corporate website. On the call with me this morning is Eric Hansotia, our Chairman, President, and Chief Executive Officer, and Damon Audia, Senior Vice President and Chief Financial Officer. With that, Eric, please go ahead.
Eric P. Hansotia: Thanks Greg and good morning. Before I go into the quarterly details and the exciting things happening at AGCO, I wanted to take a moment to reflect on how I'm feeling about the industry and the things that we are doing to position AGCO for success.
Eric P. Hansotia: Thanks, Greg, and good morning. Before I go into the quarterly details and the exciting things happening at AGCO, I wanted to take a moment to reflect on how I feel about the industry and the things that we are doing to position AGCO for success. As in prior cycle downturns, there's always a big correction year where the industry slows rapidly as farmers reduce their spending on new equipment. We've known 2024 was going to be that big transitional year.
Eric P. Hansotia: As in prior cycle downturns, there's always a big correction year, where the industry slows rapidly as farmers reduce their spend on new equipment. We've known 2024 was going to be that big transitional year.
Eric P. Hansotia: After the transitional year, industry demand tends to float around trough levels for a period of time before ramping back up. The duration and the severity of the decline are influenced by many things like commodity prices, weather, and stock-to-use ratios, which will make every downturn a little different. For AGCO, we understand the industry dynamics and are working aggressively to address the challenges and position ourselves for success. We are rapidly cutting production this year, faster than in the past, to right-size dealer inventory levels this year in hopes that production and retail demand will be more balanced in 2025.
Eric P. Hansotia: After the transitional year, industry demand tends to float around trough levels for a period of time before ramping back up.
Eric P. Hansotia: The duration and the severity of the decline are influenced by many things, like commodity prices, weather, and stock-to-use ratios, which will make every downturn a little different.
AGCO: For AGCO, we understand the industry dynamics and are working aggressively to address the challenges and position ourselves for success.
Eric P. Hansotia: We have been actively addressing costs for several quarters. In the second quarter, we made the decision to further restructure our workforce due to weakening market demand. We also challenged our teams to think differently about technologies and other sustainable, lower cost operating alternatives.
AGCO: We have been actively addressing costs for several quarters. In the second quarter, we made the decision to further restructure our workforce due to the weakening market demand.
Eric P. Hansotia: Much of these savings are still to come in 2025 and beyond, helping to further improve our ability to deliver higher operating margins throughout the state. In addition, we are doubling down on being the most farmer-focused company in the industry. With our continued role in our Farmer Corps, we're helping better serve farmers the way they want to be. In addition to our unique mixed fleet retrofit mindset, we're helping farmers improve their productivity and profitability despite the industry backdrop. With this mindset and focus, we are a different company that has more farmers, is more resilient, and makes more profit. Damon will cover the financials and the outlook later.
AGCO: Much of these savings are still to come in 2025 and beyond, helping to further improve our ability to deliver higher operating margins throughout the cycle.
AGCO: In addition, we are doubling down on being the most farmer-focused company in the industry.
AGCO: With our continued role at our Farmer Corps, we are helping better serve farmers how they want to be served.
AGCO: In addition to our unique mixed fleet retrofit mindset, we are helping farmers improve their productivity and profitability despite the industry backdrop.
AGCO: With this mindset and focus, we are a different company that is more farmer-focused.
Eric P. Hansotia: But even in a big correction year, where we're dropping well below mid cycle, we are still planning on delivering one of the best operating margins in our history and well above historical levels at these industry levels. With that as a backdrop, let's jump into the second quarter, slide three, where you can see that AGCO sales were down approximately 15%. Our results reflect the impacts of both softer industry-wide demand and a resulting production cut.
AGCO: More resilient and more profitable.
AGCO: Now, Damon will cover the financials and the outlook later, but even in a big correction year where we are dropping well below mid-cycle, we are still planning on delivering one of the best operating margins in our history and well above historical levels at these industry levels.
Damon J. Audia: With that as a backdrop, let's jump into the second quarter, slide three, where you can see that AGCO's sales were down approximately 15%.
Speaker Change: Our results reflect the impacts from both softer industry-wide demand and our resulting production cuts.
Eric P. Hansotia: Our team is analyzing all aspects of the business to identify cost savings and better align our operations with the current market environment. We are balancing the need for cost reduction with our commitment to farmer-focused customer support and innovation, as well as our desire to continue our market share growth ambition. Last week, we announced a definitive agreement to divest the grain and protein business. The divestiture of this business supports our strategic transformation, recently accelerated by the PTX Trimble joint venture, and is an inflection point for AGCO.
Speaker Change: Our team is analyzing all aspects of the business to identify cost savings and better align our operations with the current market environment.
Speaker Change: We are balancing the need for cost reduction with our commitment to farmer-focused customer support and innovation, as well as our desire to continue our market share growth ambitions.
Speaker Change: Last week we announced a definitive agreement
Speaker Change: The divestiture of this business supports our strategic transformation, recently accelerated by the PTX-Trimble joint venture, and is an inflection point for AGCO.
Eric P. Hansotia: Divesting this business allows us to streamline and sharpen our focus on AGCO's portfolio of award-winning agricultural machinery and precision ag technology products. We believe this sale will better position us for long-term growth in our higher margin and higher free cash flow generating business. Simultaneously, it will raise our profitability through the cycle, as grain and protein has historically been a below-average margin business. I do want to take a moment to thank the Grain and Protein teams around the world who have done an excellent job staying focused on serving the customer and delivering on their commitments while we work through the strategic review of the business.
Speaker Change: We believe this sale will better position us for the long-term growth in our higher-margin and higher-free-cash-flow-generating businesses.
Speaker Change: Simultaneously, it will raise our profitability through the cycle, as grain and protein has historically been a below-average margin business.
Speaker Change: I do want to take a moment to thank the Grain and Protein teams around the world who have done an excellent job staying focused on serving the customers and delivering on their commitments while we work through the strategic review of the business.
Eric P. Hansotia: Now getting back to our second quarter results, consolidated operating margin was 10.3% on an adjusted basis. Lower sales, production cuts, and operating leverage were the major factors in our reduced margin. South America remains our most challenged region, as the industry continues to contract.
Speaker Change: Now getting back to our second quarter results, consolidated operating margin was 10.3% on an adjusted basis.
Speaker Change: Lower sales, production cuts, and operating leverage were the major factors in our reduced margins.
Speaker Change: South America remains our most challenged region as the industry continues to contract. In that region, we saw operating margins of approximately 3.6 percent in the second quarter of 2024 compared to more than 20 percent in the second quarter of 2023.
Eric P. Hansotia: In that region, we saw operating margins of approximately 3.6% in the second quarter of 2024, compared to more than 20% in the second quarter of 2023. Due to falling demand, we cut production by around 57% in the second quarter compared to the second quarter of 2023, with additional cuts planned for the balance of 2024. We remain confident that long-term agricultural fundamentals remain positive despite the downturn in commodity markets.
Speaker Change: Due to falling demand, we cut production by around 57% in the second quarter compared to the second quarter of 2023, with additional cuts planned for the balance of 2024.
Speaker Change: We remain confident that long-term agricultural fundamentals remain positive despite the downturn in commodity markets.
Eric P. Hansotia: Our optimism for the long-term demand for our products is driving continued investment in premium technology, smart farming solutions, and enhanced digital capabilities to support our farmer-first strategy while helping to sustainably feed the world. Slide four details industry unit retail sales by region for the first half of 2024. Global Industry Retail Sales of Farm Equipment in the second quarter were lower in all of AGCO's key markets. North American industry retail sales decreased 8% for the first six months of 2024 compared to the first six months of 2023. Sales declines in smaller equipment were more significant than in most of the larger equipment categories. In Western Europe, industry retail sales dropped 5% during the first six months of 2024.
Speaker Change: Our optimism for the long-term demand for our products is driving continued investment in premium technology, smart farming solutions, and enhanced digital capabilities to support our farmer-first strategy while helping to sustainably feed the world.
Speaker Change: Slide 4 details industry unit retail sales by region for the first half of 2024. Global industry retail sales of farm equipment in the second quarter were lower in all of AGCO's key markets.
Speaker Change: North American industry retail sales decreased 8% for the first six months of 2024 compared to the first six months of 2023. Sales declines in smaller equipment were more significant than most of the larger equipment categories.
Speaker Change: In Western Europe , industry retail sales dropped 5% during the first six months of 2024.
Speaker Change: South American industry tractor retail sales decreased 14% during the first six months of 2024 compared to the same period of 2023.
Eric P. Hansotia: South American industry tractor retail sales decreased 14% during the first six months of 2024 compared to the same period of 2023. Strong declines were consistent across Brazil, Argentina, and their smaller South American markets. The weakening demand in Brazil was negatively magnified by the floods in Rio Grande do Sul and will also continue to be affected by funding shortfalls of the government subsidized loan program and a challenging first half harvest in the Cerrado region.
Speaker Change: Strong declines were consistent across Brazil, Argentina, and their smaller South American markets.
Speaker Change: The weakening demand in Brazil was negatively magnified by the floods in Rio Grande do Sul, while also continuing to be affected by funding shortfalls of the government subsidized loan program and a challenging first half harvest in the Cerrado region.
Eric P. Hansotia: Similar to tractors, the combine industry was down significantly in all regions through the first six months of 2024. However, although market conditions continue to soften from the extremely strong conditions over the last few years, we remain positive about the underlying ag fundamentals. Reporting Long-Term Industry Demand. Population growth and the increase in the middle class will drive the need for additional grain. Stocks-to-use levels are higher than the recent lows, but they are still below prior downturn levels.
Speaker Change: Similar to tractors, the combine industry was down significantly in all regions through the first six months of 2024.
Speaker Change: Although market conditions continue to soften from the extremely strong conditions over the last few years, we remain positive about the underlying ag fundamentals.
Speaker Change: Supporting long-term industry demand.
Speaker Change: Population growth and the increase in middle class will drive the need for additional green.
Speaker Change: Stocks-to-use levels are higher than the recent lows, but are still below prior downturn levels.
Eric P. Hansotia: As the demand for clean energy grows, the need for solutions like sustainable aviation fuel and vegetable oil-based diesel will grow strongly, driving demand for our farmers that will further support commodity prices. Also, input costs such as fertilizer and fuel are down from their peaks in 2022, which has helped dampen the effect that lower commodity prices are having on farmers' profitability. AGCO's 2024 factory production hours are shown on slide five. Our production decreased in the second quarter by approximately 23%. Significant reductions were made in all regions, with the biggest reductions being in South America and Asia Pacific.
Speaker Change: As the demand for clean energy grows, the need for solutions like sustainable aviation fuel and vegetable oil-based diesel will grow strongly, driving demand for our farmers that will further support commodity prices.
Speaker Change: Also, input costs, such as fertilizer and fuel, are down from their peaks in 2022, which has helped dampen the effect of lower commodity prices are having on farmers' profitability.
Speaker Change: AGCO's 2024 factory production hours are shown on slide 5.
Speaker Change: Our production decreased in the second quarter by approximately 23 percent.
Speaker Change: Significant reductions were made in all regions, with the biggest reductions being in South America and Asia-Pacific.
Eric P. Hansotia: The Union Company Inventory Management remains a key priority for us as the market continues to soften, and we push to right-size inventory levels this year. As a result, we expect further production cuts through 2024, with all regions targeting to align to retail demand for 2025. Currently, we're expecting 20% to 25% lower production in 2024 versus 2023 on a full-year basis, which is a more significant reduction than our prior outlook, given our current 2024 market forecast, market share growth assumptions, and targeted reductions to dealer inventory.
Speaker Change: Viewer and Company Inventory Management remains a key priority for us as the market continues to soften, and we push to right-size inventory levels this year.
Speaker Change: As a result, we expect further production cuts through 2024, with all regions targeting to align to retail demand for 2025.
Speaker Change: Currently, we are expecting 20% to 25% lower production in 2024 versus 2023 on a full year basis.
Speaker Change: which is a more significant reduction than our prior outlook, given our current 2024 market forecast, market share growth assumptions, and targeted reductions to dealer inventory.
Eric P. Hansotia: In general, our order book is in a good position and relatively consistent with last quarter. However, there are pockets of dealer inventory that we will need to focus on right-sizing in the balance of the year. In Europe, tractors have between four to five months of order, and dealer inventories of approximately four months of supply are in line with our targeted level. Massey Ferguson and Valter dealer inventories are a bit higher, and Fent a bit lower than the average, in part due to strong share gains on Fent.
Speaker Change: In general, our order board is in good position and relatively consistent with last quarter.
Speaker Change: However, there are pockets of dealer inventory that we will need to focus on rate sizing in the balance of the year.
Speaker Change: In Europe , tractors have between four to five months of orders.
Speaker Change: Dealer inventories of approximately four months of supply are in line with our targeted levels.
Speaker Change: Massey Ferguson & Valter dealer inventories are a bit higher and Fent a bit lower than the average, in part due to strong share gains on Fent.
Eric P. Hansotia: In South America, we have order coverage through September 2024, where we continue to limit our orders to one quarter in advance due to inflationary pressure. Despite our aggressive production cuts, we still have approximately four months of dealer inventory across all products as industry conditions continue to weaken. Our goal is to further reduce it by year end. In North America, we currently have approximately four months of supply. Depending on the product, smaller rural lifestyle equipment has the lowest order coverage, while bigger equipment has higher order coverage.
Speaker Change: In South America, we have order coverage through September 2024, where we continue to limit our orders to one quarter in advance due to inflationary pressures.
Speaker Change: Despite our aggressive production cuts, we still have approximately four months of dealer inventory across all products as the industry conditions continue to weaken.
Speaker Change: Our goal is to further reduce it by year-end. In North America, we currently have approximately four months of order coverage, depending on the product. Smaller, rural lifestyle equipment has the lowest order coverage, while bigger equipment is higher.
Eric P. Hansotia: Our dealer inventory increased by just over one month compared to last quarter, as industry conditions weaken further, and it is now approximately eight months of supply. Our North America targets for dealer inventory range from four to six months, depending on the product. We will continue to focus on underproducing retail demand, coupled with retail market share execution to bring dealer inventories in line with our targeted range. Moving to slide six, where you'll see our three high-margin growth levers aimed at improving our mid-cycle operating margins to 12% and outgrowing the industry by 4 to 5% annually.
Speaker Change: Our dealer inventory increased by just over one month compared to last quarter, as industry conditions weaken further, and is now approximately eight months of supply. Our North America targets for dealer inventory range from four to six months, depending on the product.
Speaker Change: We will continue to focus on underproducing retail demand coupled with retail market share execution to bring dealer inventories in line with our targeted range.
Speaker Change: Moving to slide 6, where you'll see our three high margin growth levers aimed at improving our mid-cycle operating margins to 12% and outgrowing the industry by 4-5% annually.
Eric P. Hansotia: Now, to reiterate, these three growth levers are, The globalization and full line product rollout of our front end, focusing on accelerating our global parts business and increasing the market share of genuine AGCO parts, and Growing Our Precision Ag. Our precision ag business is where we'll focus today. We recently held our 2024 technology days in Westminster, Colorado, and near Salina, Kansas.
Speaker Change: Now, to reiterate, these three growth levers are...
Speaker Change: The Globalization and Full-Line Product Rollout of our Friend Brand.
Speaker Change: Focusing on accelerating our global parts business and increasing the market share of genuine AGCO parts.
Speaker Change: and Growing Our Precision Ag Business.
Speaker Change: Our precision ag business is where we will focus today. We recently held our 2024 Technology Days in Westminster, Colorado, and near Salina, Kansas.
Eric P. Hansotia: Our growing technology stack and Precision Ag products were on full display to those in attendance. Slide 7 recaps some of the key messages from that event and how AGCO is committed to differentiating farmer-focused solutions for mixed wheat. In Westminster, the home of our PTX Trimble joint venture, we discussed our go-to-market strategy for our aftermarket and retrofit side of the business and our PTX OEM solutions side of the business.
Speaker Change: Our growing technology stack and Precision Ag products were on full display to those in attendance.
Speaker Change: Slide 7 recaps some of the key messages from that event and how AGCO is committed to differentiating farmer focused solutions for the mixed wheat.
Speaker Change: In Westminster, the home of our PTX Trimble joint venture, we discussed our go-to-market strategy for our aftermarket and retrofit side of the business and our PTX OEM solutions side of the business.
Eric P. Hansotia: Our aftermarket and retrofit dealers focus on adding new capabilities to existing machines of almost any make and vintage. Our PTX OEM solutions provide technology and services to over 100 OEMs from the fact, in addition to AGCO's Fendt, Massey Ferguson, and Vulture brands.
Speaker Change: Our aftermarket and retrofit dealers focus on adding new capabilities to existing machines of almost any make and vintage.
Speaker Change: Our PTX OEM solutions provide technology and services to over 100 OEMs.
Speaker Change: from the factory.
Speaker Change: In addition to AGCO's Fent, Massey Ferguson, and Vulture Brands.
Eric P. Hansotia: AGCO is unique as the only major OEM in the world with a separate, independent, retrofit dealer channel. We can take an on-farm approach to sales and act as consultants for farmers, recommending the best PTX products for their specific use case. These retrofit dealers are primarily focused on selling incremental solutions to address farmer pain points to improve productivity and profitability, leveraging the farmer's existing machines. This is in contrast with a traditional dealer whose focus would tend to be on selling a completely new, more expensive piece of equipment.
Speaker Change: AGCO is unique as the only major OEM in the world with a separate, independent, retrofit dealer channel.
Speaker Change: We can take on-farm approach to sales and act as consultants for farmers, recommending the best PTX products for their specific use cases.
Speaker Change: These retrofit dealers are primarily focused on selling incremental solutions to address farmer pain points, to improve productivity and profitability, leveraging the farmer's existing machines.
Speaker Change: This is in contrast with a traditional dealer whose focus would tend to be on selling a completely new, more expensive piece of equipment.
Eric P. Hansotia: Now, both types of dealers are critical to ensuring farmer satisfaction. Because AGCO has both, it allows us to be the most farmer-focused company in the industry and the farmers' most trusted partner for industry leading smart farming solutions.
Speaker Change: Now, both types of dealers are critical to ensuring farmer satisfaction.
Speaker Change: Because AGCO has both, it allows us to be the most farmer-focused company in the industry.
Speaker Change: and the Farmer's Most Trusted Partner for Industry-Leading Smart Farming Solutions.
Eric P. Hansotia: As I touched on in my opening comments, we also discussed how we're bringing the dealer to the farmer through our Farmer Corps initiative. This revolutionary approach in our industry blends brick and mortar presence with mobile trucks capable of performing most services right on the farm. This mobile model will help us further grow our parts penetration by utilizing the telemetry data coming off the machines and proactively performing maintenance before it becomes a problem.
Speaker Change: As I touched on in my opening comments, we also discussed how we're bringing the dealer to the farmer through our Farmer Corps initiative.
Speaker Change: This revolutionary approach in our industry blends brick-and-mortar presence with mobile trucks capable of performing most services right on the farm.
Speaker Change: This mobile model will help us further grow our parts penetration by utilizing the telemetry data coming off the machines and proactively performing maintenance before it becomes a problem.
Eric P. Hansotia: Just like the shift to e-commerce in people's daily lives, we strongly believe that PharmaCorp will help improve the AGCO customer experience by taking business to the farm, where many of them want to be. Lastly, we saw product demonstrations from across the PTX portfolio that illustrated how our technology stack has taken a big leap forward with our new PTX Trimble joint venture. We showed how AGCO is able to optimize farms better than ever with advanced products like guidance, water management, the connected carbon exchange platform, and Precision Planting's radical agronomic soil testing solution.
Speaker Change: Just like the shift to e-commerce in people's daily lives, we strongly believe that PharmaCorp will help improve the AGCO customer experience.
Speaker Change: by taking business to the farm where many of them want to be served.
Speaker Change: Lastly, we saw product demonstrations from across the PTX portfolio that illustrated how our technology stack has taken a big leap forward with our new PTX Trimble joint venture.
Speaker Change: We showed how AGCO is able to optimize farms better than ever with the advanced products like guidance, water management, the connected carbon exchange platform, and Precision Planting's radical agronomic soil testing solution.
Eric P. Hansotia: All these solutions help make the farmer more productive and profitable. Flight 8 covers some of the key milestones AGCO is committed to in terms of smart solutions. Targeted spraying will launch later in 2024 on a retrofit basis, with an OEM solution in 2026. Also in 2024, we will be launching our autonomous retrofit solutions for green card applications, with more autonomy across the crop cycle to come. We anticipate having autonomous solutions for all parts of the crop cycle by 2030.
Speaker Change: All these solutions help make the farmer more productive and profitable.
Speaker Change: Slide 8 covers some of the key milestones AGCO is committed to in terms of smart solutions.
Speaker Change: Targeted Spraying will launch later in 2024 on a retrofit basis with an OEM solution in 2026.
Speaker Change: Also in 2024, we will be launching our autonomous retrofit solutions for green card applications, with more autonomy across the crop cycle to come.
Speaker Change: We anticipate having autonomous solutions for all parts of the crop cycle by 2030. We also showed our advancements in connectivity and cloud data management, allowing farmers more actionable insights and control over their operations.
Eric P. Hansotia: We also showed our advancements in connectivity and cloud data management, allowing farmers more actionable insights and control over their operation. Our farm office highlighted the agronomic and machine data management benefits at the farm level, across numerous makes and models of machinery.
Speaker Change: Our farm office highlighted the agronomic and machine data management benefits at the farm level.
Speaker Change: across numerous makes and models of machinery.
Eric P. Hansotia: AGCO's solutions allow farmers to manage, collect, and make data available to maximize their investments in precision ag technology. We aim to deliver the most agnostic data platform across the crop cycle and for mixed wheat. Furthermore, our technology stack will allow customers to participate in almost any sustainability program, like the PTX Connected Carbon Exchange.
Speaker Change: Utilizing Agtech requires data.
Speaker Change: AGCO's solutions allow farmers to manage, collect, and make data available to maximize their investments in precision ag technology.
Speaker Change: We aim to deliver the most agnostic data platform across the crop cycle and for mixed fleets.
Speaker Change: Furthermore, our technology stack will allow customers to participate in almost any sustainability program, like the PTX Connected Carbon Exchange.
Eric P. Hansotia: We highlighted the next evolution of our autonomous grain cart, which now enables two grain carts to partner with one combine to ensure maximum output and the utilization of the combine. An autonomous grain cart helps farmers get their crop harvested earlier, preserving sustained substantial yield. Additionally, it can enable the flexible deployment of labor by freeing up a driver from the grain. The easily-installed Retrofit Autonomy Kit was shown on two different brands of equipment, highlighting our farmer-focused mindset and the ease of adaptability across a mixed fleet of brands.
Speaker Change: We highlighted the next evolution of our autonomous grain cart, which now enables two grain carts to partner with one combine to ensure maximum output and the utilization of the combine.
Speaker Change: An autonomous grain cart helps farmers get their crop harvested earlier, preserving substantial yields.
Speaker Change: Additionally, it can enable the flexible deployment of labor by freeing up a driver from the grain cart.
Speaker Change: The easily installed Retrofit Autonomy Kit was shown in two different brands of equipment, highlighting our farmer-focused mindset and the ease of adaptability across a mixed fleet of brands.
Eric P. Hansotia: Autonomous tillage is the next phase of the crop cycle we are tackling. Autonomous tillage enhances productivity across diverse farm sizes and locations by ensuring timely crop planting within ideal windows, extending operational hours for increased throughput, and boosting operational efficiency through Flexible Labor Management.
Speaker Change: Autonomous tillage is the next phase of the crop cycle we are tackling.
Speaker Change: Autonomous tillage enhances productivity across diverse farm sizes and locations by ensuring timely crop planting within ideal windows.
Speaker Change: Extending operational hours for increased throughput, and boosting operational efficiency through flexible labor management.
Eric P. Hansotia: A major benefit of AGCO's Retrofit Kit is that the same hardware and sensors can be used as we enable more phases of autonomy across the crop cycle, making it more convenient and less costly for farmers. Our automated planter and fertilizer options were also shown on a Momentum planter. Controlling fertilizer usage is a big opportunity for Precision Ag, and fertilizer placement and timing have an impact on farmers' profitability. Momentum's dry fertilizer system offers farmers flexibility and accuracy.
Speaker Change: A major benefit of AGCO's Retrofit Kit is that the same hardware and sensors can be used as we enable more phases of autonomy across the crop cycle, making it more convenient and less costly for farmers.
Speaker Change: Our automated planter and fertilizer options were also shown on a Momentum planter.
Speaker Change: Controlling fertilizer usage is a big opportunity for Precision Ag and fertilizer placement and timing has an impact on farmers profitability.
Speaker Change: Momentum's dry fertilizer system offers farmers flexibility and accuracy.
Eric P. Hansotia: Momentum's agronomic features also solve compaction problems and offer accurate seed placement, leading to more dollars in the pockets of farmers. Lastly, we showed our targeted sprayer, PTX Trimble offers Weed Seeker 2. This is a proven retrofit solution already in the market today, which detects weeds with infrared sensors and applies herbicide only where needed. We also showed our precision planting symphony vision system, which utilizes cameras to detect and spray only weeds and allows scouting of farmers' fields to identify where weed pressure is the highest.
Speaker Change: Momentum's agronomic features also solve compaction problems and offer accurate seed placement, leading to more dollars in the pockets of farmers.
Speaker Change: Lastly, we showed our targeted spray solutions.
Speaker Change: PTX Trimble offers Weed Seeker 2.
Speaker Change: This is a proven retrofit solution already in the market today, which detects weeds with infrared sensors and applies herbicide only where needed.
Speaker Change: We also showed our precision planting Symphony Vision System, which utilizes cameras to detect and spray only weeds, and allows scouting of farmer's fields to identify where weed pressure is the highest.
Eric P. Hansotia: There's never been a more exciting time to be in the ag space. With these and several other technologies, we remain committed to our goal of achieving $2 billion in annual precision egg sales by 2028. For those of you that were with us, we want to thank you for your attendance at the event and your interest in AGCO.
Speaker Change: There's never been a more exciting time to be in the ag space.
Speaker Change: With these and several other technologies, we remain committed to our goal of achieving $2 billion in annual precision egg sales by 2028.
Speaker Change: 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 farmers' profitability.
Damon J. Audia: We hope that you saw how we are driving innovative solutions that are focused on helping improve farmers' profitability. For those of you who did not attend, we hope we piqued your interest and that you'll attend our future events. With that, I'll hand it over to Damon.
Speaker Change: For those of you who did not attend, we hope we piqued your interest and that you'll attend our future events. With that, I'll hand it over to Damon.
Damon J. Audia: Thank you, Eric, and good morning, everyone. Slide 9 provides an overview of regional net sales performance for the second quarter. Net sales were down approximately 16% in the second quarter compared to the second quarter of 2023 when excluding the negative effect of currency translation and the positive impact of acquisition. By region, the Europe Middle East segment reported sales down roughly 5% in the quarter compared to the same period of 2023, excluding the impact of unfavorable currency translation and the favorable impact of acquisition. Growth in Germany, France, and Spain was offset by lower sales across nearly all other European markets.
Damon J. Audia: Increasing sales of high horsepower tractors, especially Fendt products, was offset by declines in other products. South American net sales decreased approximately 40% in the quarter, excluding the impact of unfavorable currency translation and the favorable impact of acquisition. Significantly softer industry sales and underproduction of retail demand drove most of the decrease. Lower sales of tractors and combines accounted for most of the decline. The substantial sales decrease in Brazil was slightly offset by modestly higher sales in Argentina and other South American markets. Net sales in the North American region decreased approximately 18% in the quarter, excluding the impact of unfavorable currency translation and the favorable impact of acquisition.
Damon J. Audia: Thank you Eric and good morning everyone. Slide 9 provides an overview of regional net sales performance for the second quarter.
Damon J. Audia: Net sales were down approximately 16% in the second quarter compared to the second quarter of 2023 when excluding the negative effect of currency translation and the positive impact of acquisitions.
Damon J. Audia: By region, the Europe-Middle East segment reported sales down roughly 5% in the quarter compared to the same period of 2023, excluding the impact of unfavorable currency translation and favorable impact of acquisitions.
Damon J. Audia: Growth in Germany, France, and Spain was offset by lower sales across nearly all other European markets.
Damon J. Audia: Increased sales of high horsepower tractors, especially Fendt products, was offset by declines in other products.
Damon J. Audia: South American net sales decreased approximately 40% in the quarter, excluding the impact of unfavorable currency translation and favorable impact of acquisitions.
Damon J. Audia: Significantly softer industry sales and underproduction of retail demand drove most of the decrease.
Damon J. Audia: Lower sales of tractors and combines accounted for most of the decline. The substantial sales decrease in Brazil was slightly offset by modestly higher sales in Argentina and other South American markets.
Damon J. Audia: Net sales in North American region decreased approximately 18% in the quarter, excluding the impact of unfavorable currency translation and favorable impact of acquisitions.
Damon J. Audia: Software Industry Sales and Lower End Market Demand all contributed to lower sales. The most significant sales declines occurred in the high horsepower and mid-range tractor categories. Net sales in the second quarter of Asia-Pacific and Africa decreased 35% excluding the negative currency translation impacts and favorable impacts of acquisitions due to weaker end market demand and lower production volumes. Lower sales in China and Australia drove most of the decline. Finally, consolidated replacement part sales were approximately $488 million for the second quarter, down approximately 1% year-over-year or flat, excluding the effects of negative currency translation. Turning to slide 10.
Damon J. Audia: Software industry sales and lower end market demand all contributed to lower sales. The most significant sales declines occurred in the high horsepower and mid-range tractor categories.
Damon J. Audia: Net sales in the second quarter in Asia-Pacific Africa decreased 35%, excluding the negative currency translation impacts and favorable impacts of acquisitions, due to weaker end market demand and lower production volumes. Lower sales in China and Australia drove most of the decline.
Damon J. Audia: Finally, consolidated replacement parts sales were approximately $488 million for the second quarter, down approximately 1% year-over-year, or flat, excluding the effects of negative currency translation.
Damon J. Audia: The second quarter adjusted operating margin declined by 280 basis points versus a very strong second quarter of 2023. Margins in the quarter were mainly affected by a significant decline in production, reflective of the increasingly weak industry conditions, along with higher discounts. By region, the Europe-Middle East segment income from operations decreased just under $7 million, while operating margins improved 40 basis points in the quarter compared to the same period of 2023. The improvement in margin was driven by a favorable product mix related primarily to the sales of spent high-horsepower tractors.
Damon J. Audia: Turning to slide 10.
Damon J. Audia: The second quarter adjusted operating margin declined by 280 basis points versus a very strong second quarter of 2023.
Damon J. Audia: Margins in the quarter were mainly affected by the significant decline in production, reflective of the increasingly weak industry conditions, along with higher discounts.
Damon J. Audia: by region.
Damon J. Audia: The Europe-Middle East segment income from operations decreased just under $7 million.
Damon J. Audia: While operating margins improved 40 basis points in the quarter compared to the same period of 2023. The improvement in margin was driven by favorable product mix related primarily to the sales of bent high-horsepower tractors.
Damon J. Audia: North American income from operations for Q2 of 2024 decreased approximately $60 million year over year, and operating margins were 9.2%. The decrease resulted from lower sales and production as well as increased warranty expenses. Operating margins in South America decreased by approximately $109 million in Q2 versus the prior year.
Damon J. Audia: North American income from operations for Q2 of 2024 decreased approximately $60 million year-over-year, and operating margins were 9.2%. The decrease resulted from lower sales and production, as well as increased warranty expenses.
Damon J. Audia: Operating margins in South America decreased by approximately $109 million in Q2 versus the prior year. The decrease was primarily a result of lower sales and significantly lower production volumes, as well as increased discounts year-over-year.
Damon J. Audia: The decrease was primarily a result of lower sales and significantly lower production volumes, as well as increased discounts year-over-year. Finally, in our Asia Pacific and Africa segment, income from operations decreased by $8.5 million in Q2 of 2024 due to lower sales and production volumes. Slide 11 details our June year-to-date free cash flow for 2023 and 2024. As a reminder, free cash flow represents cash used in or provided by operating activities, less purchases of property, plant, and equipment, and free cash flow conversion is defined as free cash flow divided by adjusted net income.
Damon J. Audia: Finally, in our Asia Pacific Africa segment, income from operations decreased by $8.5 million in Q2 of 2024 due to lower sales and production volumes.
Damon J. Audia: Slide 11 details our June year-to-date free cash flow for 2023 and 2024. As a reminder, free cash flow represents cash used in or provided by operating activities, less purchases of property, plant, and equipment, and free cash flow conversion is defined as free cash flow divided by adjusted net income.
Damon J. Audia: We used $328 million of cash through June of 2024, approximately 45% less than the same period in 2023, primarily related to improved working capital and lower capital expenditures. For the full year, we continue to expect our free cash flow to be in the upper half of our long-term targeted range of 75% to 100% of adjusted net income. We also remain focused on rewarding investors with direct returns. In addition to the regular quarterly dividend of $0.29 per share, we also paid a special variable dividend of $2.50 per share in the second quarter.
Damon J. Audia: We used $328 million of cash through June of 2024, approximately 45% less than the same period of 2023, primarily related to improved working capital and lower capital expenditures.
Damon J. Audia: For the full year, we continue to expect our pre-cash flow to be in the upper half of our long-term targeted range of 75% to 100% of adjusted net income.
Damon J. Audia: We also remain focused on rewarding investors with direct returns.
Damon J. Audia: In addition to the regular quarterly dividend of $0.29 per share, we also paid a special variable dividend of $2.50 per share in the second quarter. This is now the fourth consecutive year of us paying the special variable dividend.
Damon J. Audia: This is now the fourth consecutive year we have paid the special variable dividend. Even with the increased debt associated with the closing of the PTX Trimble joint venture, the special variable dividend is another sign of our confidence in how we have transformed our long-term profitability and remain focused on deploying capital in the most effective ways for our shareholders. Slide 12 highlights our 2024 market forecast for three major regions. For North America, the market has continued to weaken, and we now expect demand to be 10 to 15% lower compared to levels in 2023. The high-horsepower row crop equipment segment is expected to decrease after several years of strong growth that was fueled by high levels of farm income.
Damon J. Audia: Even with the increased debt associated with the closing of the PTX Trimble joint venture, the Special Variable Dividend is another sign of our confidence in how we have transformed our long-term profitability and remain focused on deploying capital in the most effective ways for our shareholders.
Damon J. Audia: The smaller tractor segment is also expected to decrease in 2024, although the rate of decline is slowing compared to prior years. For Western Europe, we continue to expect the industry to be down five to 10% compared to 2023. Farmer settlement and other indices have been hovering near trough levels for a few months now due to reduced commodity prices and higher input costs. We are updating our guidance for South America to reflect the increasing weakness and now expect industry sales to be down approximately 25 to 30 percent in 2024 compared to our previous estimate of a 20 percent reduction. The industry for tractors greater than 340 horsepower combines and planters continues to deteriorate even more than we had anticipated.
Damon J. Audia: Slide 12 highlights our 2024 market forecast for our three major regions.
Damon J. Audia: For North America, the market has continued to weaken, and we now expect demand to be 10-15% lower compared to the levels in 2023.
Damon J. Audia: The high-horsepower row crop equipment segment is expected to decrease after several years of strong growth that was fueled by high levels of farm income.
Damon J. Audia: The smaller tractor segment is also expected to decrease in 2024, although the rate of decline is slowing compared to prior years.
Damon J. Audia: For Western Europe , we continue to expect the industry to be down 5-10% compared to 2023. Farmer settlement and other indices have been hovering near trough levels for a few months, now due to reduced commodity prices and higher input costs.
Damon J. Audia: We are updating our guidance for South America to reflect the increasing weakness and now expect industry sales down approximately 25-30% in 2024 compared to our previous estimate of a 20% reduction.
Damon J. Audia: The industry for tractors greater than 340 horsepower, combines, and planters continue to deteriorate even more than we had anticipated.
Damon J. Audia: Farmers are holding onto their grain longer in the region, awaiting higher prices, and shortfalls in the subsidized financing program cause farmers to postpone purchases. Flooding in Rio Grande do Sul has also weighed on sentiment. Although this may affect demand in the short term, South America remains one of the more long-term attractive end markets, especially in Brazil, where the farm footprint is increasing. While farm inco is expected to decline from elevated levels in 2023, AGCO's brand agnostic retrofit approach to precision ag and our strong parts business should help dampen the cycle, making our margins less volatile.
Damon J. Audia: Farmers are holding onto their grain longer in the region, awaiting higher prices, and shortfalls in the subsidized financing program cause farmers to postpone purchases.
Damon J. Audia: Flooding in Rio Grande do Sul have also weighed on sentiment. Although this may affect demand in the short-term, South America remains one of the more long-term attractive end markets, especially in Brazil, where the farm footprint is increasing.
Speaker Change: While farm income is expected to decline from elevated levels in 2023, AGCO's brand-agnostic retrofit approach to precision ag and our strong parts business should help dampen the cycle, making our margins less volatile.
Damon J. Audia: Slide 13 highlights a few key assumptions underlying our 2024 outlook, which is still inclusive of the grain and protein business and also includes the consolidated results of the PTX-DRIMBLE joint venture. Despite the weakening market conditions, our sales plan includes market share gains. In addition, full-year pricing is now expected to be effectively 0% year-on-year.
Speaker Change: Slide 13 highlights a few key assumptions underlying our 2024 outlook, which is still inclusive of the grain and protein business, and also includes the consolidated results of the PTX Dremel Joint Venture.
Speaker Change: Despite the weakening market conditions, our sales plan includes market share gains. In addition, full-year pricing is now expected to be effectively 0% year-on-year.
Damon J. Audia: As our raw material costs have stabilized and we pursue further cost-savings actions, we still expect this level of pricing will allow us to be approximately break-even on a net pricing basis. We expect currency translation to have a 1% adverse effect year over year, primarily due to a weakening of the euro. Engineering expenses are expected to be flat in 2024 compared to 2023, including PTX trimble.
Speaker Change: As our raw material costs have stabilized and we pursue further cost savings actions, we still expect this level of pricing will allow us to be approximately break-even on a net pricing basis.
Speaker Change: We expect currency translation to have a 1% adverse effect year over year, primarily due to a weakening of the euro.
Speaker Change: Engineering expenses are expected to be flat in 2024 compared to 2023, including PTX Trimble.
Speaker Change: Excluding PTX Trimble, engineering expense would have been down around 7% as we look to moderate some investments given the softening industry outlook.
Damon J. Audia: Excluding PTX Trimble, engineering expense would have been down around 7% as we look to moderate some investments given the softening industry outlook. With expectations of our industry declining around 15% from approximately 105% of mid-cycle in 2023 to near 90% in 2024, we would expect our adjusted operating margins to come down from the record 12% in 2023 to around 9% in 2024. Given the significant levels of underabsorption reflected in our financials as we cut production, coupled with the operating margins enhancements associated with the pending sale of the grain and protein business, and the additional run rate savings associated with our restructuring announcements, we believe the current forecast 9% adjusted operating margin should be near our trough margin, assuming traditional downturn patterns, which demonstrate the significant improvements we have made to our business over the last several years, will provide an updated long-term mid-cycle operating margin target at our December 2024 analyst meeting to account for the performance of PTX Trimble and announce divestiture of our grain and protein business.
Speaker Change: With expectations of our industry declining around 15% from approximately 105% of mid-cycle in 2023 to near 90% in 2024, we would expect our adjusted operating margins to come down from the record 12% in 2023 to around 9% in 2024.
Speaker Change: Given the significant levels of underabsorption reflected in our financials as we cut production, coupled with the operating margins enhancements associated with the pending sale of the grain and protein business,
Speaker Change: and the additional run rate savings associated with our restructuring announcements, we believe the current forecast 9% adjusted operating margin should be near our trough margin, assuming traditional downturn patterns, which demonstrate the significant improvements we have made to our business over the last several years.
Speaker Change: We'll provide an updated long-term mid-cycle operating margin target at our December 2024 Analyst Meeting to account for the performance of PTX Trimble and announce divestiture of our grain and protein business.
Damon J. Audia: Our effective tax rate is now anticipated to be approximately 30% for 2024, which is roughly 1.5 percentage points higher than our previous guidance. The reason for the increase is due to a higher proportion of income in higher tax jurisdictions.
Speaker Change: Our effective tax rate is now anticipated to be approximately 30% for 2024, which is roughly 1.5 percentage points higher than our previous guidance. The reason for the increase is due to a higher proportion of income in higher tax jurisdictions.
Damon J. Audia: On slide 14, we highlight a few details in terms of the restructuring plan we announced in late June, along with the details of the recently signed agreement to divest our grain and protein business. Our restructuring plan was announced in response to continued weakening demand in the agriculture industry and long-term efforts to structurally change AGCO's operations. The objective of the program is to reduce structural costs, streamline our workforce, and enhance global efficiencies by better leveraging technology in global centers of excellence.
Speaker Change: On slide 14, we highlight a few details in terms of the restructuring plan we announced in late June , along with the details of the recently signed agreement to divest our grain and protein business.
Speaker Change: Our restructuring plan was announced in response to continued weakening demand in the agriculture industry and long-term efforts to structurally change AGCO's operations.
Speaker Change: The objective of the program is to reduce structural costs, streamline our workforce, and enhance global efficiencies by better leveraging technology in global centers of excellence.
Damon J. Audia: As part of the plan, we announced a planned reduction of approximately 6% of our salaried workforce. As a result of the restructuring actions, we will incur between $150 and $200 million in expenses mainly related to one-time termination benefits. This expense is anticipated to be incurred in 2024 and in the first half of 2025, with $28 million recorded in the second quarter.
Speaker Change: As part of the plan, we announced a planned reduction of approximately 6% of our salaried workforce.
Speaker Change: As a result of the restructuring actions, we will incur between $150 and $200 million in expenses mainly related to one-time termination benefits.
Speaker Change: This expense is anticipated to be incurred in 2024 in the first half of 2025, with $28 million recorded in the second quarter.
Damon J. Audia: More importantly, the program will result in between $100 to $125 million in annual run rate savings, the majority of which will start in 2025, which will help year-over-year profitability. As mentioned earlier, we have entered into a definitive agreement to sell our grain and protein business. As of June 30, 2024, the business met the criteria to be classified as held for sale.
Speaker Change: More importantly, the program will result in between $100 to $125 million in annual run rate savings, the majority of which will start in 2025, which will help year-over-year profitability.
Damon J. Audia: The company determined the intended sale of the grain and protein business does not represent a strategic shift that will have a major effect on the consolidated results of operations, and therefore, the results of this business were not classified as discontinued operations. The results of the grain and protein business are included within our regional reported segment. We expect to receive proceeds of approximately $700 million from the sale, subject to customary working capital and other adjustments.
Speaker Change: As mentioned earlier, we have entered into a definitive agreement to sell our grain and protein business.
Speaker Change: As of June 30, 2024, the business met the criteria to be classified as held for sale.
Speaker Change: The company determined the intended sale of the grain and protein business does not represent a strategic shift that will have a major effect on the consolidated results of operations, and therefore results of this business were not classified as discontinued operations.
Speaker Change: The results of the Granted Protein Business are included within our original reported segments. We expect to receive proceeds of approximately $700 million from the sale, subject to customary working capital and other adjustments.
Damon J. Audia: Upon the classification of the help for sale, the company recognized a projected loss of approximately $495 million in the company's consolidated statement of operations based on the current estimate that will be adjusted at the time of closing. The closing of the transaction is subject to regulatory approvals and customary closing conditions and is expected to be completed before the end of the year. Turning to slide 15 for our 2024 outlook, our full-year net sales outlook is $12.5 billion, down from the record levels seen in 2023 and down from our previous outlook. The adjusted earnings per share forecast is now approximately $8.
Speaker Change: Upon the classification of health for sale, the company recognized a projected loss of approximately $495 million in the company's consolidated statement of operations, based on the current estimate that will be adjusted at the time of closing.
Speaker Change: The closing of the transaction is subject to regulatory approvals and customary closing conditions and is expected to be completed before the end of the year.
Speaker Change: Turning to slide 15 for our 2024 Outlook.
Speaker Change: Our full-year net sales outlook is $12.5 billion, down from the record levels seen in 2023, and down from our previous outlook. Adjusted earnings per share forecast is now at approximately $8.
Damon J. Audia: We continue to expect capital expenditures to be approximately $475 million, slightly lower than what we spent in 2023. Our free cash flow conversions should be at the upper end of our range of 75% to 100% of adjusted net income, consistent with our long-term target. With continued underproduction relative to retail demand in the third quarter, we project sales in the $2.9 billion range, adjusted operating margins of approximately 7%, and adjusted earnings per share of about $1.05. With that, I'll turn the call over to the operator for Q&A. We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone.
Speaker Change: We continue to expect capital expenditures to be approximately $475 million, slightly lower than what we spent in 2023. Our free cash flow conversions should be at the upper end of our range of 75% to 100% of adjusted net income, consistent with our long-term target.
Speaker Change: With continued underproduction relative to retail demand in the third quarter, we project sales in the $2.9 billion range, adjusted operating margins of approximately 7%, and adjusted earnings per share of about $1.05.
Speaker Change: With that, I'll turn the back over to the operator for Q&A.
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2.
Unknown Attendee: If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. The first question comes from Jerry Revich of Goldman Sachs. Please go ahead. Yes, hi. Good morning, everyone.
Speaker Change: Please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster.
Unknown Attendee: I'm wondering if you could just talk about the decremental margin outlook that's implied for the back half of the year, you know, what the impact of the inventory reduction that you guys are delivering is. You know, in prior cycles, decremental margins for you guys have been closer to 20%, so I'm wondering, as we think about 25 after company inventories have come down, should we be thinking about decremental margins in the first Yeah, I think Jerry, you know, we're, as you saw with the production cuts here in the back half of 2024, you know, doing a significant level of reduction again, the 20 to 25% reductions this year is the highest level we've cut in over a decade, really trying to right-size dealer inventories as we go through this year.
Speaker Change: The first question comes from Jerry Revich of Goldman Sachs. Please go ahead.
Jerry David Revich: Yes, hi. Good morning, everyone.
Jerry David Revich: I'm wondering if you could just talk about the decremental margin outlook that's implied for the back half of the year, you know, what's the impact to that of the inventory reduction that you folks are delivering, you know, in prior cycles, decremental margins for you folks have been.
Speaker Change: Closer to 20%, so I'm wondering as we think about 25 after company inventories have come down, should we be thinking about decriminal margins in the first half of 25 being closer to the low 20s that you folks have posted historically?
Unknown Attendee: So as we think about 2025, and you listen to Eric's comments about the industry, likely floating at this trough level, you know, we would expect, assuming not a significant reduction, but we would expect that our, our decrements next year should be closer to that, you know, mid to high 20s that you would have seen. And again, I think if you factor in the effect that pricing is having here in the back half of the year, you would see that the decrements from an operational standpoint are in that high 20, 30% range as well as just being magnified because of the decrease in pricing as well. I finally got it.
Jerry David Revich: Yeah, I think, Jerry, you know, as you saw with the production cuts here in the back half of 2024, you know, doing a significant level of reduction, again, the 20 to 25 percent reductions this year is
Speaker Change: The highest level we've cut in over a decade, you know, really trying to right-size dealer inventories as we go through this year. So as we think about 2025 and you listen to Eric's comments about the industry likely floating at this trough level, you know, we would expect, assuming not a significant reduction, but we would expect that our decrementals next year should be closer to that, you know, mid to high 20s that you would have seen. And again, I think if you factor in the effect of pricing is having here in the back half of the year, you would see that the decrementals from an operational standpoint are in that high 20, 30% range as well as just being magnified because of the decrease in pricing as well.
Unknown Attendee: That is clear. And then, on your precision ag business here, can you talk about developments that you're seeing in the market? How is the aftermarket precision ag business performing in the back half of the year versus what you're seeing on the whole good side? Can you just double-click on the near-term performance, if you don't mind? Yeah, I'll take that one.
Speaker Change: Got it, that is clear. And then can I ask on your precision ag business, can you talk about developments that you are seeing in the market? How is the aftermarket precision ag business performing in the back half of the year versus what you are seeing on the whole good side? Can you just double click on the near term?
Eric P. Hansotia: So our what we call our business now is PTX precision technologies multiplied. That's the combination of PTX Trimble, the JV we created, and precision planting. Both of them have a mix of OEM sales and retrofit sales. The OEM sales are down, much like the industry, maybe even a little bit more because there's some channel D stocking with some of the key OEMs, but we haven't lost any OEM customers
Speaker Change: Performance, if you don't mind.
Speaker Change: Yeah, I'll take that one. So what we call our business now is PTX, Precision Technologies Multiplied. That's the combination of PTX Trimble, the JV we created, and Precision Planting. Both of them have a mix of OEM sales and retrofit sales.
Speaker Change: The OEM sales are down much like the industry, maybe even a little bit more because there's some channel destocking with some of the key OEMs, but we haven't lost any OEM customers. It's just they're moving with the industry.
Eric P. Hansotia: It's just they're moving with the industry; retrofit has been up, but it's cooling. And so we're seeing areas now where even some of the retrofit is going down. But again, we've got our AGCO ramp up right on track, maybe even a little bit ahead of plan. The C&H dealer signups are on track, maybe even a little bit ahead of plan. And we've not lost any OEM customers, and we haven't lost any talent from our organization in terms of engineers and things like that. So the business is performing like we would expect; it's just being hit by the industry. Movement. Thank you, Eric. You're welcome. The next question comes from Tami Zakaria with J.P. Morgan. Please go ahead.
Speaker Change: Retrofit has been up but it's cooling and so we're seeing areas now where even some of the retrofit is is going down but again it's we've
Speaker Change: We've got our AGCO ramp up right on track, maybe even a little bit ahead of plan. The C&H dealer
Speaker Change: Signups are on track maybe a little bit ahead of plan and we've not lost any OEM customers not lost any talent from our organization in terms of Engineers and things like that. So the business is performing like we would expect. It's just being hit by the industry
Speaker Change: movements.
Eric P. Hansotia: Thank you, Eric.
Eric P. Hansotia: You're welcome.
Speaker Change: Next question comes from Tami Zakaria with J.P. Morgan. Please go ahead.
Unknown Attendee: Hey, good morning; thank you so much. I was hoping you could help me with some numbers. So the implied back half production outlook. How much is that versus your expectation of retail sales? I'm trying to understand production versus retail sales growth expectation as you exit this. And so, Tami, the production in the back half is going to be down, call it 20, you know, mid to upper 20, mid 20s.
Tami Zakaria: Hey good morning, thank you so much. So I was hoping you could help me with some numbers. So the implied back half production outlook
Tami Zakaria: How much is that versus your expectation of retail sales? I'm trying to understand production versus retail sales growth expectation as you exit this year.
Unknown Attendee: More, more pronounced here in the third quarter, I would say on a quarterly basis, a little bit above the annual guidance. And then in the fourth quarter, sort of, I'd say in the range of that 20 to 25%, 20 to 25%, mainly because we're lapping the easier comp in South America in the fourth quarter.
Tami Zakaria: Yes.
Tami Zakaria: Tami, the production in the back half.
Speaker Change: is going to be down, call it mid to upper 20s, mid-20s, more pronounced here in the third quarter. I would say on a quarterly basis, a little bit above the annual guidance. And then in the fourth quarter, sort of I'd say in the range of that 20 to 25%, mainly because we're lapping the easier comp in South America in the fourth quarter. So you're going to be seeing production levels down in the sort of low to mid-20s here in Q3 and Q4 as we go into 2025.
Damon J. Audia: So you're going to be seeing production levels down in the, you know, sort of low to mid 20s here in Q3 and Q4 as we go into 2025. Got it. Okay, so then, as you exit this year, how much is your production going to be versus your expectation of the mid-cycle volume? So I guess the way I would look at the mid-cycle volume, Tami, is that last year we were at about 105% of mid-cycle.
Speaker Change: Got it. Okay. So, so then
Speaker Change: As you exit this year, how much is your production going to be versus your expectation of the mid-cycle volume?
Speaker Change: So I guess the way I would look at the mid-cycle volume, Tami, is last year we were at about 105 percent.
Damon J. Audia: If you remember last year, there was also a fairly strong channel replacement or filling of the channel as we started 2023 with a very low dealer inventory level. So you would sort of view that at 105% plus some incremental production, you know, a little bit of incremental production for that dealer fill now coming down to an industry of around 90%. So you can see that production levels are down 15 plus percent to get back to sort of, I would say, you know, this mid-cycle when you factor in the overproduction. The next question comes from Steven Fisher with UBS. Please go ahead.
Tami Zakaria: of mid cycle. If you remember last year, there was also a fairly strong channel replacement or filling of the channel as we started 2023 with a very low dealer inventory level. So you would sort of view that at 105%
Tami Zakaria: Plus
Tami Zakaria: And then we've got some incremental production. It's a little bit of incremental production for that dealer fill. Now coming down to an industry of around 90%. So you can see that we're sort of production levels are down 15 plus percent to get back to sort of I would say, this mid cycle when you factor in the over production. So call it 10 to 15% is probably the range to think about the delta between where we are and getting back to mid cycle.
Speaker Change: Next question comes from Steven Fisher with UBS. Please go ahead.
Unknown Attendee: Steven, your line is live. Thanks for taking the question. The pricing down to 0%, what drove that? Was that higher incentives to make trades happen? Was it reductions in actual pricing? And how do we think about the sort of regional spread of where that change happened from prior pricing expectations? Yeah, Steve, I think the, you know, generally speaking, the incremental price to the reduction in our outlook is reflective of the incremental discounts really trying to spur more retail sales.
Speaker Change: Steven, your line is live.
Steven Fisher: Sorry about that, it was just on mute. Thanks for taking the question. The pricing down to 0%, what drove that?
Steven Fisher: Higher incentives to make trades happen. Was it reductions in actual pricing? And how do we think about sort of the regional spread of where that change happened from the prior pricing expectations of the year? Unknown Speaker
Speaker Change: Yeah, Steve, I think generally speaking, the incremental price, the reduction in our outlook is reflective of the incremental discounts really trying to spur more retail sales. As we've seen the industries weaken here, South America, North America, and even to a certain degree in the non-branded products in Europe , we've definitely seen the incentives picking up. I think relative to our prior outlook, I would say that the declines or the change has really been focused.
Unknown Attendee: You know, as we've seen the industries we can hear South America, North America, and even to a certain degree in the non branded products in Europe, we've definitely seen the incentives picking up, I think, relative to our prior outlook, you know, I would say that the declines or the change has really been focused South America, Europe, and to a lesser degree, North America. But I would say Europe and South America were probably the two biggest changes that we saw relative to the last quarter. Great.
Speaker Change: South America, Europe , and to a lesser degree, North America, but I would say Europe and South America were probably the two biggest changes that we saw relative to the last quarter.
Damon J. Audia: And then you're undertaking this restructuring. I'm curious where you think that will leave you relative to the ideal manufacturing structure that you see for the future of the business. Do you think this will get you there?
Speaker Change: You're undertaking this restructuring. I'm curious where you think that will leave you relative to the ideal manufacturing structure that you see for the future of the business. Do you think this will get you there or are there still other steps that you think you might take?
Speaker Change: Be taking over the next couple of years to kind of put the business and the manufacturing structure in place for the next 10 years.
Eric P. Hansotia: Or are there still other steps that you think you might be taking over the next couple of years to kind of put the business and the manufacturing structure in place for the next 10 years? Yes, so maybe I'll start and then Eric may want to add a few more comments on the longer term. But the restructuring activities that we alluded to, I would say we're more SG&A back office oriented. So that 6% reduction in the workforce we've talked about is really reflective of the industry cooling and us trying to shrink our overall cost here.
Eric P. Hansotia: Yes, so maybe I'll start and then Eric may want to add a few more comments longer term, but the restructuring activities that we alluded to, I would say we're more SG&A back office orientated. So that 6% reduction in the workforce we've talked about is really reflective of the industry cooling and us trying to shrink our overall cost here. But at the same time, as I may have mentioned during the technology day, you know, this is really challenging our teams to look deeper at leveraging technologies, generative AI and trying to do things in a much more efficient manner. And at the same time, trying to commonize things where we can centralize them potentially in lower cost areas or have centers of excellence.
Eric P. Hansotia: But at the same time, as I may have mentioned during the technology day, this is really challenging our teams to look deeper at leveraging technologies, generative AI, and trying to do things in a much more efficient manner. And at the same time, trying to commonize things where we can centralize them potentially in lower cost areas or have centers of excellence, versus how AGCO has been built up in the history of a group of acquisitions, we're really not creating that common skeleton.
Eric P. Hansotia: of Excellence, versus how AGCO had been built up in the history of a group of acquisitions were really not creating that common skeleton. So as we looked at the industry, it sort of gave us that opportunity to shrink the workforce to stay, you know, to stay where we need to be, but at the same time, take down or further reduce it through simplicity. So again, I think there's probably opportunities that we looked as we learn more about our operations, we learn more about technology. But if you look at what we're talking about, that 100 to 125 million, as Eric alluded to, and I alluded to, that's run rate savings, that's not reflective in these numbers, that we'll start to see that build in 25. And hopefully more to come as we as we better leverage technology. But I think on the footprint, Eric, anything else you want to add?
Damon J. Audia: So as we looked at the industry, it sort of gave us that opportunity to shrink the workforce to stay, you know, to stay where we needed to be, but at the same time, take down or further reduce it through simplicity. So again, I think there are probably opportunities that we can look at as we learn more about our operations, and we learn more about technology. But if you look at what we're talking about, that 100 to 125 million, as Eric alluded to, and I alluded to, that's run rate savings that are not reflective in these numbers, that we'll start to see that build in 25. And hopefully, more to come as we better leverage technology. But I think on the footprint. Eric, anything else you want to add? No, that's exactly right.
Eric P. Hansotia: We're taking fast action on getting ourselves the right size for the industry that we're seeing. The 6% is a net number. So we're actually cutting deeper in some of our high-cost countries and hiring back in some low-cost countries. But that's really about right sizing and reflecting the demand we're facing. Then there's chapter two about thinking differently about how we run the business. And Damon already covered that, so I don't need to repeat it, but it's largely using artificial intelligence and automating many of the routine tasks that we have, and higher leverage of lower cost locations.
Eric P. Hansotia: No, that's exactly right. We're taking fast action on getting ourselves right-sized for the industry that we're seeing. The 6% is a net number, so we're actually cutting deeper in some of our high-cost countries, hiring back in some low-cost countries. But that's really about right-sizing and reflecting the demand we're facing.
Eric P. Hansotia: Then there's a chapter two about thinking differently about how we run the business. And Damon already covered that, so I don't need to repeat, but it's largely using artificial intelligence and automating much of the routine tasks that we have and higher leverage of lower cost locations.
Eric P. Hansotia: The next question comes from Mig Dobre with RW Barrett. Please go ahead. Thank you. Good morning. I want to go back to the discussion on production and dealer inventories. I just want to make sure that I properly understand it.
Eric P. Hansotia: The next question comes from Mig Dobre with R.W. Barrett. Please go ahead.
Unknown Attendee: So, you know, you talked about your industry forecast being down 15% for this year and production for the full year down 20 to 25%. Is it fair to assume the gap between the two is the amount of underproduction or destocking that is happening in a channel? And if so, can you give us a sense, from a unit perspective, where you think your channel, your dealer inventories are going to, relative to where they exited in 2022?
Mircea Dobre: Thank you. Good morning. I want to go back to the discussion on production and dealer inventories. I just want to make sure that I properly understand this. So, you know, you talked about your industry forecast being down 15% for this year and production for the full year down 20% to 25%.
Speaker Change: Is it fair to understand the gap between the two and the amount of underproduction or destocking that is happening in a channel? And if so, can you give us a sense from a unit perspective where you think your channel, your dealer inventories are going to be?
Unknown Attendee: So before, we had that kind of stocking dynamic. Yeah, so maybe we'll have to go back and look at the 2022 stuff. I don't think we have that handy right now. But maybe on a follow-up, I can get you that.
Speaker Change: Relative to where they exited in 2022. So before we had that kind of like stocking dynamic.
Speaker Change: of last year.
Speaker Change: Yeah, so maybe we'll have to go back and look at the 2022 stuff. I don't think we have that handy right now, but maybe on a follow-up, I can get you that. But I think your comment about the industry decline versus the production decline, that's spot on. That's the destocking that we're talking about here to try to better right-size the inventory. And again, I think as we said on some of my comments, there is still more work to do here in North America. We do want to take that inventory levels down right now. We're sitting at around eight months of inventory, so we want to get that down a couple more months. And that's part of the large production cuts we have planned in the back half of the year. Europe has been staying flat the last couple quarters at around four months of inventory.
Damon J. Audia: But I think your comment about the industry decline versus the production decline is spot on. That's the destocking that we're talking about here to try to better right-size the inventory. And again, I think, as I said in some of my comments, there is still more work to do here in North America.
Damon J. Audia: We do want to take inventory levels down right now. We're sitting at around eight months of inventory. So we want to get that down a couple more months. And that's part of the large production cuts we have planned in the back half of the year. Europe has been staying flat the last couple quarters at around four months of inventory.
Damon J. Audia: And again, we probably have a little bit of access in our more volume-oriented brands of Massey and Voltra since they are doing quite well from a share capture standpoint, which is keeping the dealer inventory levels at probably the optimal level. And then South America, as that industry continues to decline, despite the production cuts we're taking in the last quarter. In the second quarter, we cut production in South America 57%. And so a significant cut there as we see that industry cool. The dealer inventory, though, stayed relatively flat.
Speaker Change: And again, we probably have a little bit of excess in our more volume-orientated brands of Massey and Voltra. Sends doing quite well from a share capture standpoint, which is keeping the dealer inventory levels at probably the optimal level. And then South America, as that industry continues to decline, despite the production cuts we're taking in last quarter, in the second quarter, we cut production in South America 57%. And so a significant cut there as we see that industry cool. The dealer inventory, though, stayed relatively flat. So again, we now have more production cuts in the back half of the year, trying to get that four months down to probably more around three months by the end of the year, as we...
Damon J. Audia: So again, we now have more production cuts in the back half of the year, trying to get that four months down to, you know, probably more around three months by the end of the year, as we hopefully see some improvement going into 2025 in that market. Okay, as we said in our comments, this is the big correction year. And most cycles go through one big year where there's a big correction, and this one's going from 105 down to 90.
Speaker Change: as we hopefully see some improvement going into 2025 in that market.
Speaker Change: As we said in our comments, this is the big correction year, and most cycles, they go through one big year where there's a big correction, and this one's going from 105 down to 90.
Eric P. Hansotia: And we're being very aggressive, much more aggressive than we would have in other historical cycles to cut production, get it out of the system so that we can be much closer to retail demand in 25. That makes sense. My follow-up question is on that mid-cycle comment that you had, maybe a reminder here in terms of how you guys frame mid-cycle, and, I guess I am wondering, given the fact that machines have become so much more productive, could that actually have an impact on where mid-cycle demand from a volume standpoint truly is these days? Well, it's a 10-year average, and we watch for trends in certain markets. So, for example, Brazil is an increasing marketplace.
Speaker Change: And we're being very aggressive, much more aggressive than we would have in other, in historical cycles to cut production, get it out of the system so that we can be much closer to retail demand in 25.
Speaker Change: My follow-up is on that mid-cycle comment that you had, maybe a reminder here in terms of how you guys frame mid-cycle.
Speaker Change: I guess I am wondering, given the fact that machines have become so much more productive, could that actually have an impact on where mid-cycle demand from a volume standpoint truly is these days? Thank you.
Speaker Change: Well, it's a 10-year average, and we watch for trends in certain markets. So like, for example,
Eric P. Hansotia: It still has cyclicality to it, but the long-term trend is increasing because they're putting more acres into production. So we watch overall trends, and we've got that factored into our model. And the intention is that 100% is the average industry that we should expect through the business cycle on a global basis. And so the numbers we're talking about are our global perspective. And so we believe we're about 90%.
Speaker Change: Brazil is an increasing marketplace. It still has cyclicality to it, but the long term trend is increasing because they're putting more acres into production. So we watch overall trends, and we've got that factored into our model. And the intention is that 100% is the average industry that we should expect through the business cycle on a global basis.
Speaker Change: And so the numbers we're talking about are our global perspective. And so we're believing we're about 90%. We believe this is the big correction year. And like I said earlier, oftentimes there's one big correction year, then the industry hovers around that for a little while, but doesn't move.
Eric P. Hansotia: We believe this is the big correction year. And like I said earlier, oftentimes, there's one big correction year, then the industry hovers around that for a little while, but doesn't move so dramatically like it did this year, and then it starts working its way back up again.
Eric P. Hansotia: That's what we expect to happen. The next question comes from Kyle Menges with Citigroup. Please go ahead.
Speaker Change: So dramatically like it did this year and then it starts working its way back up again. That's what we expect to happen
Unknown Attendee: Thank you. I'd love to follow up on that last question and just dive deeper into the mid cycle. So if you're at 90% of mid cycle, could you kind of parse out where you think you are as a percent of mid cycle by region, like North America is actually closer to 100% than maybe South America and Europe are more in the 80% range? I think, Kyle, the way I would look at it, Europe tends to be the least volatile of our major regions, you know, usually fluctuating in the 105 to 95% range, given the So I would tell you it's probably a little bit below, you know, call it in the high 90s.
Speaker Change: The next question comes from Kyle Menges with Citigroup. Please go ahead.
Kyle Menges: Thank you. I'd love to follow up on that last question and just dive deeper into mid-cycle. So if you're at 90% of mid-cycle, could you kind of parse out where you think you are as a percent of mid-cycle by region? Like North America, is that actually closer to 100%? And then maybe South America and Europe are more in the 80% range?
Kyle Menges: I think, um, so Kyle, the way I would look at it, Europe , uh...
Kyle Menges: tends to be the least volatile of our major regions. It usually fluctuates in the 105 to 95% range, given the level of subsidies that the EU provides for the farmers. So I would tell you, it's probably a little bit below, call it in the high 90s. And then as you move further down, North America is coming closer to the 90%-ish range that we're talking about. And then right now with the steep correction in South America, I'd put it a little bit below that. But again, remember South America's corrections, it's coming off of what were some exceptionally strong years and go back to 22. I think it was about 100.
Damon J. Audia: And then as you move further down, North America, you know, is coming closer to the mid to the 90 percent range that we're talking about. And then right now, with the steep correction, in South America, I'd put it a little bit below that. But again, remember, South America's corrections are coming off of what were some exceptionally strong years, and going back to 22. I think it was about 130% of its mid cycle.
Damon J. Audia: And so you're, you know, again, percent wise, the change over the last couple years is quite significant. But I would put Europe sort of right below 100, or North America around 90, and South America, maybe a little bit below that right now. Interesting, we're starting to see some early signs of recovery already in our Australia and New Zealand market. They're the first ones to go down, and we're starting to see them find the bottom and maybe even recovering a little bit.
Kyle Menges: [inaudible]
Kyle Menges: And interesting, we're starting to see some early signs of recovery already in our Australia-New Zealand market.
Kyle Menges: They're the first ones to go down. We're starting to see them finding bottom and maybe even recovering a little bit. So, you know, each each region is in its own different place based on where they've come from and the farmer dynamics there. But they're all behaving like we would normally see in prior cycles.
Damon J. Audia: So, you know, each region is in its own different place based on where they've come from and the farmer dynamics there. But they're, they're all behaving like we would normally see in the prior cycle. Gotcha, that's really helpful.
Unknown Attendee: And then I was curious, could you talk a little bit about the Trimble margin performance in the quarter? And is there any change to that full year outlook for Trimble margins in the high 20s? Yeah, the Trimble sales in the quarter were a little bit more challenged. Again, I think what you're seeing with Trimble is a reflection of the overall industry, Kyle.
Speaker Change: Gotcha, that's really helpful. And then I was curious, could you talk a little bit about the Trimble margin performance in the quarter? And is there any change to that full year outlook for Trimble margins in the high 20s?
Speaker Change: Yeah, the Trimble sales in the quarter were a little bit more challenged, again, I think what you're seeing...
Speaker Change: With Trimble is a reflection of the overall industry, Kyle, you know, as our industry levels are dropping, as we've talked in the past, there was a significant amount of purchases pre-acquisition from us, putting a lot of inventory in the channels, as the industry has slowed.
Damon J. Audia: As our industry levels are dropping, as we've talked in the past, there was a significant amount of purchases pre-acquisition from us, putting a lot of inventory in the channels. As the industry has slowed, obviously, that inventory in the channel is now moving out slower than maybe we had thought a quarter ago. And you're seeing that reflected in our industry outlooks. And so, you know, the sales were a little bit below our expectations.
Speaker Change: Obviously, that inventory in the channel is now moving out slower than maybe what we had thought a quarter ago, and you're seeing that reflected in our industry outlooks. And so, you know, the sales were a little bit below our expectations, obviously that translates to the, you know, a margin issue, given the high margin of that business. Our outlook when we gave you last quarter was the PTX Trimble business was going to be $300-plus million, as I think about the lower OE sales, a little bit lower industry outlook right now, you know, I would tell you that's probably a little bit below $300, so, you know, down a little bit, not materially different, so, you know, instead of $300-plus, maybe $300-negative would be the way to look at that, but again, it's more a reflection of the industry.
Damon J. Audia: Obviously, that translates to a margin issue given the high margin of that business. Our outlook when we gave you last quarter was that the PTX Trimble business was going to be $300 million plus. As I think about the lower OE sales, a little bit lower industry outlook right now, I would tell you that it's probably a little bit below $300. So, you know, down a little bit, not materially different. So, you know, instead of $300 plus, maybe $300 negative would be the way to look at that.
Damon J. Audia: But again, it's more a reflection of the industry levels dropping and what was in the channel moving out slower as the industry has slowed. But, you know, I think what we would tell you is all of the operational aspects of PTX Trimble, signing up the CNH dealers, connecting with the customers themselves about the value proposition, all of that is working in line with our plan, and we feel very good about the growth prospects.
Speaker Change: [inaudible]
Speaker Change: All of the operational aspects of PTX Trimble.
Speaker Change: signing up the C&H dealers, connecting with the customers themselves about the value proposition. All of that is working in line with our plan, feeling very good about the growth prospects. It's just working through this industry decline and letting this churn, which we knew 2024 was going to be a churn coming off of what C&H was selling to their dealers, moving from Trimble into the AGCO family. All of that was going to create churn in 2024. So again, nothing's changing in the long-term prospects. It's just sort of working itself out quarter to quarter here.
Damon J. Audia: It's just working through this industry decline and letting this churn, which we knew 2024 was going to be a churn coming off of what CNH was selling to their dealers, moving from Trimble into the Agco family. All of that was going to create churn in 2024. So, again, nothing's changing in the long-term prospects. It's just sort of working itself out quarter to quarter here. The next question comes from Kristen Owen with Oppenheimer. Please go ahead.
Unknown Attendee: Good morning. Thank you for taking the time to answer the question. I wanted to ask about the assumption for market share gains. I mean, that's something that you've consistently held through the last three guidance cycles. You talked a little bit about FENT in Europe, but I just wanted to see if you could unpack the market share assumptions, maybe by product line or by geography, to help us understand where that share gain is. Yeah, I think, Kristen, I mean, not going into a lot of specifics, but, you know, as we've said for the last couple quarters, Fent has been doing exceptionally well in Europe, whether that's a result of the new 600 we've launched, the new Gen 7 700, you know, all of those are driving great market share performance.
Speaker Change: The next question comes from Kristen Owen with Oppenheimer. Please go ahead.
Kristen Owen: Good morning. Thank you for taking the question. I wanted to ask about the assumption for market share gains. I mean, that's something that you've consistently held through the last three guidance cycles. You talked a little bit about FENT in Europe , but just wanted to see if you could unpack the market share assumptions, maybe by product line or by geography, help us understand where that share gain is coming from.
Unknown Attendee: Fent as an overall product portfolio, just to put that in perspective, is actually up year to date. So we look at Fent globally, and despite this market environment, the sales are actually up 1% or so, give or take. So, strong performance driven by Europe.
Kristen Owen: Yeah, I think, Kristen, I mean, not going into a lot of specifics, but, you know, as we've said for the last couple of quarters,
Speaker Change: Fendt has been doing exceptionally well in Europe , whether that's a result of the new 600 we've launched, the new Gen 7 700, you know, all of those are driving great market share performance. Fendt as an overall product portfolio, just to put that in perspective, is actually up year-to-date. So when you look at Fendt globally, and despite this market environment, the sales are actually up 1% or so, give or take. So strong performance driven by Europe . If I think about some of the other regions, we are seeing shared growth in South America, not to the extent that we were hoping as part of our original plan, given the competitive environment there, but we are seeing some shared growth.
Damon J. Audia: If I think about some of the other regions, we are seeing shared growth in South America, not to the extent that we were hoping for as part of our original plan, given the competitive environment there, but we are seeing some shared growth there. And then, again, depending on the pockets, whether you're looking at the combines or different horsepower, you know, we're seeing some shared growth in other markets, but it's more selective in areas again, like lower horsepower, for example, here in North America. The team's doing quite well. So it's a little bit of a mix and match beyond those two, South America and the Fent Europe that I touched on.
Speaker Change: there. And then again depending on the pockets, whether you're looking at the combines or different horsepower, you know, we're seeing some share growth in in other markets, but it's more selective in areas again like lower horsepower for example here in North America, the team's doing quite well so it's a little bit of a mix and match beyond those two South America and the Fed Europe that I touched on.
Unknown Attendee: Great. Thank you for that. And my follow-up is a little bit longer term. You know, I recall during the upcycle, your goal of getting to a more balanced margin portfolio across the regions, some of those efforts were kind of prolonged in South America, just given how strong the upcycle was there. Now that we are in this environment of resetting production, particularly in Brazil, are there things that you can do during this downtime to sustainably support the margin improvement in that region? Yeah, so I think there's a couple things that you're seeing here, Kristen. I mean, again, I wouldn't lose too much sleep in South America.
Speaker Change: Great, thank you for that. And my follow-up is a little bit longer term.
Speaker Change: I recall during the upcycle, your goal of getting to a more balanced margin portfolio across the regions.
Speaker Change: Some of those efforts were kind of prolonged in South America just given how strong the upcycle was there. Now that we are in this environment of resetting production, particularly in Brazil, are there things that you can do during this downtime to sustainably support the margin improvement in that region?
Speaker Change: Yeah, so I think there's a couple things that you're seeing here, Kristen. I mean, again, I wouldn't lose too much sleep on South America. Production was down 57% in the quarter. That has a tremendous...
Damon J. Audia: Production was down 57% in the quarter. That has a tremendous burden on the P&L here. But if you think about South America, and you think about those professional growers in the Cerrado region, that caters to the Fent portfolio. And so Fent's still got a relatively low share there.
Speaker Change: burden on the P&L here. But if you think about South America, and you think about those professional growers in the Cerrado region, that caters to the Fent portfolio. And so Fent's still a relatively low share there. We've opened up several stores growing share there, you know, hopefully those professional growers are more consistent with their buying behaviors versus some of the smaller growers, you know, who are going to be more influenced by the subsidized funding. So that should hopefully help as we grow the Fent market share. The second one is the precision, the PTX businesses in total. And again, that's both the precision planting business, which as you know, is growing in South America, still a relatively small footprint there. But we see that growing, then you layer on PTX.
Damon J. Audia: We've opened up several stores, and we're growing our share there, you know, hopefully those professional growers are more consistent with their buying behaviors versus some of the smaller growers, you know, who are going to be more influenced by the subsidized funding. So that should hopefully help as we grow the Fent market share. The second one is the precision, the PTX businesses in total.
Damon J. Audia: And again, that's both the precision planting business, which, as you know, is growing in South America, still a relatively small footprint there, but we see that growing. Then you layer on PTX Trimble, which again, had a good business there, but significant growth potential in that market. So we see those being more stable, high-margin, higher growth businesses. And then as Fent grows in penetration, coupled with Massey and Falter down there, the parts business, again, we've increased the penetration and the fill rate down there.
Speaker Change: Trimble, which again had a good business there, but significant growth potential in that market. So we see those being more stable, high margin, higher growth businesses. And then as Fent grows in penetration, coupled with Massey and Falter down there, the parts business. Again, we've increased the penetration and the fill rate down there. And again, especially as Fent grows, the amount of parts business growing there hopefully will again stabilize and bolster the underlying margins and improving the bottom end margins in South America over the next several years.
Damon J. Audia: And again, especially as Fent grows, the amount of parts business growing there hopefully will again stabilize and bolster the underlying margins and improve the bottom end margins in South America over the next several years. Just a couple comments; everything he said, Damon said is spot on.
Eric P. Hansotia: We've moved from a company that was focused on small, low-tech tractors in the south of Brazil to one that's got a full crop cycle set of solutions of industry leading products that's focused on the whole region. We probably have more channel change in South America than any other region in terms of improving our dealer capability. So it's a big shift in product, and a big shift in channel. Both of those, we think, are good for the long-term prospects and health of that business. Our next question comes from Steven Volkmann with Jefferies. Please go ahead.
Speaker Change: And just a couple comments, everything he said, Damon said is spot on. We've moved from a company that was focused on small, low-tech tractors in the south of Brazil to one that's got a full crop cycle set of solutions of industry-leading products.
Speaker Change: that's focused on the whole region. We probably had more channel change in South America than any other region in terms of improving our dealer capability. So it's a big shift in product, big shift in channel. Both of those we think are good for the long-term prospects and health of that business.
Speaker Change: Our next question comes from Steven Volkmann with Jefferies. Please go ahead.
Unknown Attendee: Great. Thank you guys for fitting me in. Most of my questions have been answered, but I wanted to ask about the cadence of the cost cutting program that you've done. You know, the 125, I think it was.
Stephen Edward Volkmann: Great, thank you guys for fitting me in. Most of my questions have been answered, but I wanted to ask about the cadence of the cost-cutting program that you've done.
Stephen Edward Volkmann: You know, the 125 I think it was, do we get sort of the full 125 in 25? Is that the right way to think about it? Or does it sort of end the year at that run rate and we maybe don't get the full amount?
Damon J. Audia: Do we get sort of the full 125 in 25? Is that the right way to think about it? Or does it sort of end the year at that run rate, and we maybe don't get the full amount? Yeah, Steve. We won't likely get the full amount. As you know, given our large European footprint, we will go into consultation with trade unions in Europe. That will take some time. I don't know exactly when we'll be able to wrap that up.
Speaker Change: Yeah, Steve, we won't likely get the full amount, as you know, given our large European footprint, we will go into consultation with workers' councils in Europe , you know, that will take some time. I don't know exactly when we'll be able to wrap that up, but, you know, I would like to think, again, I can't predict the exact timing, but, you know, hopefully in the first half of the year, first quarter, maybe first half, if we work through those consultations in sort of the second half, if all goes well, we'll start to see that run rate then maybe a little bit sooner, but I would have sort of assumed the exit is in that 100 to 125, but definitely, you know, getting some of it through the, as it moves through the course of the year.
Damon J. Audia: But, you know, I would like to think again. I can't predict the exact timing. But, hopefully, in the first half of the year, first quarter, maybe first half, we work through those consultations, and sort of the second half, if all goes well, we'd like to see those run rates and maybe a little bit sooner. But I would have sort of assumed the exit is in that 100 to 125.
Damon J. Audia: But definitely, you know, getting some of it through as it moves through the course of the year. But some of those actions have already been taken, you know, in the non-works council areas. Some of those actions have already been taken. So it's a mixture.
Speaker Change: But some of those actions have already been taken. You know, in the non-Works Council series, some of those actions have already been taken. So it's a mixture.
Damon J. Audia: Thank you, Eric. And what about on the direct labor side? What are you doing there?
Speaker Change: That's good. Thank you, Eric. And what about on the direct labor side? What are you doing there? How should we think about what sort of benefits might come on that side?
Damon J. Audia: How should we think about what sort of benefits might come on that side? Yeah, Steve, we've, um, been reducing our direct labor as a result of the overall industry environment. And I think, year to date, we've taken out probably around 3000 direct labor associates or, or corresponding hours, you know, overtime, flex time, things of that nature.
Steve: Yeah, Steve, we've, um, we've been reducing our direct labor as a result of the overall industry environment. And I think, um, year to date, we've taken out probably around 3000, um, direct labor associates or, um, or corresponding hours, you know, over time, flex time, things of that nature. And, I mean, let me use that as a base when we talk about 2024, you know, right sizing the inventory levels, taking the production down, trying to position ourselves for 2025. And I think you heard Eric and I both talk about, you know, generally feeling this 9% is near the trough level. And, you know, again, for us to look into 2025, there's several catalysts that we see should be more positive for us.
Damon J. Audia: And, I mean, let me use that as a basis when we talk about 2024, you know, and right-sizing the inventory levels, taking the production down, trying to position ourselves for 25. And I think you heard Eric and I both talk about, you know, generally feeling that 9% is near the trough level. And, you know, again, for us to look into 2025, there are several catalysts that we see should be more positive for us as we go into 2025. You touched on that restructuring, right 100 to 125 million of run rate savings. That's not embedded in my numbers, you know; my production is coming down somewhere in the range of 20 to 2025%. Looking back over the last decade, 25% would be more than we've ever cut in the last decade plus.
Speaker Change: as we go into 2025. You touched on that restructuring, right? 100 to 125 million of run rate savings that's not embedded in my numbers. You know, my production is coming down somewhere in the range of 20 to 20, 25%.
Damon J. Audia: And anytime that we have cut in a big production down year, the subsequent years have been significantly less. And so if again, if you think about that retail versus the absorption, this year, that should be a positive next year, industry policies, Eric said, are sort of trending in a similar area. So you know, I have better restructuring savings, better retail versus, um, Production Absorption, PTX Trimble. Again, we said this was a year of churn. We know it's not at the margin where we want it to be.
Speaker Change: We look back over the last decade, 25% would be more than we've ever cut in the last decade plus.
Speaker Change: And any time that we have cut in a big production down year, the subsequent years have been significantly less.
Speaker Change: And so, again, if you think about that retail versus the absorption this year, that should be a positive next year if the industry follows, as Eric said, sort of trending in a similar area. So, you know, better restructuring savings, better retail versus absorption.
Speaker Change: Production Absorption, PTX Trimble. Again, we said this is a year of churn. We know it's not at the margin we want it to be. As it works through the dealer inventories, we expect to see that margin accretive in 2025. And then you layer on the grain and protein business, you know, which has been margin dilutive this year. If we eliminate that or sell that business, that should be margin accretive next year as well. So if the industry does follow historical patterns, we feel very good that there's an opportunity that the margins next year could be higher than they were this year, even if we don't see a significant uplift or material change in the industry.
Damon J. Audia: As it works through dealer inventories, we expect to see that margin accretive in 2025. And then you layer on the grain and protein business, which has been margin dilutive this year. If we eliminate that or sell that business, that should be margin accretive next year as well. So if the industry does follow historical patterns, we feel very good that there's an opportunity that the margins next year could be higher than they were this year, even if we don't see a significant uplift or material change in the industry. Right on.
Damon J. Audia: And our last time, our margins were more in the four to 5% range. This time, we're right now reporting 9% for this period. So, you know, we've got a lot of structural changes embedded in the company, not even hitting the upcoming ones that Damon just mentioned. Our last question today comes from Chad Dillard with Bernstein. Please go ahead.
Speaker Change: Right on. And our last time our margins were more in the four to five percent range. This time we're, right now we're reporting nine percent for this period.
Speaker Change: You know, we've got a lot of structural changes that have been embedded into the company, not even hitting the upcoming ones that Damon just mentioned.
Speaker Change: Our last question today comes from Chad Dillard with Bernstein. Please go ahead.
Unknown Attendee: Hey, good morning, guys. So my question is on price and cost, just trying to understand what that data point will look like in the first half of the year. And then what are you embedding for the second half of 2024? Yeah, so for the full year net zero, Chad, price versus cost was slightly positive. Price was slightly positive here in the first half of the year. You know, be proud; when you include all the discounts, it'll be maybe a little bit on the zero to slightly negative to net. The material costs are coming down as well in the back half of the year, which is sort of what closes the gap to keep us sort of at a net neutral here. Gotcha, that's helpful.
Charles Albert Edward Dillard: Hey, good morning, guys. So my question is on price-cost. Just trying to understand what that data point looked like in the first half of the year, and then what are you embedding for the second half of 2024?
Speaker Change: Yeah, so, um, for the full year, net zero.
Charles Albert Edward Dillard: Chad Price
Speaker Change: Price was slightly positive here in the first half of the year, when you include all the discounts it will be. Price was slightly positive here in the first half of the year, when you include all the
Speaker Change: So maybe a little bit on the, you know, zero to slightly negative, the net. The material costs are coming down as well in the back half of the year, sort of what closes the gap to keep us sort of at a net neutral here.
Unknown Attendee: And then just a second question is about South America. So, given you guys are down plus 50% in terms of production in the second quarter, where does that compare versus, you know, prior production troughs? And then I guess the second part is just like thinking about, you know, if we do get to that, I guess, absolute trough in terms of production, how should we think about the operating margins of the business? Do you think you can actually maintain positive operating margins there?
Speaker Change: Gosh, that's helpful. And then just a second question is about South America. So like given you guys are down plus 50% in terms of production in the second quarter, where does that compare versus you know prior production troughs?
Speaker Change: And then I guess like the second part is just like thinking about, you know, if we do get to that, I guess, absolute trough in terms of production, how should we think about like the operating margins of the business? Do you think you can actually maintain positive operating margins there?
Damon J. Audia: Yeah, I think, you know, again, Chad, for us, we'll have to pull back on the historical production levels. But I think if, again, look at the numbers for South America, where we cut production 57% in the quarter and still delivered positive operating margin, I think, as Eric alluded to, you know, the structural changes to that business of moving from what were low to medium horsepower tractors into expanding around the crop cycle here with the ideal combine with the momentum planter with the fence tractors, bringing in our PTX Trimble group now, on top of the Ideally, we would expect that to be a double-digit margin business. Again, this year happens to have two factors going against us.
Speaker Change: Yeah, I think, yeah.
Speaker Change: Again, Chad, for us, we'll have to pull the historical production levels, but I think if
Speaker Change: Again, look at the numbers of South America. We cut production 57% in the quarter and still delivered positive operating margin. I think as Eric alluded to, the structural changes to that business of moving from what were low to medium horsepower tractors.
Eric P. Hansotia: into expanding around the crop cycle here with the Ideal Combine, with the Momentum Planter, with the Fentractors, bringing in our PTX Trimble Group now on top of the Precision Planting business there. You know, we have structurally changed the business there. Ideally, we would expect that to be a double-digit margin business. Again, this year happens to have two factors going against us. One is the speed at which we're cutting that production. And second, and remember, we've been trying to communicate this now for a year, the pricing that South America was delivering a year ago we knew was unsustainable. And so we weren't giving really any discounts given the strength of that market. And so we knew that was coming down. So when you put that discounting.
Damon J. Audia: One is the speed at which we're cutting that production. And second, remember, we've been trying to communicate this now for a year. The pricing that South America was delivering a year ago was unsustainable, and so we weren't giving really any discounts given the strength of that market. And so we knew that was coming down.
Damon J. Audia: So when you put that discounting on top of the absorption, you know, it's really driving the margins down, putting the team in a challenging situation. And despite that, what they are delivering is still good margins, positive margins here, which, again, is a sentiment or a statement of really the way we've structurally changed the business long term there. This concludes our question and answer session. I would like to turn the conference back over to Eric Hansotia for any closing remarks. Thank you.
Eric P. Hansotia: on top of the absorption, you know, it's really driving the margins down, putting the team in a challenged situation. And despite that, what they are delivering is still good margins, positive margins here, which again was a sentiment or a statement of really the way we've structurally changed the business long term there.
Eric P. Hansotia: This concludes our question and answer session. I would like to turn the conference back over to Eric Hansotia for any closing remarks.
Eric P. Hansotia: I'll close today by just saying in the short term, we're focused on executing our plan to reduce inventory and aggressively control costs to better align our operations with the current weak market environment. The key to our long-term success is the continued execution of our Farmer First strategy. Our focus is on growing our margin-rich businesses like Fent and Parts & Service and our Precision Ag business, which we've been investing in heavily over the last few years to become an innovation leader.
Eric P. Hansotia: But.
Eric P. Hansotia: Thank you. I'll close today by just saying in the short term we're focused on executing our plan to reduce inventory and aggressively control costs to better align our operations with the current weak market environment.
Eric P. Hansotia: The key to our long-term success is the continued execution of our Farmer First strategy.
Eric P. Hansotia: Our focus is on growing our margin-rich businesses like Fent and Parts and Service and our Precision Ag business, which we've been investing in heavily over the last few years to become an innovation leader.
Eric P. Hansotia: The strategic actions we've taken in the last six months, like launching Farmer Corps, forming the PTX-Trimble joint venture, and divesting the green and protein business, should enhance and accelerate the benefits of our Farmer First strategy. Over the last few quarters, we've touched on many factors supporting our markets, including growing populations, changing diets, low stocks to use levels, increased demand for biofuels, and relatively healthy commodity prices. All these trends give us confidence in the long-term health of our industry.
Eric P. Hansotia: The strategic actions we've taken over the last six months, like launching Farmer Corps, forming the PTX-Trimble joint venture, and divesting the grain and protein business should enhance and accelerate the benefits of our Farmer First strategy.
Eric P. Hansotia: Over the last few quarters, we've touched on many factors supporting our markets, including growing populations, changing diets, low stocks-to-use levels, increased demand for biofuels, and relatively healthy commodity prices.
Eric P. Hansotia: And while cycles are typical in the ag industry, how we react and weather them will illustrate how we are structurally changing AGCO to be a better, high-performing business regardless of market conditions. And we recognize that we're surely closer to the bottom of the cycle than we are at the top of the cycle.
Eric P. Hansotia: All these trends give us confidence in the long-term health of our industry. And while cycles are typical in the ag industry, how we react and weather them will illustrate how we are structurally changing AGCO to be a better, high-performing business regardless of market conditions.
Eric P. Hansotia: And we recognize that we're surely closer to the bottom of the cycle than we are the top of the cycle.
Operator: We look forward to seeing you at our upcoming meeting at the Farm Progress Show late in August, and thanks for your participation today. Thank you for joining the AGCO Second Quarter 2024 Earnings Call. The call has now concluded. Have a nice day.
Eric P. Hansotia: We look forward to seeing you at our upcoming meeting at Fire and Progress Show late in August and thanks for your participation today.
Operator: Copyright © 2020, All Rights Reserved. Copyright © 2020, New Thinking Allowed Foundation, © The Ultimate Parody Site! Copyright © 2020, New Thinking Allowed Foundation, Copyright © 2020, All Rights Reserved. © BF-WATCH TV 2021, Copyright © 2020, All Rights Reserved. © BF-WATCH TV 2021, Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music Music ?? ?? ?? ?? ?? Good day and welcome to the AGCO second quarter 2024 earnings call. All participants will be in a listen only mode.
Speaker Change: Thank you for joining the AGCO Second Quarter 2024 Earnings Call. The call has now concluded. Have a nice day.
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Operator: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. In consideration of time, please limit yourself to one question and one follow-up. To ask a question, you may press the star key, then one on your touch-tone phone.
Speaker Change: Good day and welcome to the AGCO second quarter 2024 earnings call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
Speaker Change: After today's presentation, there will be an opportunity to ask questions. In consideration of time, please limit yourself to one question and one follow-up. To ask a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press star, then two.
Greg Peterson: To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Greg Peterson, AGCO's Head of Investor Relations. Please go ahead.
Speaker Change: Please note, this event is being recorded.
Speaker Change: I would now like to turn the conference over to Greg Peterson, AGCO Head of Investor Relations. Please go ahead.
Greg Peterson: Thanks, and good morning. Welcome to those of you joining us for AGCO's second quarter 2024 earnings call. This morning we'll refer to a slide presentation that's posted on our website at www.agcocorp.com. The non-GAAP measures used in that slide presentation are reconciled to GAAP measures in the appendix of the presentation.
Greg Peterson: Thanks and good morning. Welcome to those of you joining us for AGCO's second quarter 2024 earnings call.
Speaker Change: This morning we'll refer to a slide presentation that's posted on our website at www.agcocorp.com.
Speaker Change: The non- GAAP measures used in that slide presentation are reconciled to GAAP measures in the appendix of the presentation. We'll also make forward-looking statements this morning about our strategic plans and initiatives, as well as their financial impacts.
Greg Peterson: We'll also make forward-looking statements this morning about our strategic plans and initiatives as well as their financial impact, discuss demand, product development, and capital expenditure plans and timing of those plans and our expectations concerning the costs and benefits of those plans and the timing of those benefits. Future revenue, crop production, and farm income will also be discussed as well as production levels, price levels, margins, earnings, operating income, cash flow, engineering expenses, tax rates, and other financial metrics.
Speaker Change: We'll discuss demand, product development, and capital expenditure plans.
Speaker Change: and Timing of those plans and our expectations concerning the costs and benefits of those plans.
Speaker Change: and timing of those benefits.
Speaker Change: Future revenue, crop production, and farm income will also be discussed, as well as production levels, price levels, margins, earnings, operating income, cash flow, engineering expense, tax rates, and other financial metrics.
Greg Peterson: Our expectations with respect to the sale of our grain and protein business will be discussed. However, all of these are subject to risks that could cause the actual results to differ materially from those suggested by those statements.
Speaker Change: Our expectation
Speaker Change: with respect to the sale of our grain and protein business will be discussed.
Speaker Change: All of these are subject to risks that could cause the actual results to differ materially from those suggested by those statements.
Greg Peterson: These include, but are not limited to, adverse developments in the agricultural industry, supply chain disruption, inflation, weather, commodity prices, changes in product demand, interruptions in the supply of parts and products, and the possible failure to develop new and improved products on time, including premium technology and smart farming solutions, within budget and with the expected performance and price benefits. Difficulties in integrating the PTX Trimble business in a manner that produces the expected financial results, reactions by customers and competitors to the transactions, including the rate at which PTX Trimble's largest OEM customer reduces purchases of PTX Trimble equipment and the rate of replacement by the joint venture of those sales.
Speaker Change: These include, but are not limited to, adverse developments in the agricultural industry, supply chain disruption, inflation, weather, commodity prices, changes in product demand,
Speaker Change: Interruptions in the supply of parts and products, the possible failure to develop new and improved products on time, including premium technology and smart farming solutions,
Speaker Change: within budget and with the expected performance and price benefits.
Speaker Change: Difficulties in integrating the PTX Trimble business in a manner that produces the expected financial results.
Speaker Change: Reactions by Customers and Competitors to the Transactions
Speaker Change: Including the rate at which PTX Trimble's largest OEM customer reduces purchases of PTX Trimble equipment and the rate of replacement by the joint venture of those sales.
Greg Peterson: Introduction of New or Improved Products by Our Competitors and Reductions in Pricing by Them, The War in the Ukraine, Difficulties Integrating Acquired Businesses, and in Completing Expansion and Modernization Plans on Time and in a Manner that Produces the Expected Financial Results. The need to fulfill closing conditions, including obtaining required governmental approvals in connection with the sale of our grain and protein business and adverse changes in However, actual results could differ materially from those suggested in these statements.
Speaker Change: Introduction of New or Improved Products by Our Competitors and Reductions in Pricing by Them.
Speaker Change: The War in the Ukraine, Difficulties in Integrating Acquired Businesses, and in Completing Expansion and Modernization Plans on Time and in a Manner that Produces the Expected Financial Results.
Speaker Change: The need to fulfill closing conditions, including obtaining required governmental approvals in connection with the sale of our grain and protein business and adverse changes in the financial and foreign exchange markets.
Speaker Change: Actual results could differ materially from those suggested in these statements.
Speaker Change: Further information concerning these and other risks is included in AGCO's filings with the SEC, including its Form 10-K for the year ended December 31st, 2023, and subsequent Form 10-Q filings.
Speaker Change: AGCO disclaims any obligation to update any forward-looking statements except as required by law.
Speaker Change: We will make a replay of this call available on our corporate website.
Greg Peterson: Further information concerning these and other risks is included in AGCO's filings with the SEC, including its Form 10-K for the year ended December 31st, 2023, and subsequent Form 10-Q filings. AGCO disclaims any obligation to update any forward-looking statements except as required by law. We will make a replay of this call available on our corporate website. On the call with me this morning is Eric Hansotia, our Chairman, President, and Chief Executive Officer, and Damon Audia, Senior Vice President and Chief Financial Officer. With that said, Eric, please go ahead.
Speaker Change: On the call with me this morning is Eric Hansotia, our Chairman, President, and Chief Executive Officer, and Damon Audia, Senior Vice President and Chief Financial Officer.
Eric P. Hansotia: Thanks, Greg, and good morning. Before I go into the quarterly details and the exciting things happening at AGCO, I wanted to take a moment to reflect on how I feel about the industry and the things that we're doing to position AGCO for success. As in prior cycle downturns, there's always a big correction year where the industry slows rapidly as farmers reduce their spending on new equipment. We've known 2024 was going to be that big transitional year.
Speaker Change: With that, Eric, please go ahead.
Eric P. Hansotia: Thanks Greg and good morning. Before I go into the quarterly details and the exciting things happening at AGCO, I wanted to take a moment to reflect on how I'm feeling about the industry and the things that we are doing to position AGCO for success.
Eric P. Hansotia: As in prior cycle downturns, there's always a big correction year where the industry slows rapidly as farmers reduce their spend on new equipment. We've known 2024 was going to be that big transitional year.
Eric P. Hansotia: After the transitional year, industry demand tends to float around trough levels for a period of time before ramping back up. The duration and the severity of the decline are influenced by many things like commodity prices, weather, and stock-to-use ratios, which will make every downturn a little different. For AGCO, we understand the industry dynamics and are working aggressively to address the challenges and position ourselves for success. We are rapidly cutting production this year, faster than in the past, to right-size dealer inventory levels this year in hopes that production and retail demand will be more balanced in 2025.
Eric P. Hansotia: After the transitional year, industry demand tends to float around trough levels for a period of time before ramping back up.
Eric P. Hansotia: The duration and the severity of the decline are influenced by many things, like commodity prices, weather, and stock-to-use ratios, which will make every downturn a little different.
Eric P. Hansotia: For AGCO, we understand the industry dynamics and are working aggressively to address the challenges and position ourselves for success.
Eric P. Hansotia: We are rapidly cutting production this year, faster than in the past, to right-sized dealer inventory levels this year in hopes that production and retail demand are more balanced in 2025.
Eric P. Hansotia: We have been actively addressing costs for several quarters. In the second quarter, we made the decision to further restructure our workforce due to weakening market demand. We also challenged our teams to think differently about technologies and other sustainable, lower cost operating alternatives.
Eric P. Hansotia: We have been actively addressing costs for several quarters. In the second quarter, we made the decision to further restructure our workforce due to the weakening market demand.
Eric P. Hansotia: We also challenged our teams to think differently with technologies and other sustainable, lower-cost operating alternatives.
Eric P. Hansotia: Much of these savings are still to come in 2025 and beyond, helping to further improve our ability to deliver higher operating margins throughout the state. In addition, we are doubling down on being the most farmer-focused company in the industry. With our continued role in our Farmer Corps, we're helping better serve farmers the way they want to be. In addition to our unique mixed fleet retrofit mindset, we're helping farmers improve their productivity and profitability despite the industry backdrop. With this mindset and focus, we are a different company that has more pharma, is more resilient, and makes more profit. Damon will cover the financials and the outlook later.
Eric P. Hansotia: Much of these savings are still to come in 2025 and beyond, helping to further improve our ability to deliver higher operating margins throughout the cycle.
Eric P. Hansotia: In addition, we are doubling down on being the most farmer-focused company in the industry.
Eric P. Hansotia: With our continued role at our Farmer Corps, we are helping better serve farmers how they want to be served.
Eric P. Hansotia: In addition to our unique mixed fleet retrofit mindset, we are helping farmers improve their productivity and profitability despite the industry backdrop.
Eric P. Hansotia: With this mindset and focus, we are a different company that is more farmer-focused.
Eric P. Hansotia: But even in a big correction year, where we're dropping well below mid cycle, we are still planning on delivering one of the best operating margins in our history and well above historical levels at these industry levels. With that as a backdrop, let's jump into the second quarter, slide three, where you can see that AGCO sales were down approximately 15%. Our results reflect the impacts of both softer industry-wide demand and a resulting production cut.
Eric P. Hansotia: More resilient and more profitable.
Eric P. Hansotia: Now, Damon will cover the financials and the outlook later, but even in a big correction year where we are dropping well below mid-cycle, we are still planning on delivering one of the best operating margins in our history and well above historical levels at these industry levels.
Damon J. Audia: With that as a backdrop, let's jump into the second quarter, slide three, where you can see that AGCO's sales were down approximately 15%.
Damon J. Audia: Our results reflect the impacts from both softer industry-wide demand and our resulting production cuts.
Eric P. Hansotia: Our team is analyzing all aspects of the business to identify cost savings and better align our operations with the current market environment. We are balancing the need for cost reduction with our commitment to farmer-focused customer support and innovation, as well as our desire to continue our market share growth ambition. Last week, we announced a definitive agreement to divest the grain and protein business. The divestiture of this business supports our strategic transformation, recently accelerated by the PTX Trimble joint venture, and is an inflection point for AGCO.
Damon J. Audia: Our team is analyzing all aspects of the business to identify cost savings and better align our operations with the current market environment.
Damon J. Audia: We are balancing the need for cost reduction with our commitment to farmer-focused customer support and innovation, as well as our desire to continue our market share growth ambitions.
Damon J. Audia: Last week we announced a definitive agreement to divest the grain and protein business.
Damon J. Audia: The divestiture of this business supports our strategic transformation, recently accelerated by the PTX-Trimble joint venture, and is an inflection point for AGCO.
Eric P. Hansotia: Divesting this business allows us to streamline and sharpen our focus on AGCO's portfolio of award-winning agricultural machinery and precision ag technology products. We believe this sale will better position us for long-term growth in our higher margin and higher free cash flow generating business. Simultaneously, it will raise our profitability through the cycle, as grain and protein has historically been a below-average margin business. I do want to take a moment to thank the Grain and Protein teams around the world who have done an excellent job staying focused on serving the customer and delivering on their commitments while we work through the strategic review of the business. Now getting back to our second quarter results, the consolidated operating margin was 10.3% on an adjusted basis.
Damon J. Audia: Divesting this business allows us to streamline and sharpen our focus on AGCO's portfolio of award-winning agricultural machinery and precision ag technology products.
Damon J. Audia: We believe this sale will better position us for the long-term growth in our higher-margin and higher-free-cash-flow-generating businesses.
Damon J. Audia: Simultaneously, it will raise our profitability through the cycle, as grain and protein has historically been a below-average margin business.
Speaker Change: I do want to take a moment to thank the Grain and Protein teams around the world who have done an excellent job, staying focused on serving the customers and delivering on their commitments while we work through the strategic review of the business.
Speaker Change: Now getting back to our second quarter results, consolidated operating margin was 10.3% on an adjusted basis. Lower sales, production cuts, and operating leverage were the major factors in our reduced margins.
Eric P. Hansotia: Lower sales, production cuts, and operating leverage were the major factors in our reduced margin. South America remains our most challenging region as the industry continues to contract. In that region, we saw operating margins of approximately 3.6 percent in the second quarter of 2024 compared to more than 20 percent in the second quarter of 2023. Due to falling demand, we cut production by around 57% in the second quarter compared to the second quarter of 2023, with additional cuts planned for the balance of 2024. We remain confident that long-term agricultural fundamentals remain positive despite the downturn in commodity markets.
Speaker Change: South America remains our most challenged region, as the industry continues to contract. In that region, we saw operating margins of approximately 3.6% in the second quarter of 2024, compared to more than 20% in the second quarter of 2023.
Speaker Change: Due to falling demand, we cut production by around 57% in the second quarter compared to the second quarter of 2023, with additional cuts planned for the balance of 2024.
Speaker Change: We remain confident that long-term agricultural fundamentals remain positive despite the downturn in commodity markets.
Eric P. Hansotia: Our optimism for the long-term demand for our products is driving continued investment in premium technology, smart farming solutions, and enhanced digital capabilities to support our farmer-first strategy while helping to sustainably feed the world. Slide four details industry unit retail sales by region for the first half of 2024. Global Industry Retail Sales of Farm Equipment in the second quarter were lower in all of AGCO's key markets. North American industry retail sales decreased 8% for the first six months of 2024 compared to the first six months of 2023.
Speaker Change: Our optimism for the long-term demand for our products is driving continued investment in premium technology, smart farming solutions, and enhanced digital capabilities to support our farmer-first strategy while helping to sustainably feed the world.
Speaker Change: Slide 4 details industry unit retail sales by region for the first half of 2024. Global industry retail sales of farm equipment in the second quarter were lower in all of AGCO's key markets.
Speaker Change: North American industry retail sales decreased 8% for the first six months of 2024 compared to the first six months of 2023.
Eric P. Hansotia: Sales declines in smaller equipment were more significant than most of the larger equipment categories. In Western Europe, industry retail sales dropped 5% during the first six months of 2024 compared to the same period of 2023. South American industry tractor retail sales decreased 14% during the first six months of 2024 compared to the same period of 2023. Strong declines were consistent across Brazil, Argentina, and their smaller South American markets.
Speaker Change: Sales declines in smaller equipment were more significant than most of the larger equipment categories.
Speaker Change: In Western Europe , industry retail sales dropped 5% during the first six months of 2024.
Speaker Change: South American industry tractor retail sales decreased 14% during the first six months of 2024 compared to the same period of 2023.
Speaker Change: Strong declines were consistent across Brazil, Argentina, and their smaller South American markets.
Speaker Change: The weakening demand in Brazil was negatively magnified by the floods in Rio Grande do Sul, while also continuing to be affected by funding shortfalls of the government subsidized loan program and a challenging first half harvest in the Cerrado region.
Speaker Change: Similar to tractors, the combine industry was down significantly in all regions through the first six months of 2024.
Speaker Change: Although market conditions continue to soften from the extremely strong conditions over the last few years, we remain positive about the underlying ag fundamentals.
Eric P. Hansotia: The weakening demand in Brazil was negatively magnified by the floods in Rio Grande do Sul, and will also continue to be affected by funding shortfalls of the government-subsidized loan program and a challenging first half harvest in the Cerrado region. Similar to tractors, the combine industry was down significantly in all regions through the first six months of 2024. Although market conditions continue to soften from the extremely strong conditions over the last few years, we remain positive about the underlying agricultural fundamentals. Reporting Long-Term Industry Demand Population growth and the increase in the middle class will drive the need for additional grain.
Speaker Change: Supporting Long-Term Industry Demand.
Speaker Change: Population growth and the increase in middle class will drive the need for additional green.
Eric P. Hansotia: Stocks to use levels are higher than the recent lows, but they are still below prior downturn levels. As the demand for clean energy grows, the need for solutions like sustainable aviation fuel and vegetable oil-based diesel will grow strongly, driving demand for our farmers that will further support commodity prices. Also, input costs such as fertilizer and fuel are down from their peaks in 2022, which has helped dampen the effect that lower commodity prices are having on farmers' profitability.
Speaker Change: Stocks-to-use levels are higher than the recent lows, but are still below prior downturn levels.
Speaker Change: As the demand for clean energy grows, the need for solutions like sustainable aviation fuel and vegetable oil-based diesel will grow strongly, driving demand for our farmers that will further support commodity prices.
Speaker Change: Also, input costs, such as fertilizer and fuel, are down from their peaks in 2022, which has helped dampen the effect of lower commodity prices are having on farmers' profitability.
Eric P. Hansotia: AGCO's 2024 product factory production hours are shown on slide five. Our production decreased in the second quarter by approximately 23%. Significant reductions were made in all regions, with the biggest reductions being in South America and Asia Pacific.
Speaker Change: AGCO's 2024 factory production hours are shown on slide 5.
Speaker Change: Our production decreased in the second quarter by approximately 23 percent.
Speaker Change: Significant reductions were made in all regions, with the biggest reductions being in South America and Asia-Pacific.
Eric P. Hansotia: The Union Company Inventory Management remains a key priority for us as the market continues to soften, and we push to right-size inventory levels this year. As a result, we expect further production cuts through 2024, with all regions targeting to align to retail demand for 2025. Currently, we're expecting 20% to 25% lower production in 2024 versus 2023 on a full-year basis, which is a more significant reduction than our prior outlook, given our current 2024 market forecast, market share growth assumptions, and targeted reductions to dealer inventory. In general, our order book is in a good position and relatively consistent with last quarter.
Speaker Change: The Union Company Inventory Management remains a key priority for us as the market continues to soften, and we push to right-size inventory levels this year.
Speaker Change: As a result, we expect further production cuts through 2024, with all regions targeting to align to retail demand for 2025.
Speaker Change: Currently, we are expecting 20% to 25% lower production in 2024 versus 2023 on a full-year basis.
Speaker Change: which is a more significant reduction than our prior outlook given our current 2024 market forecasts, market share growth assumptions, and targeted reductions to dealer inventory.
Speaker Change: In general, our order board is in good position and relatively consistent with last quarter.
Eric P. Hansotia: However, there are pockets of dealer inventory that we will need to focus on rate sizing in the balance of the year. In Europe, tractors have between four to five months of order, and dealer inventories of approximately four months of supply are in line with our targeted level. Massey Ferguson and Valter dealer inventories are a bit higher, and Fent a bit lower than the average, in part due to strong share gains on Fent.
Speaker Change: However, there are pockets of dealer inventory that we will need to focus on rate sizing in the balance of the year.
Speaker Change: In Europe , tractors have between four to five months of orders.
Speaker Change: Dealer inventories of approximately four months of supplier in line with our targeted levels.
Speaker Change: Nassi Ferguson and Valter dealer inventories are a bit higher and Fent a bit lower than the average, in part due to strong share gains on Fent.
Eric P. Hansotia: In South America, we have order coverage through September 2024, where we continue to limit our orders to one quarter in advance due to inflationary pressure. Despite our aggressive production cuts, we still have approximately four months of dealer inventory across all products as industry conditions continue to weaken. Our goal is to further reduce it by year end. In North America, we currently have approximately four months of supply. Depending on the product, smaller rural lifestyle equipment has the lowest order coverage, while bigger equipment has higher order coverage.
Speaker Change: In South America, we have order coverage through September 2024, where we continue to limit our orders to one quarter in advance due to inflationary pressures.
Speaker Change: Despite our aggressive production cuts, we still have approximately four months of dealer inventory across all products as the industry conditions continue to weaken. Our goal is to further reduce it by year-end.
Speaker Change: In North America, we currently have approximately four months of order coverage, depending on the product. Smaller, rural lifestyle equipment has the lowest order coverage, while bigger equipment is higher.
Eric P. Hansotia: Our dealer inventory increased by just over one month compared to last quarter, as industry conditions weaken further, and it is now approximately eight months of supply. Our North America targets for dealer inventory range from four to six months, depending on the product. We will continue to focus on underproducing retail demand, coupled with retail market share execution to bring dealer inventories in line with our targeted range. Moving to slide six, where you'll see our three high-margin growth levers aimed at improving our mid-cycle operating margins to 12% and outgrowing the industry by 4 to 5% annually.
Speaker Change: Our dealer inventory increased by just over one month compared to last quarter, as industry conditions weaken further, and is now approximately eight months of supply.
Speaker Change: Our North America targets for dealer inventory range from four to six months, depending on the product.
Speaker Change: We will continue to focus on underproducing retail demand coupled with retail market share execution to bring dealer inventories in line with our targeted range.
Speaker Change: Moving to slide 6, where you'll see our three high-margin growth levers aimed at improving our mid-cycle operating margins to 12% and outgrowing the industry by 4-5% annually.
Eric P. Hansotia: Now, to reiterate, these three growth levers are, The Globalization and Full-Line Product Rollout of our Front End, focusing on accelerating our global parts business and increasing the market share of genuine AGCO parts, and Growing Our Precision Ag. Our precision ag business is where we'll focus today. We recently held our 2024 technology days in Westminster, Colorado, and near Salina, Kansas. Our growing technology stack and Precision Ag products were on full display.
Speaker Change: Now, to reiterate, these three growth levers are...
Speaker Change: The Globalization and Full-Line Product Rollout of our Friend Brand.
Speaker Change: Focusing on accelerating our global parts business and increasing the market share of genuine AGCO parts.
Speaker Change: and Growing Our Precision Ag Business.
Speaker Change: Our Precision Ag business is where we'll focus today. We recently held our 2024 Technology Days in Westminster, Colorado and near Salina, Kansas.