Q3 2024 AGCO Corp Earnings Call
Speaker Change: Good day and welcome to the Ag Co. 3rd quarter, when a 24 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.
After today's presentation, there will be an opportunity to ask questions. In consideration of time, please let me yourself to one question and one follow-up. To ask a question, you may press star, then one on your touchstone foam. To withdraw your question, please press star then two.
Speaker Change: Please note this event is being recorded. I would now like to turn the conference over to Greg Peterson, at Co. Head of Investor Relations. Please go ahead, sir.
Greg Peterson: Thanks and good morning. Welcome to those of you joining us for AgCas 3rd Quarter, 2024 earnings call.
Speaker Change: We will refer to a slide presentation this morning that's posted on our website at www.acocork.com The non-gap measures used in the slide presentation are reconciled to gap measures in the appendix of that presentation
Speaker Change: We will make forward-looking statements this morning, including statements about our strategic plans and initiatives, as well as our financial impacts.
Speaker Change: 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 and timing of those benefits.
and we'll also cover future revenue, crop production farm income, production levels, price levels, margins, earnings, operating income, cash flow, engineering expense.
Tech Rates
Speaker Change: and other financial metrics. All of these are subject to risks that could cause actual results to differ materially from those suggested by the statements.
Speaker Change: These risks include that are not limited to adverse developments in the agricultural industry.
Speaker Change: Supply Chain Disruption, Inflation Weather, Commodity Prices.
Speaker Change: Changes in Product demand.
the possible failure of your developed new and improved products on time, including including premium technology and smart-farning solutions within budget and with the expected performance in price benefits.
Speaker Change: Difficulties and integrating the PTAX Trimble Business in a manner that produces the expected financial results.
Speaker Change: Reactions by customers and competitors to the transaction, including the rate at which PTX trembles largest OEM customer reduces purchases of PTX trembling equipment and the rate of replacement by the joint venture of those sales.
Speaker Change: Introduction of New Orleans Purge Products by our competitors and reduction 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: and at first changes in the financial and foreign exchange markets.
Speaker Change: Actress results could differ materially from those suggested by these statements.
Speaker Change: Further information concerning these and other risks is included in anchors, filing with the Security's Exchange Commission, including its form 10K for the year ended December 31, 2023, and subsequent forms into the two filings.
Speaker Change: at Co-Discline's any obligation to update any forward-looking statements except as required by law.
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: Thanks, Greg, and good morning. I wanted to touch on a few highlights from AgC was performance against the backdrop of the cyclical downturn we're seeing in the industry before I get into the results for the quarter.
Speaker Change: 2024 has brought a significant contraction in the egg industry compared to the highly profitable years, farmers saw from 2021 to 2023. The significant contraction is not uncarracristic of prior downturns.
Speaker Change: What is different this time is how we are addressing it.
Speaker Change: We are focused on reducing inventory and cutting production faster than in prior downturns.
Speaker Change: We have been much more aggressive in reducing costs to better align our operations with the weak market environment.
Speaker Change: The Spiteies challenges, we remain focused on being the most farmer focused company in the industry.
Speaker Change: are three high margin growth levers, which include defent, full line globalization, precision ag and parts are central to this commitment.
Speaker Change: Although this quarter was challenging in some ways, we are confident that the steps we are taking along with these growth engines will help us deliver higher trough margins than before and will increase the durability and resilience of echoes earnings through the cycle.
Eric: The thoughtful and efficient rules of our North America Fent distribution network through our Farmer Core model is progressing.
Eric: and Ohio, Missouri, and Wisconsin in the quarter.
Eric: These new locations can serve farmers on the farm where they want to be business with the mobile fleet approach to sales and service.
Eric: In addition, through the Farm Recorder approach, Acco dealers have also expanded their presence in Louisiana and Georgia. We are now on track to improve Fent Market coverage to over 80% this year.
Speaker Change: The momentum for vent continues as dealers and farmers recognize the value of the vent full line of products.
Speaker Change: This was evident in the third quarter when major echo dealers across five US states in the Midwest adopted our Fentful Line Strategy.
Speaker Change: They removed competitive harvesting product lines and selected the ideal combine as their preferred product offering to help farmers maximize performance during their harvest.
Speaker Change: This is yet just another example of the opportunity ahead for us as more and more farmers see the value of our industry leading and award winning fan products.
Speaker Change: Benson proved distribution and technology rich, full product line has been translating into improved market share, particularly in Europe this year.
Speaker Change: Also the rebuilding of the PTX Trimble dealer network remains a tap priority for us.
Speaker Change: Over the past several months, hundreds of dealers have signed distribution contracts directly with PTX Trimble to continue serving their customers with the innovative products they are seeking.
Speaker Change: Although sales and margins for PTX Trimble have been lower than mixed back of this year, given the rapid decline in our industry, we are energized to continue integrating, innovating and growing the PTX portfolio of products and services.
Speaker Change: Leveraging the strength of the PTX Trimow portfolio, along with the farmer first mindset and award-winning products from precision planting and our equipment brands, we are poised to reach new heights.
Speaker Change: I want to reiterate that Ag goes unique retrofits strategy allows us to offer an industry leading suite of advanced technology solutions for farmers around the world looking to save on inputs or increase yields regardless of the brand of equipment.
Speaker Change: This is especially impactful in a year when firemen come as down and we can help farmers with new technology at a lower price than a brand new piece of equipment.
Speaker Change: Finally, I want to take a moment to extend my sincere thanks to the Graham Protein team for their hard work during the past year with the completion of the divestiture at November 1st.
Speaker Change: We couldn't have done it without them. I wish them well and look forward to their continued success.
Speaker Change: This portfolio change supports our strategic transformation and allows echo to focus on core agricultural machinery and precision at technology.
Speaker Change: The PTX Trimble Joint Venture, Edition and the Green and Protein Devestiture, are major strategic shifts that will provide margin tailwinds for echo over long term.
Speaker Change: That's changing now to egg was third quarter performance in slide three, which shows our sales down approximately 25% and in a just operating margin of 5.5%.
Speaker Change: Lower sales and reduced operating leverage related to significant production cuts and a difficult pricing environment where the primary factors in our lower margins this quarter.
Speaker Change: In this environment, echo continues to focus on controlling the things we can manage.
Speaker Change: The restructuring announced in June is progressing well and we are continuing to explore new ways to leverage technology and global centers of excellence to optimize our operating model.
Speaker Change: Sancy announcement, we have begun to see some of these savings materialized this order and we are confident in achieving the full 100 to $125 million of run rate cost savings midway through 2025.
Speaker Change: The biggest challenge for Ico this past quarter was Beastocking the dealer inventory channel.
Speaker Change: The spite of significant production cut in quarter 3, 2024, which was the largest year-over-year agriculture cut has ever taken an over a decade.
Speaker Change: The Market Conditions have made the outlook more challenging.
Speaker Change: I want to touch on these details later, but I wanted to provide some context for now and how we're aggressively trying to write says the other inventories.
Speaker Change: Fly for details industry unit retail sales by region for the first nine months of 2024.
Speaker Change: Global Interacy, retail sales of farm equipment continue to be weak in all of Echo's key markets.
Speaker Change: North American industry retail tractor sales decreased 11% for the first nine months of 2024 compared to the first nine months of 2023. Sales declines were relatively consistent across the worst-part categories with higher categories declining more in recent months.
Speaker Change: In Western Europe, industry retail tractor sales decreased 6% during the first nine months of 2024 compared to the first nine months of 2023.
Speaker Change: South American industry retail tractor sales decreased 9% during the first nine months of 2024 compared to the first nine months of 2023.
Speaker Change: Demand in Brazil was negatively impacted by the floods in Rio Grande do Sul, which, while a challenging first harvest in the Cerrado region, continues to affect farmers buying behavior.
Speaker Change: Following three strong years of retail demand in South America, it's expected to remain soft in 2024 as a result of lower commodity prices and weaker farm income.
Speaker Change: The combine industry was down significantly in all regions through the first nine months of 2024, ranging between 19% and 35% down year-over-year depending on the region.
Speaker Change: Eric Hansotia, Eric Hansotia, Eric Hansotia, Eric Hansotia,
Speaker Change: Despite the current down cycle of the agricultural industry, AGCO is well positioned to capitalize on the long-term growth in our sector.
Speaker Change: Farmers are being asked to produce more crops with fewer acres as the world's population grows and food security becomes increasingly more important.
Speaker Change: We have also taken decisive steps to focus our product portfolio on precision ag technology with the PTX Trimble Joint Venture and Precision Planting, complemented by an industry-leading machinery that is the best in AgCo's history.
Speaker Change: While commodity prices are down compared to the recent past, the cost of farm inputs have also come down, though not to the same degree.
Speaker Change: With Agco's TechStack, farmers can further reduce their expenses with precise application of fertilizer, seeds, and by leveraging data analytics with our tools.
Speaker Change: Agco's mixed fleet retrofit solutions typically offer a one to two year payback and are available at a significantly lower cost compared to buying a new machine.
Speaker Change: Agco's 2024 factory production hours are shown on slide 5.
Speaker Change: Our production decreased in the third quarter by approximately 35%.
Speaker Change: which was 19% more than we anticipated in our third quarter guidance.
Speaker Change: Significant reductions were made in all regions with the biggest reductions occurring in South America and North America.
Speaker Change: Reducing dealer and company inventory remains a key priority for us as the market continues to soften.
Speaker Change: Well, we have brought dealer inventory down by 6% on a unit basis.
Speaker Change: sequentially from quarter two to quarter three with our significant production cuts.
Speaker Change: Further weakening and market retail demand has resulted in an increase in months of supply on a forward-looking basis.
Speaker Change: In response, we are cutting production even further.
Speaker Change: Our new 2024 production guidance now reflects a 25% year-over-year reduction in production hours.
Speaker Change: Even with this more aggressive reduced production schedule, our current outlook for 2025 North America and South America will likely result in production less than retail demand in the first part of 2025.
Speaker Change: Diving into the regional breakdown, in Europe tractors have approximately three months of orders, which is down from last quarter.
Speaker Change: Deodorant inventories rose roughly half a month and are now closer to five months of supply, above our target level of four months.
Speaker Change: Matthew Ferguson and Walter 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 South America, we have order coverage through December 2024, where we continue to limit our orders to one quarter in advance due to inflationary pressures.
Speaker Change: Despite our aggressive production cuts and the reduction in the number of units at the dealers, our 12-month sales outlook results in around five months of dealer inventory across all products as the industry conditions continue to remain weak.
Speaker Change: Our goal is to have around 3 months of dealer inventory, which will likely require further reduced production in 2024 and 2025 based on the current environment.
Speaker Change: In North America, we currently have approximately four months of order coverage.
Speaker Change: Smaller, rural lifestyle equipment has the lowest order coverage, while bigger equipment is higher.
Speaker Change: Like the challenge in South America, our dealer inventory increased by one month compared to last quarter as industry conditions have continued to weaken. It is now approximately nine months of supply. Our North American 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. The current environment will result in lower production levels in the fourth quarter and in 2025.
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 now growing the industry by 4% to 5% annually.
Speaker Change: To reiterate, these three growth levers are
Speaker Change: Number one, globalization and full line product rollout of our front brand.
Speaker Change: Number two, focusing on accelerating our global parts business and increasing the market share of genuine Agco parts. And number three, growing our precision ag business.
Speaker Change: We continue to execute on each of these initiatives, and I wanted to highlight a few of the most recent new product introductions supporting our growth plans.
Speaker Change: Slide 7 spotlights the products we have brought to North America market at the Farm Progress Show in late August.
Speaker Change: On the technology front, we officially launched the OutRun Retrofit Autonomy Kit, available through PTX Trimble.
Speaker Change: OutRun is the first commercially available autonomous retrofit grain cart solution in the market and the latest offering that demonstrates our commitment to retrofit first and mixed fleets.
Speaker Change: The autonomous grain cart allows a single combine driver to operate two pieces of machinery simultaneously.
Speaker Change: The combine driver can stage the autonomous tractor on the field, call the tractor so it can pull alongside the combine, and receive the grain on the go, and finally send the tractor to an unload zone, all without requiring a driver in the tractor cab.
Speaker Change: The OutRun hardware is available initially on two tractor brands, with more to follow.
Speaker Change: This kit will be the backbone of Agco's system to allow fully autonomous solutions across the crop cycle by 2030.
Speaker Change: This is just the first step of many. As we showed at our technology days earlier this year, we are already working on the next phase where the combine can operate two grain carts simultaneously.
Speaker Change: As more phases of the crop cycle are automated, the same outrun hardware can be used, which allows for a simple unlock from a farmer's standpoint.
Speaker Change: This product will also bring AGCO a recurring revenue stream, where farmers will be billed for every active task hour where the tractor is running in autonomous mode.
Speaker Change: Farmers can purchase ours a few different ways.
Speaker Change: Pay-As-You-Go, Hourly Bundle, or Unlimited.
Speaker Change: We are very excited about this launch and helping farmers drive increased efficiency during one of their most critical points in the season.
Speaker Change: On the machinery side, North America is getting several new products in the coming year, starting with the new Massey Ferguson 9S tractor.
Speaker Change: which completes Matthew Ferguson's tractor lineup.
Speaker Change: This new product delivers an industry-leading cost-of-ownership experience for our farmers through field-proven technology, better dependability, and better fluid efficiency.
Speaker Change: The MF9S enables our dealers to deliver a solution for farmers that optimizes yield, reduces operator training, and enhances field efficiency.
Speaker Change: We also launched the Fendt 600, which brings an uncompromising product that perfectly blends power and versatility. It's a great option for those looking for a machine that can handle a wide range of jobs, from the row crop farming, to loader work, to transport, and anything in between.
Speaker Change: And finally, the new Gleaner T-Series combine has been refreshed, offering a lightweight performance, superior control, and premium grain quality for the best value in farmers' fields.
Speaker Change: This straightforward and dependable product complements our premium Fendt Ideal Combine in North America and allows our dealers to offer several options to their customers.
Speaker Change: As I mentioned earlier, Agco's product lineup is the best it's ever been. The innovation and performance of these new offerings is a testament to our continued investment in R&D over the years and our farmer-first focus.
Speaker Change: I'll now hand it over to Damon to walk you through some of the financials from the quarter.
Damon Audia: Thank you, Eric. And good morning, everyone. Slide 8 provides an overview of regional net sales performance for the third quarter.
Damon Audia: Net sales were down approximately 26% in the quarter compared to the third quarter of 2023 when excluding the negative effect of currency translation and positive impact of acquisitions.
Damon Audia: By region, the Europe-Middle East segment reported sales down roughly 21% in the quarter compared to the same period in 2023, excluding the impact of favorable currency translation and favorable impacts of acquisitions.
Damon Audia: Sales were down in nearly all countries with declines in France, Germany, and Italy showing the largest reduction. The product segments showing the most significant declines were mid-range tractors, high horsepower tractors, and hay equipment.
Speaker Change: Parts showed modest growth.
Speaker Change: South American net sales decreased approximately 44%, excluding the impact of unfavorable currency translation and favorable impact of acquisitions.
Speaker Change: The market continues to be very challenged, and we continue to underproduce relative to retail demand. Tractors, combines, and implements all showed large reductions.
Speaker Change: In the corner, there was significant negative mix year over year as the high horsepower segment of the tractor market underperformed the medium and low horsepower segments.
Speaker Change: The Brazilian market was down the most, while Argentina was modestly down.
Speaker Change: Net sales in North American region decreased approximately 22% excluding the impact of unfavorable currency translation and favorable impacts of acquisitions.
Speaker Change: Net sales in Asia-Pacific Africa decreased 15% excluding favorable currency translation impacts and favorable impact of acquisitions due to weaker end market demands and lower production volumes.
Speaker Change: The most significant declines occurred in Africa, China, and Australia.
Speaker Change: Finally, consolidated replacement parts sales were approximately $488 million for the third quarter, up 4% on a reported basis, and up approximately 5% year-over-year when excluding the effect of negative currency translation.
Speaker Change: Thank you very much.
Speaker Change: Turning to slide 9.
Speaker Change: Margins in the quarter were heavily affected by the significant decline in production, reflective of the increasingly weak industry conditions along with the higher discounts given the weak retail demand across the world.
Speaker Change: By region, the Europe-Middle East segment income from operations decreased by $116 million and operating margins decreased by 620 basis points compared to the same period in 2023.
Speaker Change: The reduced margins were primarily a result of lower sales volume, factory underabsorption from reduced production, and increased discounts.
Speaker Change: North American income from operations decreased approximately 87 million year over year and operating margins were 7.2%. The decrease resulted from lower sales volume and increased factory under absorption, increased warranty expenses and higher SG&A expenses associated with the consolidation of the PTX Trimble business.
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Speaker Change: Operating income in South America decreased by approximately $105 million.
Speaker Change: This decrease was primarily a result of continued weak market conditions resulting in lower sales and significantly lower production volumes as well as increased discounts year-over-year.
Speaker Change: The operating margins in the quarter were 11.8 percent, driven by cost savings measures at the factories and in SG&A expenses, as well as a one-time tax benefit in Argentina that flowed through cost of goods sold that contributed approximately 200 basis points of margin improvement.
Speaker Change: Lastly, income from operations in our Asia Pacific Africa segment decreased by approximately 12 million dollars due to lower sales and production volumes.
Speaker Change: Eric Hansotia, Greg Peterson, Eric Hansotia, Greg Peterson,
Speaker Change: Slide 10 details our September 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.
Speaker Change: We used $387 million of cash through September of 2024, approximately $232 million more than the same period of 2023. Lower net income in 2024 is the primary driver of the year-over-year change.
Speaker Change: 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, putting us between $435 to $580 million.
Speaker Change: We remain committed to a balanced capital allocation plan, which includes reinvesting back in the business, repaying debt to maintain our investment grade credit ratings, and rewarding investors with direct returns.
Speaker Change: On November 1st, we repaid the $500 million outstanding under the term loan facility utilizing the proceeds from the grain and protein business.
Speaker Change: In addition to the regular quarterly dividend of $0.29 per share, as a reminder, we also paid a special variable dividend of $2.50 per share in the second quarter. ADCO has paid over $1.2 billion in special variable dividends over the last four years.
Speaker Change: We will remain focused on deploying capital in the most effective ways for our long-term shareholders.
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Speaker Change: Slide 11 highlights our 2024 market forecast for our three major regions, which has not changed from the last quarter. For North America, we still expect demand to be 10 to 15 percent lower compared to the levels in 2023.
Speaker Change: For Western Europe, we continue to expect the industry to be down 5-10% compared to 2023. Farmer sentiment and other indices have been hovering at historic lows for a few months now due to reduced commodity prices and higher input costs.
Speaker Change: Our forecast for South America remains unchanged, indicating a 25-30% industry decline in 2024.
Speaker Change: Slide 12 captures the assumptions related to our 2024 outlook which now reflect the divestiture of the grain and protein business as of November 1st.
Speaker Change: Despite the weakening market conditions, our sales plan includes market share gains. We are updating our full year pricing to reflect about a negative one-half percent year-on-year.
Speaker Change: This pricing assumption is comprised of positive pricing in North America, offset by negative pricing in South America, and modestly negative pricing in Europe.
Speaker Change: Our raw material costs have stabilized and declined in certain cases. We are continuing to pursue cost savings and look to be about break-even on a net pricing basis.
Speaker Change: We expect currency translation to have no meaningful effect on our sales year over year or our prior guidance had assumed about a negative 1% adverse effect on sales year over year.
Speaker Change: Engineering expenses are now expected to be down 5% in 2024 compared to 2023, including PTX Trimble, and 11% excluding PTX Trimble.
Speaker Change: We are reaffirming our adjusted operating margin target of approximately 9%, which we view as achievable, given the sales outlook and cost savings initiatives we have executed, coupled with the structural changes we've made to our business.
Speaker Change: We see 2024 as being around 90% of mid-cycle, almost 15% below 2023, where ADCO saw a record-adjusted operating margin of 12%.
Speaker Change: Despite the challenges in the third quarter, we are confident the AGCO team can deliver the 9% on a full-year basis.
Speaker Change: This would represent among the highest adjusted operating margins ever achieved, not only well above the prior trough of 4.1% adjusted operating margins we saw in 2016, but also higher than previous peak margins before we began executing our current strategy.
Speaker Change: We will provide updated long-term mid-cycle operating margin targets at our December 19th Analyst Meeting to account for the performance of PTX Trimble and the divestiture of our grain and protein business.
Speaker Change: Our effective tax rate is anticipated to be approximately 30% for 2024 in line with our prior guidance.
Speaker Change: Turn to slide 13 for our revised 2024 Outlook.
Speaker Change: Our full year net sales outlook is now $12 billion, down from our previous outlook reflective of the market environment and the elimination of the grain and protein sales for the balance of the year.
Speaker Change: We are reducing our adjusted earnings per share forecast to $7.50, down from our prior guidance of $8, which is also reflective of the market environment and the elimination of the grain and protein sales for the balance of the year.
Speaker Change: Given the weak market environment, we are modestly reducing our TAPX spending to approximately $450 million.
Speaker Change: Our free cash flow conversion should be at the upper end of our targeted 75 to 100% of adjusted net income, consistent with our long-term target.
Speaker Change: On slide 14, you can see the details for our 2024 Analyst Event, where we will provide sell-side analysts and investors an update on our business. We hope you will join us, and we look forward to seeing you there. With that, I'll turn it back over to the operator for Q&A.
Speaker Change: Eric Hansotia, Greg Peterson, Greg Peterson, Greg Peterson, Greg Peterson, Greg Peterson,
Speaker Change: And our first question today comes from Jamie Cook with Truist. Please go ahead.
Jamie Cook: Hi, good morning. I guess two questions. First, on the guide for 2024, you're maintaining your margin guide. Pricing is an incremental headwind relative to the previous guide. Your sales forecast is lower, and so it sort of implies margins in the fourth quarter have to reach 10% versus 5.5% in the third quarter. So just trying to understand the margin ramp there and what would be driving that. And then my second question, just on ag codealer inventories. I mean, it sounds like you're saying...
Speaker Change: Eric Hansotia, Greg Peterson
Speaker Change: Agco specific versus the industry and like to what degree is there any way you could frame the production cuts in South America and North America in the first half of 2025. Thank you.
Speaker Change: Sure. So, Jamie, we'll go to your first question on the 10% outlook for the fourth quarter.
Speaker Change: Again, if I think about how I would look at it, the third quarter, where you alluded to the 5.5 percent, I think there's a couple...
Speaker Change: Eric Hansotia, Greg Peterson
Speaker Change: So those would be a couple things. In addition to that, you know that Q4 is always our seasonally strongest quarter that we'll see some improvements there. And then internally specific to AGCO, the cost actions that we've been implementing, we continue to see those pick up as we move month to month and we start to take out more of the associates. And our warranty, again, we had a little bit of a spike here in the third quarter. We expect that to get more into the normalized rates here as we go into the fourth quarter. So at the end of the day, we feel good. We know the teams are working to drive the retail sellout, even in the weakening environment. I would make your comment on pricing, you know, probably the effective offset to that is FX is a little bit more of a tailwind for us here.
Speaker Change: we were today.
Speaker Change: As you know, our inventory month is a forward, 12-month forward looking, and so as we do see the market continuing to be weakened to 2025, you know, that's reducing the retail sale outlook here for us, thus increasing the months of supply on hand. We are taking significant incremental production cuts around the world year over year. South America, again, will be the biggest one after back-to-back 50-plus percent cuts in Q2 and in Q3. You know, we see South America down again, and that's lapping a very strong production cut last year in the fourth quarter, just given the very weak industry environment that we're seeing there. But we're also cutting production overall in Europe and in...
Speaker Change: in North America.
Speaker Change: So, we sort of see that happening in the fourth quarter. We're not ready to give an outlook on what the production schedules will look like for early 2025 for South America or North America yet. We want to get through the fourth quarter, see how the retail traffic is, see how our share plays out, get our overall industry outlook in alignment. But as we sit here today, again, our confidence is that we will likely have to underproduce at least in the early part of 2025, just given what we see the industry and the current dealer inventories look like right now.
Speaker Change: Eric Hansotia, Greg Peterson, Eric Hansotia, Greg Peterson, Eric Hansotia, Greg Peterson,
Speaker Change: And our next question today comes from Kristen Owen with Oppenheimer. Please go ahead.
Kristen Owen: Hi, good morning. Thank you for the question a little bit of a follow-up on that Just help us understand. I mean you talked about some of the moving pieces in Europe around the production around some feeler things and can you can you help us understand what pricing looks like in Europe and and how to Square that circle with some of the market share gains that you've seen and then I'll have a follow-up
Speaker Change: Yeah, so, Kristen, you know, overall pricing in the quarter for Europe was modestly negative. I would tell you it's a little bit on the volume brands, but even a little bit more in cent. If I break that down a little bit further, it's really focused on the transition that we're going through with the Fence 700 Gen 6.
Kristen Owen: and the Gen 7. You've heard us talk about introducing the new Gen 7 earlier this year. We are still producing the Gen 6. You know, we'll transition through that in 2025 at some point in time. But as you would expect, as we still are offering dealers and farmers the opportunity to choose between a Gen 7 700 and a Gen 6. You know, that Gen 6 is coming at a lower price point, and year over year that's factoring into negative price in Europe. Again, I think when you look at our overall pricing being down at around 50 basis points year over year, I think it's important to understand the geographic mix. You know, we're still seeing very good pricing here in North America. That has continued for the year, and we expect that to continue. South America, we've been forecasting.
Speaker Change: and the Community.
Speaker Change: and Eric Hansotia. Thank you.
Speaker Change: Okay, that's really helpful. Thank you for that, Damon. And then, just generally speaking, on the lowered outlook for the full year, if I back out grain and protein fourth quarter of last year, that represents, let's call it, half of the $500 million delta in the top line. Can you help us understand what that does for the bottom line? How much of a benefit is that to your year-over-year margin in the fourth quarter? Just a little bit more on the moving pieces of grain and protein in the revised guidance.
Speaker Change: Yeah, so I think you're on the revenue outlook, Kristen, you're right, I would tell you...
Damon Audia: What we saw in the third quarter, the miss in grain and protein, and where we sit here in the fourth quarter, you know, that's about 200 million, about 150 of that, I would say, directionally, would be in the fourth quarter, specifically, so that's the revenue. Operating margin-wise right now, as we sit here at this 9%, with the sale happening November 1st, I'll tell you, it really has a de minimis effect on the operating margin. EPS-wise, it's about 10 cents of our guide down in the EPS is related to the elimination of the grain and protein business here for the balance of the year.
Speaker Change: And our next question today comes from Stephen Volkman with Jefferies. Please go ahead.
Stephen Volkman: Hi, good morning guys
Stephen Volkman: So, can we just start off with Trimble, Eric, and you mentioned that things were sort of weaker I guess as the channels sort of changed there, it was a little weaker than I expected. What's your outlook there? I mean, could Trimble be up next year, sort of irrespective of end markets as that channel shift sort of changes?
Stephen Volkman: Eric Hansotia, Greg Peterson, Greg Peterson, Greg Peterson, Greg Peterson, Greg Peterson,
Stephen Volkman: Eric Hansotia, Greg Peterson, Greg Peterson, Greg Peterson, Greg Peterson, Greg Peterson,
Stephen Volkman: Yes, so it's an interesting situation in that the activities that we're monitoring are, many of them are on track in that we're signed up over 200 new dealers. We've converted our, transformed how we're sourcing product or sourcing receivers on our own machines. We used to have two suppliers, majority of which was another supplier, not Trimble. We've converted that over to predominantly Trimble now. So those types of things are happening and on track, maybe even a little bit ahead of schedule.
Speaker Change: This big air pocket that we've talked about of the last time buy from one of the top customer from Trimble is still feeding the market. So even though we've signed up all those dealers, they're really not ordering that much yet. We expect that to work its way through by the end of this year, and that's still on track with what we said last time. And then we can start seeing the activity come through from these dealers that we've signed up.
Speaker Change: Will next year be higher than this year? We're still working through our expectations for next year. The things we're putting in place we feel good about. It depends on what the market does.
Speaker Change: the, you know, the broad ag indices are at their low points. You know, you look at Purdue, was at its low point and now bounced back today, came up a little bit. Will that, you know, that's just one data point. Will that be a trend? Don't know yet. The SEMA index in Europe is at its all-time low point.
Speaker Change: So it's
Speaker Change: We're certainly close to sentiment being at the very bottom.
Speaker Change: Now, that's not meaning the market's at its very bottom, but that's usually a good indicator of what the next few months look like.
Speaker Change: So we're trying to sort out where is that inflection point and what will happen with 25. We're not speaking to that in big specifics yet. But what we're trying to focus on is what's in our control, driving those things in the channel and with the product.
Speaker Change: to make sure that we're ready when the market's there. Steve, the one comment I would add, and you probably are familiar...
Speaker Change: CNH, the OE business, we know that that is coming down this year. We've talked about them moving away from the Trimble business. That's transitioning out in 2024. That's continuing. So that'll be a year-over-year headwind. If you remember at the time of the acquisition, we announced that we would be moving, as Eric alluded to, moving Trimble as our base offering and our receipt as in our OE, in our OE production that will help mitigate some of that. But when I give you the reported sales, remember the CNH sales today is reported in that number, but if I'm transitioning that into an Agco product, it may not, it won't report as an external sale as it's intercompany. And so similar to precision planting, where you'll hear us give one number, we'll try to overlay sort of what's intercompany for this technology.
Speaker Change: Eric Hansotia, Greg Peterson
Speaker Change: Got it. That's helpful. Thanks. And then as a follow-up, you've been having sort of a semi-public debate with your largest shareholder and some changes in that relationship, I think, relative to production and so forth. Is that taking significant amount of your time and any sort of update you can give from your perspective?
Speaker Change: Yeah, just as a reminder, this is 1% of our sales and it's really only for a few markets.
Speaker Change: So the rest of the organization is focused on the core of our business and is marching forward trying to serve farmers and deliver on our farmer first strategy
Speaker Change: There's a few of us that are trying to manage this in a professional way, and I think it's been handled that way well.
Speaker Change: We're looking for a smooth...
Speaker Change: settlement to this overall situation. We've put on the table some, we think very generous offers to get it to resolve smoothly. The ball's really in Tafe's court now, but no, it's a small.
Speaker Change: impact on the business. We're trying to keep it focused that way and the organization is really focused on delivering precision ag solutions to productive production farmers all around the world.
Speaker Change: And we're going to have and we've got
Speaker Change: Plenty of activity underway to replace that Those tractor sales as well. So we feel fine about that. The channel is served today We've got inventory in the channel for those products. So
Speaker Change: Dealers are served today. We've got backfill options that we're working and we have confidence in those We've got open lines of communications with TAFE offered a few very reasonable deals and generous deals We're just hoping that they'll they'll take those and we can resolve this
Speaker Change: And our next question today comes from Joel Jackson with BMO Capital Markets. Please go ahead.
Joel Jackson: Hi, good morning. Thanks for taking my question. I wanted to follow up on Europe a bit more. You did address some of this already a few minutes ago on a prior question.
Joel Jackson: But, like, in trying to look through into early 25, would you give us just a little bit of outlook on that?
Speaker Change: You know, trying to figure out how transient the step-down of margins are in Europe in Q3. Again, he gave some color. But should we expect kind of a ramp-back over a couple quarters on margin in Europe? Or should we expect, you know, first half margins in Europe, 25, to be, you know, a lot less than we saw first half of 24? Because it does mean a lot for you guys. Thanks.
Speaker Change: Well, Joe, I think it's a little bit too early for us to, we're not going to get into the outlook for 2025 yet, but I think if you step back at the more macro level, you know, Europe from an industry standpoint tends to be the least volatile of all the three major regions that we sell in. You know, that continues to lend itself to better stability in our order patterns. You don't see as much variability like you do in North America, South America. You know, we know year over year, we're, we've seen the SEMA index, which is, Eric alluded to the Purdue barometer here, the SEMA index is at a historic low point right now. When you look at that index, it usually doesn't stay at that.
Speaker Change: are
Speaker Change: pricing and then what do we do to make sure that we're adjusting the dealer inventories to get back to that four months again. We said we were up about a half a month here from the third from the second quarter to the third quarter again fairly manageable for us to work that down especially with the fourth quarter you know being a strong sales month for us but farmer sentiments a big point and you know that will influence the other things and so I mentioned on one of the prior questions you know we do have a couple of products that we're transitioning out here with the fence 700 gen 6 you know that will move down you know which will hopefully year-over-year improve the pricing but you know again the market will really dictate sort of how 2025 shapes out in Europe for us
Speaker Change: But Joe, we do expect our fourth quarter margins in Europe to bounce back similar to what they look like in the first half of the year.
Speaker Change: Okay, that's helpful. Thank you. And just another question.
Speaker Change: I'm trying to compare slides 4 and 11 from today's deck. So slide 11, you've maintained what it was three months ago. You've maintained all of your market outlook for tractors across the three regions that you show.
Speaker Change: to maintain that. But on slide four, especially for tractors, you know, the nine-month performance
Speaker Change: year-to-date, you know, contraction for tractors in in North America and in Europe are worse versus the six-month performance. South America I think is a bit better. Can you explain that a bit? Reconcile that a bit? How you've been able to keep a full year outlook?
Speaker Change: through 9-1-4 to 6. Thanks.
Speaker Change: So Joel, we're essentially we've moved to kind of the top end of the range in terms of the markets going down year over year. There's a little bit of a disconnect in South America in that our outlook is on wholesale as opposed to retail because that's what we have more visibility on and in terms of industry being reported so
Speaker Change: South America looks a little bit different just because we're looking at wholesale versus retail.
Speaker Change: And our next question today comes from Meg Dobre with RW Barrett. Please go ahead.
Meg Dobre: Yes, good morning, everyone.
Speaker Change: I'm
Meg Dobre: But then, you know, you're also talking about having, on average, about an extra month of dealer inventories based on how you're thinking about for demand. Given the fact that you haven't really changed your outlook for demand for 2024,
Speaker Change: where you're experiencing more weakness, we should be thinking roughly about 25.
Speaker Change: Yeah, so again we're not going to give an outlook for 2025 just yet. We want to get through the fourth quarter, see how the retail demand plays out, you know, work through our analytics for the full year here. But I think, you know, what we are alluding to, and Eric has said this in a couple prior calls, when you look at our historical industry changes, we usually go through one very large transitional year, and that's what we're going through this year. We're moving down directionally around 15% from where we were last year to where we are this year, and then historically the industry floats in that general vicinity. As we look at where we're sitting here today, we are expecting the market to be down next year.
Speaker Change: We're not expecting large declines. Again, the industry historically doesn't do that, but we are expecting to see some weakness again next year, probably in most parts of the world. If I look at where the biggest challenges have been, South America continues to be the one that we're seeing the most industry challenge right now. And I think there's a couple of pieces here. You see us cutting the production, again, for four quarters now from Q4 last year through the third quarter of this year, we've been cutting production anywhere from 30 to 50%. We're planning another large production cut here in the fourth quarter of this year.
Speaker Change: really trying to take the production down. I think it's important that when you see these numbers, even in South America, it's a little bit of two parts to the story there. When you look at the numbers being down in South America, the high horsepower segment of the market in the third quarter was down significantly more than the overall industry, and that there's a negative mix happening right now, and that the very low horsepower, say the 79 horsepower and below, was actually up in the third quarter. And so when you're looking at that mix, you're seeing the overall units don't look as bad, but for where AGCO is really focused, where we're making the profit, that part of the market was down significantly in the quarter and mitigated by some of these lower volumes.
Speaker Change: more of
Speaker Change: and we're seeing you know sort of the dealer inventory levels continue to creep up not based on units, units are down but we're seeing it just based on the forward look. So again we would expect probably in the early part of the year again more challenges for our production in to deal with some of that North American market share as well or North American dealer inventory as well and then Europe I would say on the back end of that is going to be more product specific or country specific issues.
Speaker Change: Understood. Maybe just to follow up on that.
Speaker Change: I'll just build on a little bit and then take your follow-up. You know, to put some numbers behind this, our last cycle in terms of Agco's sales mix around the world, we went from a peak of 115 down to a trough of 85.
Speaker Change: At the peak, we were not supply constrained, nor was the industry. This time, our peak only got up to 109, because everybody was supply constrained during COVID.
Speaker Change: So we believe then that the trough won't be as deep potentially, nor as long potentially, as the last trough was. As I said, the last trough was 885. In 2024, we've gone from about 105 down to about 90. It's the big correction year that Damon talked about.
Speaker Change: So you compare that 90 to the previous trough that we think is probably as deep as it would get, which was 85. That kind of sizes what we're trying to assess.
Speaker Change: of what 25 looks like. We expect it to float near somewhere between 2024's results and the previous trough, and we'll clarify that in more detail in December, but at least that gives you some bookends to frame it.
Speaker Change: Thank you for that. My follow-up is on your production slide, slide 5, and the guidance there. I mean, considering the fact that
Speaker Change: You're dealing with excess inventory still I'm wondering when we're not seeing more pressure on production in in the fourth quarter. I mean you're cutting production 25% I understand that year-over-year But it certainly looks stable if not up a little bit sequentially and I'm wondering why we're not we're not seeing more of this Action being taken in the fourth quarter rather than 2025. Thank you
Speaker Change: Eric Hansotia, Greg Peterson, Eric Hansotia, Greg Peterson, Eric Hansotia, Eric Hansotia, in North America or in.
Speaker Change: Europe, there may be product lines or retail demand that we're working to produce. We're not producing to put more onto the dealer lot, but we think about what we're producing is really more of a pass-through to the end farmer where we see the demand. So, again, I realize that the numbers look different, but when you factor in what's happening in Europe,
Speaker Change: sequentially or year-over-year versus what's happening in other parts like South America, we are rapidly reducing the production hours in most of our factories.
Speaker Change: Eric Hansotia, Greg Peterson, Greg Peterson, Greg Peterson, Greg Peterson, Greg Peterson,
Speaker Change: Our next question today comes from Tammy Zacharia with JP Morgan. Please go ahead.
Tammy Zacharia: Hey, good morning. Thank you so much.
Tammy Zacharia: So I think I heard you say you expect North America pricing to continue to be strong.
Tammy Zacharia: Can you help us understand
Tammy Zacharia: Do you expect any incremental discounting needed to clear the channel and what's really driving this expectation of...
Tammy Zacharia: pricing growth in North America. Is it mixed or are you raising prices due to cost inflation? Anything to call out there, what underpins this expectation of positive pricing in North America against, you know, suboptimal demand backdrops?
Tammy Zacharia: the couple of big variables that are driving the pricing in North America.
Tammy Zacharia: got it that's helpful and my second question is can you remind what's your plan in terms of
Tammy Zacharia: Deleveraging the balance sheet and should we expect more debt pay down in the coming quarters? I think I think you paid down 150 million With the proceeds, but but any more plans of debt pay down in the next few quarters
Speaker Change: Yeah, so we did pay down the five we had a five hundred million dollar term loan in place as part of the funding for the Trimble joint venture so that has been repaid with some of with some of the proceeds from the grain and protein business We have about a quarter of a billion dollars of debt that will mature I think in March April time frame Tammy I think as we sit here today, we would likely just pay that down With the trim with the balance of the Trimble proceeds coupled with some free cash flow Those will be the two big things And then we'll look to see if there's anything else that may make sense, but that'll happen. I think March April time frame
Speaker Change: And our next question today comes from Jerry Revich with Goldman Sachs. Please go ahead.
Speaker Change: Hi this is Clay on for Jerry. Can you update us on your expectations for the plan of business as we move into next year you know given on your some of the early order conversations you're having?
Speaker Change: start of Q4, Q3 to Q3, so almost a full year booked right now, but not quite on those particular products. But overall, pretty good.
Speaker Change: Eric Hansotia, Greg Peterson, Greg Peterson, Greg Peterson, Greg Peterson, Greg Peterson,
Speaker Change: Thanks, and as a quick follow-up on dealer inventories, can you compare, you know, levels now on an absolute basis in North America, you know, versus, you know, the pre-COVID, and I'd be curious to hear about other regions as well.
Speaker Change: Yeah, well if we look at the the pre-COVID levels of this before the the massive decline, you know, ideally they would have been around in that five to six month range for North America. We're sitting here obviously higher than that but, you know, that's what we keep talking about reducing the production cuts is to to get that dealer inventory right around that six month mark here as soon as possible in early 2025.
Speaker Change: And our final question today will come from Chad Dillard with Bernstein. Please go ahead.
Speaker Change: Oh, it looks like Chad's line has disconnected.
Speaker Change: This will conclude our question and answer session. I would like to turn the conference back over to Eric Hansotia for any closing remarks.
Eric Hansotia: I'll close today by saying that in the short term we are focused on reducing inventory and aggressively controlling cost to better align our operations with the current weak market environment.
Tammy Zacharia: Our 9% operating profit is far above the previous trough, what was closer to 4%, and even above the last peak margin, that was close to 8%. But we're striving to do even better. Our org efficiency and restructuring activities that we've already implemented so far this year will deliver $100 million to $125 million of savings right on target that we projected when we took those actions.
Speaker Change: and despite all the current challenges, remain focused on continued execution of our farmer-first strategy.
Tammy Zacharia: The strategic actions we've taken over the last nine months, big ones, like forming the PTX Trimble Joint Venture, divesting our grain and protein business, and implementing our organizational efficiency efforts.
Tammy Zacharia: to take control, take advantage of tools like automation and AI will enhance and accelerate the benefits of our farmer first strategy.
Speaker Change: Over the last few quarters, we've touched on many factors supporting our markets, including growing populations, changing diets.
Speaker Change: low stock-to-use levels, increased demand for biofuels, and relatively healthy commodity prices.
Speaker Change: All these trends give us confidence in the long-term health of our industry.
Speaker Change: And while cycles are typical in the industry, how we react and weather to them
Speaker Change: will illustrate how we are structurally changing AGCO to be higher performing regardless of market conditions.
Speaker Change: We look forward to seeing you at our upcoming analyst meeting on December 19th. Thank you and have a good day.
Speaker Change: Thank you for joining the AGCO third quarter 2024 earnings call. The call has now concluded. Have a nice day.
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Speaker Change: Good day and welcome to the Agco third quarter 2024 earnings call.
Speaker Change: 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.
Speaker Change: To ask a question, you may press star, then 1 on your touchtone phone. To withdraw your question, please press star, then 2.
Speaker Change: Please note, this event is being recorded. I would now like to turn the conference over to Greg Peterson, ADCO Head of Investor Relations. Please go ahead, sir.
Greg Peterson: Thanks and good morning. Welcome to those of you joining us for AGCA's third quarter 2024 earnings call.
Speaker Change: We will refer to a slide presentation this morning that's posted on our website at www.agricorp.com. The non-GAP measures used in the slide presentation are reconciled to GAP measures in the appendix of that presentation.
Speaker Change: We will make forward-looking statements this morning, including statements about our strategic plans and initiatives, as well as their financial impacts.
Speaker Change: 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, and timing of those benefits.
Speaker Change: We'll also cover future revenue, crop production, farm income, production levels, price levels, margins, earnings, operating income, cash flow, engineering expense, TAC rates,
Speaker Change: and other financial metrics. All of these are subject to risks that could cause actual results to differ materially from those suggested by the statements.
Speaker Change: These risks include, but are not limited to, adverse developments in the agricultural industry,
Speaker Change: Changes in product demand.
Speaker Change: 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.
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 transaction 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: introduction of new or improved products by our competitors and reduction in pricing by them. 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: and Adverse Changes in the Financial and Foreign Exchange Markets.
Speaker Change: Actual results could differ materially from those suggested by these statements.
Speaker Change: Further information concerning these and other risks is included in ACCA's filings with the Securities and Exchange Commission, including its Form 10-K for the year ended December 31st, 2023, and subsequent Form 10-Q filings.
Speaker Change: ADCO 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. 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 Hansotia: Thanks, Greg, and good morning. I wanted to touch on a few highlights from Agco's performance against the backdrop of the cyclical downturn we're seeing in the industry before I get into the results for the quarter.
Eric Hansotia: 2024 has brought a significant contraction in the ag industry compared to the highly profitable years farmers saw from 2021 to 2023. The significant contraction is not uncharacteristic of prior downturns.
Eric Hansotia: What is different this time is how we are addressing it.
Eric Hansotia: We are focused on reducing inventory and cutting production faster than in prior downturns.
Eric Hansotia: We have been much more aggressive in reducing costs to better align our operations with the weak market environment.
Eric Hansotia: Despite these challenges, we remain focused on being the most farmer-focused company in the industry.
Eric Hansotia: Our three high-margin growth levers, which include the FENDT full-line globalization, precision ag, and parts, are central to this commitment.
Eric Hansotia: Although this quarter was challenging in some ways, we are confident that the steps we are taking along with these growth engines will help us deliver higher trough margins than before and will increase the durability and resilience of AGCO's earnings through the cycle.
Speaker Change: The thoughtful and efficient growth of our North America Fent Distribution Network through our FarmerCore model is progressing.
Speaker Change: We saw dealer consolidation in Ohio, Missouri, and Wisconsin in the quarter.
Speaker Change: These new locations can serve farmers on the farm where they want to do business with the mobile fleet approach to sales and service.
Speaker Change: In addition, through the Pharmacore approach, AGCO dealers have also expanded their presence in Louisiana and Georgia.
Speaker Change: We are now on track to improve fent market coverage to over 80% this year.
Speaker Change: The momentum for FENT continues as dealers and farmers recognize the value of the FENT full line of products.
Speaker Change: This was evident in the third quarter when major AGCO dealers across five U.S. states in the Midwest adopted our FENT full-line strategy.
Speaker Change: They removed competitive harvesting product lines and selected the Ideal Combine as their preferred product offering to help farmers maximize performance during their harvest.
Speaker Change: This is yet just another example of the opportunities ahead for us as more and more farmers see the value of our industry-leading and award-winning FENT products.
Speaker Change: Fence improved distribution and technology-rich full product line has been translating into improved market share, particularly in Europe this year.
Speaker Change: Also, the rebuilding of the PTX Trimble Dealer Network remains a top priority for us.
Speaker Change: Over the past several months, hundreds of dealers have signed distribution contracts directly with PTX Trimble to continue serving their customers with the innovative products they are seeking.
Speaker Change: Although sales and margins for PTX Trimble have been lower than we expected this year given the rapid decline in our industry, we are energized to continue integrating, innovating, and growing the PTX portfolio of products and services.
Speaker Change: Leveraging the strength of the PTX Trimble portfolio along with the farmer-first mindset and award-winning products from Precision Planting and our equipment brands, we are poised to reach new heights.
Speaker Change: I want to reiterate that AGCO's unique retrofit strategy allows us to offer an industry-leading suite of advanced technology solutions for farmers around the world looking to save on inputs or increase yields, regardless of their brand of equipment.
Speaker Change: This is especially impactful in a year when farm income is down, and we can help farmers with new technology at a lower price than a brand new piece of equipment.
Speaker Change: Finally, I want to take a moment to extend my sincere thanks to the Grain and Protein team for their hard work during the past year with the completion of the divestiture on November 1st.
Speaker Change: We couldn't have done it without them. I wish them well and look forward to their continued success.
Speaker Change: This portfolio change supports our strategic transformation and allows AGCO to focus on core agricultural machinery and precision ag technology.
Speaker Change: The PTX Trimble Joint Venture addition and the grain and protein divestiture are major strategic shifts that will provide margin tailwinds for AGCO over the long term.
Speaker Change: Let's transition now to Agco's third quarter performance in slide 3, which shows our sales down approximately 25% and an adjusted operating margin of 5.5%.
Speaker Change: Lower sales and reduced operating leverage related to significant production cuts and a difficult pricing environment were the primary factors in our lower margins this quarter.
Speaker Change: In this environment, ECHO continues to focus on controlling the things we can manage.
Speaker Change: The restructuring announced in June is progressing well, and we are continuing to explore new ways to leverage technology and global centers of excellence to optimize our operating model.
Speaker Change: Since the announcement, we have begun to see some of these savings materialize this quarter and we are confident in achieving the full $100 to $125 million of run rate cost savings midway through 2025.
Speaker Change: The biggest challenge for ECHO this past quarter was destocking the dealer inventory channel.
Speaker Change: Despite the significant production cut in Q3 2024, which was the largest year-over-year AGCO cut has ever taken in over a decade.
Speaker Change: The market conditions have made the outlook more challenging.
Speaker Change: I want to touch on these details later, but I wanted to provide some context for now on how we're aggressively trying to right-size dealer inventories.
Speaker Change: Slide four details industry unit retail sales by region for the first nine months of 2024.
Speaker Change: Global industry, retail sales of farm equipment continue to be weak in all of AGCO's key markets.
Speaker Change: North American industry retail tractor sales decreased 11% for the first nine months of 2024 compared to the first nine months of 2023. Sales declines were relatively consistent across the horsepower categories, with higher horsepower categories declining more in recent months.
Speaker Change: In Western Europe, industry retail tractor sales decreased 6% during the first nine months of 2024 compared to the first nine months of 2023.
Speaker Change: South American industry retail tractor sales decreased 9% during the first nine months of 2024 compared to the first nine months of 2023.
Speaker Change: Demand in Brazil was negatively impacted by the floods in Rio Grande do Sul, which, while a challenging first harvest in the Cerrado region, continues to affect farmers buying behavior.
Speaker Change: Following three strong years of retail demand in South America, it's expected to remain soft in 2024 as a result of lower commodity prices and weaker farm income.
Speaker Change: The combine industry was down significantly in all regions through the first nine months of 2024, ranging between 19% and 35% down year-over-year depending on the region.
Speaker Change: Despite the current down cycle of the agricultural industry, AGCO is well positioned to capitalize on the long-term growth in our sector.
Speaker Change: Farmers are being asked to produce more crops with fewer acres as the world's population grows and food security becomes increasingly more important.
Speaker Change: We have also taken decisive steps to focus our product portfolio on precision ag technology with the PTX Trimble Joint Venture and Precision Planting, complemented by an industry-leading machinery that is the best in AgCo's history.
Speaker Change: While commodity prices are down compared to the recent past, the cost of farm inputs have also come down, though not to the same degree.
Speaker Change: With AgQuest TechStack, farmers can further reduce their expenses with precise application of fertilizer, seeds, and by leveraging data analytics with our tools.
Speaker Change: Agco's mixed fleet retrofit solutions typically offer a one to two year payback and are available at a significantly lower cost compared to buying a new machine.
Speaker Change: Agco's 2024 factory production hours are shown on slide 5. Our production decreased in the third quarter by approximately 35 percent.
Speaker Change: which was 19% more than we anticipated in our third quarter guidance.
Speaker Change: Significant reductions were made in all regions with the biggest reductions occurring in South America and North America.
Speaker Change: Reducing dealer and company inventory remains a key priority for us as the market continues to soften.
Speaker Change: Well, we have brought dealer inventory down by 6% on a unit basis.
Speaker Change: Further weakening in market retail demand has resulted in an increase in months of supply on a forward-looking basis.
Speaker Change: In response, we are cutting production even further.
Speaker Change: Our new 2024 production guidance now reflects a 25% year-over-year reduction in production hours.
Speaker Change: Even with this more aggressive reduced production schedule, our current outlook for 2025 North America and South America will likely result in production less than retail demand in the first part of 2025.
Speaker Change: Diving into the regional breakdown, in Europe tractors have approximately three months of orders, which is down from last quarter.
Speaker Change: Deodorant inventories rose roughly half a month and are now closer to five months of supply, above our target level of four months.
Speaker Change: Matthew Ferguson and Walter 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 South America, we have order coverage through December 2024, where we continue to limit our orders to one quarter in advance due to inflationary pressures.
Speaker Change: Despite our aggressive production cuts and the reduction in the number of units at the dealers, our 12-month sales outlook results in around five months of dealer inventory across all products as the industry conditions continue to remain weak.
Speaker Change: Our goal is to have around three months of dealer inventory, which will likely require further reduced production in 2024 and 25 based on the current environment.
Speaker Change: In North America, we currently have approximately four months of order coverage.
Speaker Change: Smaller, rural lifestyle equipment has the lowest order coverage while bigger equipment is higher.
Speaker Change: Like the challenge in South America, our dealer inventory increased by one month compared to last quarter as industry conditions have continued to weaken and is now approximately nine months of supply. Our North American targets for dealer inventory range from four to six months depending on the product.