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spk11: good day and thank you for standing by welcome to the agco 2021 first quarter earnings release conference call at this time all participants are in the listen only mode after the speaker's presentation there will be a question and answer session to ask a question during the session you will need to press star 1 on your telephone if you require any further assistance please press star 0. i would now like to hand the conference over to your speaker today greg peterson AGCO, Head of Investor Relations. Please go ahead.
spk04: Thank you, James, and good morning. Welcome to all of you joining us for AGCO's first quarter 2021 earnings conference call. This morning, we're going to refer to a slide presentation that we've posted to our website. You'll find it at www.agcocorp.com. We'll be using non-GAAP measures in the slide presentation, and those non-GAAP measures are reconciled to GAAP measures in the appendix of that presentation. We'll also be making forward-looking statements this morning, including demand, product development, and capital expenditure plans, and timing of those plans, and our expectations with respect to the costs and benefits of those plans. We'll talk about production levels, share repurchase, dividend rates, future revenue, price levels, margins, earnings, cash flow, tax rates, and other financial metrics. We wish to caution you that these statements are predictions and that actual events may differ materially. We refer you to the periodic reports that we file from time to time with the Securities and Exchange Commission, including the Form 10-K for the year ended December 31, 2020. These documents discuss important factors that could cause the actual results to differ materially from those contained in our forward-looking statements. These factors include, but are not limited to, adverse developments in the agricultural industry, including those resulted from COVID-19, including plant closings, workforce availability, supply chain disruptions, and product demand. There's also risks around weather, commodity prices, and changes in product demand. We disclaim any obligation to update any forward-looking statements except as required by law. We'll have a replay of this call available on our corporate website later today. Moving on, so on the call with me this morning are Eric Kansodia, our Chairman President and Chief Executive Officer, and Andy Beck, our Chief Financial Officer. And with that, Eric, please go ahead.
spk03: Thank you, Greg, and good morning. We appreciate your interest in AGCO and your participation on the call today. I'm going to begin my remarks on slide three, where you can see that we had an excellent start to 2021. Our first quarter sales grew nearly 20% on a constant currency basis compared to the first quarter of 2020. The recent rally in commodity prices lifted farmer sentiment, creating higher demand for agricultural equipment in the first quarter. Adjusted operating income was up over 94%, driven by a 300 basis point increase in our adjusted operating margins, with improvement achieved in all of our regions. Favorable pricing helped to offset material inflation in the first quarter. However, we expect to see a more significant impact of higher material costs during the remainder of the year. We are also facing significant challenges with our supply chain as capacity constraints and COVID disruptions continue to impact timely receipt of components for production. Based on an improved market forecast and our first quarter results, we have increased our financial targets for the full year of 2021. In addition to improved sales and margins, our plan includes increased funding for smart farming, precision ag, and digital investments. to drive our strategic ambitions that we outlined to investors earlier this year. Last week, we announced a new capital return framework to enhance the company's ability to return cash to shareholders across a variety of market conditions. The new capital return strategy includes our regular quarterly dividend payments, share repurchases, and an annual variable special dividend to return excess cash. The announcement included a 25% increase in our regular dividend and a $4 special dividend to be paid out on June 1st. Andy's going to have more details on those plans in a few minutes. On slide four, we detail industry unit retail sales by region for the first quarter of 2021. The gradual recovery from the pandemic and reopening of economies have increased the demand for grains. putting pressure on global grain inventories, which are well below last year's levels. Agricultural commodity prices have risen, resulting in more favorable farm economics as well as increased demand for machinery. These improved conditions are expected to generate industry growth across all major equipment markets in 2021. In North America, industry retail sales increased about 31% in the first three months of 2021, compared to the same period in 2020. Sales of low horsepower tractors moved above the prior peak levels, while demand for high horsepower tractors also improved. With the fleet age remaining extended, industry retail sales of North America large ag equipment grew approximately 12% in the first quarter. Industry retail sales in Western Europe also increased in the first quarter of 2021, with growth across nearly all major markets. Higher wheat sales dairy and livestock prices are generating very positive farm economics and improved farmer sentiment. We expect this favorable environment to generate increased equipment demand in 2021. In South America, industry sales increased during the first three months of 2021, driven by improved demand in both Brazil and Argentina, as well as recovery in the smaller export markets. A healthy first crop, as well as favorable exchange rates, are supporting positive economic conditions for farmers who continue to replace an aged fleet. AGCO's 2021 factory production hours are shown on slide five. While our supply chain and production teams have done a great job to minimize the impact, our ability to meet the robust and market demand has become increasingly difficult. Our supply chain has been impacted by COVID-related disruptions as well as capacity constraints due to the surging industrial demand. Currently, our European and Brazilian production facilities are feeling the largest impact. For example, production was suspended at our Fendt factories in Germany last week and will resume on Monday. We are facing supplier bottlenecks and delays in all regions and expect significant challenges in the quarters ahead as we work to meet expected increases in end market demand. Total company production was approximately up 25% for the first quarter versus the same period in 2020. with the largest increase in our South America factories. We are projecting a 10% to 12% increase in full-year 2021 production compared to last year, with most of the increases occurring in the first half of the year. Now, you can remember that we had extensive COVID-related plant shutdowns in the first half of 2020, and then extremely high production schedules in the second half of 2020. Turning our attention to AGCO's order board, As of the end of March, our order board for tractors and combines was significantly higher in North America, Europe, and South America compared to a year ago. I'm going to hand over the call to Andy Beck, who will provide you more information about our first quarter results.
spk10: Thank you, Eric, and good morning to everyone. I will start on slide six, which looks at AGCO's regional net sales performance for the first quarter of 2021. Agco's net sales were up about 20% compared to the first quarter of 2020, excluding the positive impact of currency translation. Strong in-market demand and favorable pricing drove the increase across all regions. The Europe-Middle East segment reported an increase in net sales of approximately 12%, excluding the positive impact of currency, compared to the first quarter of 2020. Largest increases occurred in Germany, Turkey, and the U.K., Net sales in North America increased approximately 10%, excluding favorable impact of currency translation, compared to the levels experienced in the first quarter of 2020. Increased sales of tractors, precision planting products, and replacement parts produced most of the increase. AGCO's first quarter net sales in South America grew approximately 84%, compared to the first quarter of 2020, excluding negative currency translation impacts. Sales rose across all the South American markets with the most significant growth in Brazil. High horsepower tractors, combines, and planters showed the strongest growth. Net sales in our Asia Pacific Africa segment increased about 66% in the first quarter of 2021 on a constant currency basis compared to 2020. Last year, our Q1 sales were impacted by plant shutdowns in our China facilities. Strong growth in China and Australia as well as recovery in Africa, were the highlights. Consolidated replacement part sales were approximately $399 million for the first quarter of 2020. Part sales were up about 23% compared to the same period in 2020, excluding the positive impact of currency translation. Slide 7 examines AGCO sales and margin performance. AGCO's adjusted operating margins improved by approximately 300 basis points in the first quarter of 2021 compared to the same period in 2020. Margins were supported by higher levels of net sales and production, as well as positive net pricing in the first quarter. Our first quarter pricing of approximately 4% was adequate to cover inflationary cost increases. For the remainder of the year, we expect material cost inflation to intensify. with continued pricing required to maintain margins. The Europe-Middle East segment reported an increase of $42 million in operating income compared to the first quarter of 2020, resulting primarily from higher net sales, partially offset by higher warranty and engineering expenses. North American operating income increased approximately $14 million in the first quarter of 2020 compared to the first quarter of 2020 versus Higher sales and improved margins in the grain and protein business all contributed to the improvement. Operating margins in our South America region reached 6.7% in the first quarter, and operating income improved $25 million from the same period in 2020. Significant increases in in-market demand and improved sales mix all contributed to the improvement. In our Asia-Pacific segment, operating margins expanded to 10.5% in the first quarter, reflecting improved sales and production along with an improved sales mix. Slide 8 details grain and protein sales by region and by product. Sales increased by about 21%, excluding currency impacts in the first quarter of 2021 compared to 2020. Globally, grain and seed equipment sales increased approximately 18%, with our North American Asia-Pacific Africa regions showing the largest increase. Protein production sales grew approximately 24% in 2020, with higher sales in the Asia-Pacific Africa and South American regions, offsetting lower sales in North America. The protein production segment has been significantly impacted by the pandemic, particularly in North America, where protein processing capacity has been challenged. In China, protein producers are beginning to recover from Asian swine fever and have started to rebuild their production capabilities. We are expecting a recovery in the grain and protein sales in 2021, following weak sales in 2020, which were heavily impacted by the pandemic. On slide nine, we address AGCO's free cash flow for the first quarter, which represents cash used in operating activities, less capital expenditures. Our seasonal requirements for working capital are greater in the first half of the year and thereby resulted in a negative free cash flow in both the first quarter of 2020 and 21. AGCO's strong free cash generation last year allowed us to repay $276 million term loan facility that was taken out to provide liquidity last year. Last week, we outlined AGCO's capital allocation priorities. and a capital return framework which includes regular quarterly dividend payments, share repurchases, and an annual variable special dividend to return excess cash. Following our strong free cash flow generation in 2020, we were in position to increase our quarterly dividend by 25% and announce the first variable special dividend payable in the second quarter. We currently expect to repurchase shares opportunistically with a target amount of $120 to $150 million during 2021. The variable special dividend payment was declared last week in the amount of $4 per share, payable on June 1, 2021, to shareholders of record at the close of business on May 10. Future returns of cash to shareholders will be based on cash flow generation, our investment needs, which includes capital expenditures and acquisition opportunities, as well as our market outlook. Other details for the quarter include losses on sales and receivables associated with our receivable financing facilities, which are included in other expense net, or approximately $4.6 million during the first quarter compared to $8.1 million in the same period of 2020. Turning to our full year forecast, our 2021 outlook for the three major regional markets is captured on slide 10. We have increased our market forecast for all regions, expect higher retail industry demand globally compared to 2020. In North America, higher commodity prices and improved farmer sentiment is expected to result in increased 2021 sales. Replacement demand for an age fleet of larger equipment is expected to drive most of the increase. Demand for smaller equipment is expected to be more stable after several years of increasing demand. We project North American industry unit sales to be up approximately 15% in 2021 compared to 2020. European Union farm economics are expected to remain supportive in 2021. Higher commodity prices are expected to support healthy demand from the arable farming segment. Milk prices have increased and economics are positive for dairy producers. Western Europe industry demand is expected to remain strong and grow modestly in 2021. Elevated commodity prices and favorable exchange rates are expected to support additional growth in South America during 2021 as farmers continue to replace aged equipment. In total, industry demand in South America is expected to improve 5% to 10% from 2020 levels. Slide 11 highlights the assumption underlying our 2021 outlook. Our priorities continue to be maintaining a safe working environment for employees and providing proactive support to our customers and dealers. We also continue to manage our costs while preserving our investments in digital technology and smart farming product development. Our 2021 forecast assumes improved global industry demand with no additional impact from the pandemic. Our sales plan includes market share improvement and price increases of 3.5% to 4% aimed at offsetting material and cost inflation during 2021. At current exchange rates, we expect currency translation to possibly impact sales by about 3%. Engineering expenses are expected to increase by 50 to 60 million on a constant change rate basis compared to 2020. The increase is targeted at investments in smart farming and precision ag products, as well as continue our rollout of platform designs. Operating margins are expected to be up approximately 150 basis points from 2020 levels, driven by higher sales and production, favorable pricing, net of material cost, and productivity initiatives, partially offset by increased investments in smart products and our digital initiatives. We are targeting an effective tax rate ranging from 28% to 30% for 2021. Slide 12 lists our view of selected 2021 financial goals. We continue to operate in uncertain conditions, and this outlook does not consider any further business interrupt disruptions caused by the COVID pandemic. We are projecting sales to be in the $10.6 to $10.8 billion range with 2021 earnings per share targeted in a range of $8.40 to $8.60 per share. We expect capital expenditures to be approximately $300 million in free cash flow to be in the $450 to $500 million range. For the second quarter, our current estimate is that earnings per share will be in the range of approximately $2.10 to $2.20 per share. We project a significant improvement in sales and margins over 2020 levels, which were impacted by COVID-impacted suspensions in our European and Brazilian production facilities. We also plan to ramp up engineering expenses in the second quarter to facilitate new product introduction scheduled in 2021. While our order backlog supports our outlook, the timing between quarters of our sales is difficult to forecast due to supply chain challenges that we anticipate will continue during 2021. The quarter two estimate is highly dependent on component availability from suppliers and production levels throughout the quarter. With that, we'll turn it back over to Greg.
spk04: Thanks, Andy. And in the spirit of expanding participation in the Q&A portion of this call, We'll ask that you limit yourselves to one question and one follow-up. James, with that, why don't we move to the Q&A section?
spk11: As a reminder, to ask a question, you'll need to press star 1 on your telephone keypad. In order to withdraw your question, please press the pound key. And please note that we do ask that you limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. And our first question comes from the line of Tim Fine with Citigroup. Go ahead, please. Your line is open.
spk13: Thank you. Good morning. Maybe just to follow on Andy's comments there in terms of the margin improvement, the plus 150 basis points. What does that, just so I'm clear, what does that assume in terms of net pricing? I think you gave some color regarding the first quarter. I'm not sure. Does that, does that get fully unwound for the full year, or is the expectation that it narrows and you stay on the plus side for the full year?
spk10: Yeah, we're anticipating that we stay on the plus side. So in the first quarter, that net pricing was a little below 2% impact. So we got the pricing in in advance of this surging commodity price increases that we expect to see for the remainder of the year. As we get to the full year, we said our pricing would be 3.5% to 4%, and our net price would be about 50 to 70 basis points. So we expect to stay positive. There are some challenges that we see, you know, kind of keeping the pricing up with costs in some businesses in the middle part of the year, but by the end of the year, we expect to be fully covering all these costs.
spk13: Okay, got it. Just a quick follow-up. On the full year, what is the assumption in terms of Dealer inventories, given the issues around component and just product availability, I'm guessing there's some prioritization there that's going on in terms of hitting retail orders versus stock orders. But maybe just some color there in terms of that kind of 10-7 at the midpoint for the full-year revenue outlook. What is assumed in there in terms of where dealer inventories end the year? Thanks a lot.
spk10: Right. Well, as you know, we worked hard on getting our dealer inventories down last year. And as we look at where our dealer inventories are at the end of the first quarter, they're substantially below where we were a year ago. And a lot of that is due to the work that we did last year, but also the strong retail activities that we've had. So to your point, the focus is on retail. for sure, but we want to make sure we've got enough adequate supply of inventory to meet all the demand that we can accomplish. Our business plan, our model, really anticipates that our dealer inventory will be relatively flat year over year by the end of the year, so no additional increase or reduction plan.
spk11: Our next question comes from the line of Stephen Volkman with Jefferies. Go ahead, please. Your line is open.
spk05: Great. Good morning, everybody. I'm curious, maybe, Eric, how you're thinking about sort of how this cycle is unfolding here. And maybe I'll refer to your slide 10, where you have your various regional outlooks. Are those outlooks what you think can actually get produced and sold? Or is that really what you think demand is? And I guess what I'm trying to figure out is, you know, does demand get pushed into 22 because we have supplier issues in 21? Just sort of what are you thinking about in terms of the medium term?
spk03: Good question, Stephen. Yeah, the way I would respond to that is that I believe that there is more demand out there than the industry will be able to supply in 2021, especially in some of our markets. I think South America will be curtailed with the highest confidence of being curtailed. North America is at risk. Western Europe is probably less vulnerable to a curtailment, but there's just a lot of uncertainty left in the marketplace for what the impacts will be on COVID. So your assumption is the same as what I would guess as well. Some of this demand will not be met.
spk05: And then just to follow up on that, is it logically reasonable to think that incremental margins would be better in 22 as all these supply things kind of revert and we have a more normalized kind of a year, assuming that happens?
spk03: You know, assuming things smooth out, which with vaccines coming online, that's the root cause of these component issues. That plus a lot of the freight problems, but there's just such a surge. The overall infrastructure wasn't able to catch up and then We're having spot issues all over the place on all sorts of different commodities, and largely COVID is the root cause. So it all comes down to our assumptions on that. If the vaccines work their way through the system and they hold and are effective, then next year could return to normalcy, and a lot of these hidden costs and wastes could fade away, which would lead you to believe that there's some incremental margin to be had.
spk11: Our next question comes from the line of Adam Allman with Cleveland Research. Go ahead, please. Your line is open.
spk17: Hi, guys. Good morning. Congrats on the strong quarter.
spk03: Thanks, Adam.
spk17: I had a question on slide five for your tractor production hours. I guess I'm just wondering why, after the second quarter, the hours wouldn't be more elevated in the second half of the year maybe closer to, I don't know, more like the first half of the year, I guess. Why would you be pulling back on your production hours on an absolute basis?
spk10: I think last year was kind of an unusual year in terms of production. As you know, we really had a significant delay in production last year in the second quarter. And so the third quarter, when we typically have – summer shutdowns and things like that, we actually worked last year. Our plan this year is to have normal summer shutdowns in our plants in 2021. That's going to naturally mean that our production in third quarter last year is going to be higher than what we had this year, despite the demand. In the fourth quarter, we expect to see some production increases you know, back in. So, you know, I think also fourth quarter is relatively strong. You started to see some of these market increases. So that's what we're seeing so far.
spk17: Okay. And could you dimension the order intake? I think you mentioned that it's, you know, orders are up significantly. Are we looking at like 30% type order growth and maybe flush that out by region? And are you I assume that you're sold out, um, in some areas of the globe. Maybe, maybe you could share with us, um, your availability.
spk04: Sure. Yeah. So we're, um, Adam up, um, close to double pretty much across, across the regions, which gives us, um, some very good lead times and gives us some good visibility, um, really into the back half of the year. So, uh, Yeah, even though we saw some growth in order board through the end of last year, we continue to see orders strengthen as we came through the first quarter and ended up, like I said, about double where we were last year.
spk03: Adam, that includes green and protein.
spk11: Our next question comes from the line of Jamie Cook with Credit Suisse. Go ahead, please. Your line is open.
spk06: Hi, good morning. I guess just my first question. Can you just talk about, I mean, obviously the order book is pretty strong here today. Can you talk about what you're seeing on the market share front, some of the successes potentially in North America, you know, in South America, if there's anything to be said there? And then I guess my follow-up question, Andy, obviously the sales growth is looking to be pretty good. You know, for South America, the margins improved, you know, again in the first quarter. Any change in sort of your margin outlook for South America? Thanks.
spk10: Sure. I'll take the first half.
spk03: We're continuing on the same trajectory that we have talked to you about in the previous discussions in that we're seeing good success in our high-horsepower tractors. and that's driven largely by our globalization of the Fent brand, and then our precision ag business. So I can give you a few numbers here. In 2021, our momentum planter volume is going to grow by 60% over 2020. Our smart rows, so we also, in addition to selling full-fledged planters out of the factory, we also sell rows that are intelligent, largely out of precision planting. That's up 42% from 2020. And then our smart nozzle installations that go on sprayers coming out of the factory, we're projecting that will be up 35% since 2019. And we expect that to continue to grow across all markets going forward. And our connected machines, by the end of the year, will be up 4x versus 2019. So Precision Ag is growing strongly, and some of the largest growth rates are in North America and South America, but then our full machine sales in terms of high horsepower in North America, and especially the sprayers, planters, combines, but even tractors in South America are all growing in terms of share as well.
spk04: And Jamie... When you look at share, one of the things that looks a little bit puzzling, especially with our North American numbers, is that our sales didn't grow quite as fast as the market, and that's a function of us not building our dealer inventories as much in the first quarter of 21 as we did in 20. So our retail market share, as Eric said, did very well, but it's a little bit masked by the fact that we didn't build our inventories like we did last year.
spk06: Okay, great. And then just any color on the South America margins, sorry.
spk10: Yeah. So on the South America margins, as you said, we got off to a good start this first quarter. What we're looking at for the full year is somewhere 100 to 150 basis point improvement in the margins. We do see a little bit of a weaker mix. Some of our stronger margin markets like Argentina, we expect to start to slow back down. And we're also, you know, the cost increase and cost inflation is the most severe in South America right now. And so there's challenges keeping our pricing up to offset all that. So a little bit of a issue in a few markets and a few products there. So about 150 basis points, 100 to 150 basis points is what we're targeting.
spk11: Our next question comes from the line of Ann Dwegan from JP Morgan. Go ahead, please. Your line is open.
spk09: Hi, thank you. It's Ann Dwegan. Yeah, I'd like to go back to your end market outlook versus your production hours. I'm not sure that you answered the earlier questions sufficiently. Given your outlook this year in the supply chain constraints, your Q4 production absolute hours looks you know, frankly, woefully low. I mean, why wouldn't it be higher than Q3 back to at least maybe Q1 or Q2 levels, given the lack of dealer inventories, the expectation that demand is likely to be pushed out to 2022? You know, unless you believe that North America low horsepower is about to fall off a cliff into 2022 after the huge expansion we've seen in the last couple of years. So if you could explain that Not the year-over-year production hours, the absolute Q4 hours. Why wouldn't they be higher?
spk10: Well, Ann, you know, what we have in the fourth quarter is that, you know, it was against the backdrop of a pretty strong fourth quarter 2020. So we, at this point, have our revenue and our projections up only about 3% to 5% in 2020. in the fourth quarter. So I think, I think, uh, you know, we have the huge increase in Q2, um, and then the back half, it's getting a little more, uh, in Q3, as I, as I mentioned, our sales, um, are expected to be relatively flat versus 2020 because of the increased production we had in, uh, in catch up that we did a year ago. And then, uh, up about 3.5%, 3% to 5% in Q4. So I think that's the focus. In terms of is there opportunities for an increase, I think it, as Eric said, is about ability to produce, and certainly we're going to be watching the end markets for the rest of the year.
spk09: But that doesn't really explain the strong demand and the lack of – I mean, every dealer we speak to says they have no inventory, they need inventory. And if you can produce at the absolute levels in Q2 that you're forecasting, why can't you produce them in Q4?
spk10: Well, you know, I think we – and, you know, last year we had our – Dealer inventories coming down, and this year that's going to give us somewhat of an increase. In terms of production hours, I'm more focused on what our revenue is going to be, and I've already described that. The production hours should pick up, as we said, in the fourth quarter and be somewhat in line with what we said the sales increase would be.
spk04: And then also, Anne, keep in mind that in Brazil, we also have maintenance shutdowns in the fourth quarter. So seasonally, the production is going to be lower because of those maintenance shutdowns in Brazil. We have those maintenance shutdowns in Europe in the third quarter. So that's why typically that fourth quarter production levels aren't as high.
spk11: Our next question comes from the line of Larry DeMaria. From William Blair, go ahead, please. Your line is open.
spk12: Thanks. Good morning, everybody. Talked about some of the products, like the Momentum planter, et cetera. But I think, if I'm not mistaken, Malika's presentation called out a slower than maybe expected rollout of the ideal combine. Can you kind of update us on where you are versus where you thought you'd be? Trying to understand the strength of the overall portfolio, including the harvesting, as we go into this upcycle. Thank you.
spk03: Yeah. Ideal Combine is performing extremely well relative to all the competitors in the marketplace. We run it head-to-head. We've done tests in North America, South America, Europe, Australia, running in the same field against the competition, and it's got just outstanding performance. In the early stages, we had some reliability problems. We believe that those are largely behind us now. But we always had planned to have a stage ramp up here in terms of making sure this is a very complicated machine on the one hand, and we had a lot of dealers that weren't so focused on combines in some parts of our network. And so we wanted to walk our way into this marketplace. But the machine is performing very, very well. Customers really like it. We've been supporting it very carefully to make sure that the ramp up has been successful. And... And so we're on track, and it continues to grow. We're going to have significantly more sales this year, and our projection is to be growing that again in the next year. So it's on a steep growth curve globally. We're still producing in two locations, in Europe and in South America, and at some point we will turn on a U.S. location when the volumes justify. So that was always part of the plan.
spk12: Okay, thanks. As a follow-up, Obviously, shareholders supported your proxy and performance in the quarter, and obviously it's pretty good, very good. Are we more or less, do we think, you know, with the activist issue, is this maturing and coming to a head, or is it becoming still a distraction, or how would you characterize it overall?
spk03: Yeah. Well, you know, the – I would say we got positive votes, support votes on all directors and all proposals from TAFE. We've been having active discussions within the board meetings and so I think that it is coming towards, the discussions are moving towards the center. It's hard to predict exactly where things will go. We've had a long term relationship with TAFE but You know, our interests will not always be perfectly aligned, but I think that at least for right now, it looks like we've got a strong vote of support during the shareholder meeting, and we'll just see where things go from here.
spk11: Our next question comes from the line of Nicole de Blasi with Deutsche Bank. Go ahead, please. Your line is open.
spk08: Yeah, thanks. Good morning, guys.
spk11: Morning, Nicole.
spk08: I wanted to start on a question similar to Ann's, but rather than focusing on the revenue performance that you guys expect throughout the year, can you talk a little bit about how you're kind of thinking about the progression of margins? And it might be that the margin path kind of follows what you said about revenue, but any color would be helpful.
spk10: Sure. You know, we expect a sizable margin improvement in Q2. Again, last year was a down because of the lack of production. So we're looking for 250 basis point improvement in Q2 over Q2 last year. In Q3, our margins, we expect to actually be lower than 2020. Again, we had unusually high sales and production in 2020. And so that's, we think we'll get kind of more normal cadence that we see in 2021. And then in Q4, we expect our margins to be up again year over year in the fourth quarter by 100 to 200 basis points. So all in all, as we said in our comments, that would lead to about 150 basis point improvement in margins on an annual basis.
spk08: Got it. That's really helpful. Thanks, Andy. And then one more question on margins for you. The other driver of upside, I think, versus what we were thinking for the quarter aside from South America was North America margins also looked really strong. Can you talk a little bit about what you're expecting for that segment for the full year?
spk10: Sure. We've got a little bit over 100 basis points improvement for the full year for North America. Some of the improvement, as you point out, came in the first quarter. We had a really good first quarter. And the higher production levels and pricing that we expect to get, we think can support that margin improvement. The one negative area I'd point out is we do get a little bit of a hit on foreign exchange impacts. We import product from Europe into North America. And so that, with the stronger Euro, is giving us a little bit of a tighter margin on our North America results. But obviously, overall, with our strong European profits, those are offset by translation benefits. So to the company's bottom line, it's not a big impact, but it does show up in the margins for North America. But overall, a margin improvement is expected, and North America expect to get to double-digit margins this year.
spk11: Our next question comes from the line of Joel Tis with BMO. Go ahead, please. Your line is open.
spk16: I'm going to change the format a little bit and have a comment and then a question. I bet Martin's doing cartwheels right now with the stock price so strong versus getting all worked up about how his name is pronounced. Anyway, can you guys talk about how the operating margins, like what kind of normalized levels are Could be possible, like, you know, looking three to five years out in South America. It seems like there's been a very quick turnaround there. And I just wonder, like, if I try to think more structurally what's changed, how do I think about how that translates into margins a couple years out when things normalize? Thank you.
spk10: Yeah, we talked about that a little bit in our strategy discussion that we felt like we needed to continue to focus on the South America margin improvement as a key element of focus for the company over the next number of years. We are way ahead of schedule because of how strong the market is. And so that's really helped us. And we're seeing great success in terms of improvements in all aspects of our business down there in terms of growing our higher margin planter business, growing in grain and protein, improvement in our parts sales. All those things are really driving a lot of this improvement. We still have work to do in terms of our cost structure on our tractors and combines. We've talked a lot about how we brought in a new and localize some of our global designs, which is the cost have been impacted a lot because we're importing more of the content. So we need to localize more of that and find ways to reduce those. And we're also putting significant amount of pricing in to also offset a lot of this inflation this year, but hopefully that will carry into improvements and margins going forward. So all that being said, We think we've got still opportunity and work to do in South America. Obviously, the markets helped us, but we expect South America to be in line with our other regions as we move forward. Yep.
spk15: Okay.
spk03: The expectation is we just had another review on that business with the board. They're very pleased with the progress, or like Andy said, ahead of schedule from the plan that we presented them last time, and And the mission for every business is to be above 10%, ultimately.
spk11: Okay, thank you. Our next question comes from the line of Chad Dillard with Bernstein. Go ahead, please. Your line is open.
spk14: Hi, good morning, guys.
spk11: Morning, Chad. Morning, Chad.
spk14: So I wanted to go back to a comment that you guys made in your prepared remarks about low horsepower being above the prior peak. So to get your perspective, I mean, are you seeing some sort of structural change in that business that would, you know, lead to, you know, higher mid-cycle, higher peaks? And just like what's your view on like the median term in terms of demand? Can we continue to grow over the next couple of years within this business line?
spk03: Chad, our expectation here is that this is a, to some extent, a pull forward of demand. This is a peak largely tied to COVID root cause where you have a lot of folks stuck in their home. Looking outside and doing special projects, you see the same thing happening in home improvements, lumber prices, appliance availability, and so on. There's not a structural change in refrigerators. We don't think there's a structural change in small horsepower tractors either. So it's a surge in demand that is very, very high right now, but it's largely tied to COVID. I wouldn't change the long-term perspective of the industry.
spk14: That's helpful. And then can you just give some color on revenue contribution from your precision ag bins? I believe you called it out as a $400 million business. How are you thinking about that segment for this year and what's embedded in guidance?
spk10: Yeah. In terms of one thing we can report on is the precision planting aspect of that, precision planting. Sales, I think, were up close to 20% in the first quarter, so off to a really good start there. That's about half of that revenue. The rest of the growth is probably in line with what we've seen with our core business. So we're progressing well there, and we'll report maybe more specifically on that hopefully throughout the year.
spk11: Our next question comes from the line of Jerry Reavich with Goldman Sachs. Go ahead, please. Your line is open.
spk15: Hi, this is Ashok Siddhamohan. I'm for Jerry Reavich. You mentioned expectations for a 250 basis point year-over-year improvement in margins in the second quarter, which implies flattish margins sequentially. Normal seasonality is for margins to be up around 300 basis points sequentially. So I'm just wondering, are there any transitory items in the first quarter margins that we should consider?
spk10: In the first quarter margins? Second quarter. Well, the second quarter margins, the thing to keep in mind is that we have a pretty significant ramp up in engineering expenses and also our SG&A expense is also expected to ramp back up. Last year in the second quarter, we really dialed down everything because we were shut down, weren't producing anything, and so we kind of going back to a little more normal activity level. So our second quarter engineering expense should be up somewhere 40 to 50 percent and our SG&A up in the 20 to 25 percent in the second quarter. So I think that is part of it and then also again there are some areas like particularly grain and protein where our pricing is lagging a little bit. These surging steel prices on some of the product sales that we'll have in the second quarter. So a little bit tighter margins there. So issues here and there on really price cost would be the other thing that I'd highlight.
spk15: Great. And in terms of the increased investments in smart farming and precision ag, I'm just wondering if you can provide extra details on the investments being considered and also how you think about organic versus M&A opportunities.
spk03: Well, we've already talked to you about the, it's around $50 million extra in engineering expense. Largely, that's all aimed at precision ag type solutions. And so that's the organic portion. We're actively looking all the time at acquisitions that would fit in either as a product to fill in a precision ag portfolio or a capability. So you saw 151 Research in our grain and protein business a little while back, provides intelligence to our grain bins. Now you can essentially get an MRI signal of the grain pile. We've got other discussions underway, and so we're looking for a balance between the two to try and accelerate this as fast as we possibly can. Our vision is to become a trusted partner in industry-leading smart ag solutions, and we want to propel forward as fast as possible to deliver on that vision.
spk04: The other piece of it, we're also investing, and it doesn't show up in engineering, is in our digital customer experience. We talked a lot about that at our analyst meeting, and when you think about our web presence and our ability to do business with our customers electronically, that's one of the areas that has been a key focus, and we think it's going to help us drive better penetration of some of our products and better service levels to our customers going forward. So that's another area that we're spending a lot of time and effort around.
spk11: Our next question comes from the line of Kristen Owen with Oppenheimer. Go ahead, please. Your line is open.
spk07: Thank you for taking the question. Really strong performance in grain and protein in the quarter. I believe you came into the year with a strong backlog there. So can you talk about order trends for that business and what your market share expectations are for the year?
spk10: The grain and protein order board is up about 80%, I think, versus a year ago. So we have a good order backlog. It really varies a lot by region. We're seeing significant orders increase in Asia, Pacific, Africa, as we mentioned in our comments. There's a A lot of interest in refreshing and improving the protein production capabilities of that market, so we have very strong demand there. South America, the market's still strong. In North America, we're seeing very high orders and interest on the grain part of the business, so the silos and conditioning equipment and handling equipment. But our orders are down and are down on the protein equipment. So protein is, as we also commented, is where there's a lot of issues in terms of with the higher commodity prices, those are higher input costs. So their margins are challenged and also still a lot of disruption from the COVID situation in terms of protein production facilities. So they're not investing enough. right now. So it's a little bit of a mix of what's going on better in grain and worse in protein right now.
spk07: Thank you for that caller. And then my follow up question is really as it relates to the other side of the coin on commodities inflation. We are seeing a lot of tightness in crop protection that's driving up prices. So can you talk about any impact that that may be having on demand for some of your precision technologies? I think you mentioned some numbers around sprayer orders, but any additional color you can provide there?
spk03: I think it's a great time for precision ag growth. For the reasons you said, precision ag, one of the roles of precision ag is to more efficiently apply inputs, seed and chemical. And so that's one driver. And then the second driver is general affordability of the farmer. And both of those are extremely positive right now. And so that's why I gave you those numbers of what we're seeing in terms of growth year over year on planter and sprayer technology. It's extremely strong, anywhere from 40% on rows, 60% on planters, and 35% on our nozzles from 2019.
spk11: Our next question comes from the line of Rob Wertheimer with Mellius Research. Go ahead, please. Your line is open.
spk02: Yeah. Hey, I just have a big quick picture question on where you would put kind of Europe in the cycle. You know, you show the Western Europe numbers. I don't know if the rest of EME has been generally stronger over the last couple of years, whether that's structural or not. And, you know, you know where, you know, you have more granular detail on what you sell in France and Germany and other places, you know, is 2021, fairly high cycle or, you know, where would you characterize it? And then, you know, the real question, I guess, is a follow-up is, are you seeing farmers, you know, want to sustainably purchase more or accelerate trade in, especially in Europe, you know, due to Precision Act? I'll stop there. Thanks.
spk03: You know, we'd say Europe is close to mid-cycle. You know, it just doesn't go through the same volatility swings that other markets do. One of the major reasons is that there's a higher subsidy level in Europe, so that provides more stability because a larger portion of the farmer income is subsidy-based. They don't have the highs and the lows that other markets do. So we see increased farmer sentiment, increased market demand, and that's generally based on really commodity price driven today. So those two are linked closely. Precision ag. is also a driver. It's of interest. We're growing our precision planting business throughout Europe, and it doesn't grow quite as fast as we're seeing in North America and South America. Typically, those two markets lead, and one of the reasons is farm size, that the average farm size in Europe is generally smaller. Now, in Eastern Europe, that's not the case, but in Western Europe, on average, farm sizes are a little bit smaller, so precision ag adoption happens a little bit later than it does in North and South America.
spk11: And we have time for one last question. Our final question comes from the line of Brett Lindsey with Vertical Research. Go ahead, please. Your line is open.
spk01: Hey, thanks for squeezing me in, and good morning, everybody. Morning, Brett. Yeah, I just wanted to come back to the order boards. You know, really healthy. I appreciate all the color on some of the different technologies. Have you already opened order slots for next year? Is there customer indication they're looking to procure equipment looking in the next year?
spk03: No. We don't have order slots for next year yet. Those are just dealer forecasts and market forecasts.
spk01: Got it. And then just back to the production downtime, you noted suspending production in Germany. What is the duration there and, you know, what is the anticipated impact and, I guess, what is the gating factor to shuttering more capacity in other regions?
spk10: Yeah, so, you know, most of these shutdowns that we described, this one was, you know, a week to 10 days, something like that. We've been, we've had plants, some plants not be affected so far. We've had some plants down two weeks so far. And what our manufacturing teams are working on is how to catch these lost days back up, working with unions and work councils to determine whether we can work on weekends, we can take vacation days, flex days, all sorts of mechanisms to get that capacity back in later in the year. Part of the challenge this year is constantly replanning and reforecasting and working on being as flexible as possible so that we can produce and meet all the demands that are out there. But a lot of these are a couple days here and there or a week, and so that's what we're dealing with right now.
spk11: And with that, ladies and gentlemen, I'd like to turn the call back over to Mr. Peterson for some closing remarks.
spk04: Thanks, James. And we just want to thank everyone for participating today and for your interest in AGCO. We look forward to continuing to answer questions as we go forward in the coming days. Thanks and stay well, everyone.
spk11: We thank you for joining the call today. This concludes today's conference call. You may now disconnect.
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