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spk01: Ladies and gentlemen, thank you for standing by and welcome to the AGCO 2021 Third Quarter Earnings Release Conference Call. At this time, all participants are in a listen-only mode. After the speaker 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. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to Greg Peterson, Vice President, Investor Relations. Thank you. Please go ahead.
spk12: Thanks, Shelby, and good morning. Welcome to all of you that are joining us for AGCO's third quarter 2021 earnings call. This morning, we're going to refer to a slide presentation that you can find posted on our website at www.agcocorp.com. The non-GAAP measures that we'll be using in the presentation are reconciled to GAAP metrics in the appendix of that presentation. This morning we'll make forward-looking statements, including demand, product development and capital expenditure plans, production levels, engineering expense, exchange rate impacts, pricing, shareware purchases, dividends, and future commodity prices, as well as crop production, our supply chain inflation, retail, revenue, margins, earnings, cash flow, tax rates, and other financial metrics. We do wish to caution you that these statements are predictions and that actual events may differ materially. We refer you to the periodic reports that we file from time to time with the Securities and Exchange Commission, including the company's Form 10-K for the year ended December 31, 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 resulting from COVID-19, which might include plant closings, workforce availability, and product demand. It also includes supply chain disruptions, weather, exchange rate volatility, commodity prices, and changes in product demand. We disclaim any obligation to update any forward-looking statements except as required by law. A replay of this call will be available on our corporate website later today. On the call with me this morning are Eric Ansodia, our Chairman, President, and Chief Executive Officer, and Andy Beck, our Chief Financial Officer. And with that, Eric, please go ahead.
spk13: Thank you, Greg, and good morning. We appreciate everyone joining us on the call today. Our third quarter results were highlighted by sales growth and earnings improvement against the backdrop of a very challenging supply chain environment. We continue to experience significant component shortages that are impacting our production volumes. These supply chain disruptions have intensified in recent weeks, and we have reduced our fourth quarter revenue and earnings to reflect our revised production plans. In addition, material and freight cost inflation is increasing, requiring additional pricing to offset its impact. The encouraging news is that despite the global supply chain bottlenecks and inflationary pressures, farmer economics are very, very healthy, and global end market demand remains strong. I would like to strongly recognize and appreciate the entire global AGCO team for their tireless and dedicated work to mitigate these challenging conditions, serve our customers, and maximize our full year results, which will feature strong margin and earnings improvement. Let's start on slide three, where you can see that net sales grew 9% compared to the third quarter of 2020. Adjusted operating income increased nearly 13%, while margins improved about 30 basis points. Our investments in smart farming precision ag and digital solutions are paying off, as we are seeing excellent demand for technology-rich vent tractors, our precision planting solutions, and replacement parts. Agco's precision ag sales are up over 33% so far this year, with strong growth for both our precision planting business as well as our Fuse suite of products. Our healthy balance sheet supports our technology-related investments as well as cash returns to our shareholders. Slide 4 details industry unit retail sales by region for the first nine months of 2021. The financial health of our farmer customers remains strong. Global crop production in 2021 looks to be very good, and agricultural commodity prices continue to support favorable farm income, resulting in increased demand for machinery. These improved conditions are expected to generate industry growth across all the major equipment markets in 2021. In North America, industry retail tractor sales increased about 17% in the first nine months of 2021, compared to the same period in 2020, with industry retail sales of large ag equipment growing by approximately 28%. Rural crop farmers are taking advantage of improved commodity prices and projected healthy income levels to upgrade their equipment. Industry retail sales in Western Europe also increased in the first nine months of 2021 versus supply-constrained levels a year ago. With growth across all major markets, higher wheat, dairy, and livestock prices combined with healthy levels of crop production are generating positive farmer economics and farmer sentiment in the region. In South America, industry sales increased strongly during the first nine months of 2021, driven by improved demand in Brazil, as well as recovery in the smaller export markets. Healthy crop production, as well as favorable exchange rates, are supporting positive economic conditions for farmers who continue to replace an age fleet. AGCO's 2021 factory production hours are shown on slide five. As I mentioned, AGCO continues to face unprecedented supply chain and logistics challenges, as well as material freight cost inflation. Supply chain constraints have intensified in the recent weeks, limiting our ability to increase our production to match the strong end market demand. The scarcity of parts has impacted the company's ability to produce and ship units, and contributed to labor inefficiencies, as well as higher than anticipated raw material and work and process inventory levels. While we expect to reduce our inventories before the end of the year from our current situation, the volatile supply chain environment is requiring us to carry more inventory. Total company production was up approximately 14% for the third quarter versus the very high rate of production in the third quarter of 2020. The largest increases were seen in our North and South American factories. Overall, we are projecting a 20% to 25% increase in full-year 2021 production compared to last year. You'll remember that production ramped up significantly in the back half of 2020, so our growth in the second half of 2021 will not be as large as what we've experienced in the first half of this year. Turning our attention to AGCO's order board, as of the end of September, our order board for tractors and combines was significantly higher in North America, Europe, and South America compared to a year ago. I'll now hand over the call to Andy Beck, who will provide you more information about our third quarter results.
spk06: Thanks, Eric, and good morning to everyone. I'll start on slide six, which looks at AGCO's regional net sales performance for the third quarter and first nine months of 2021. Agco's net sales were up about 8% compared to an extremely strong third quarter of 2020, excluding the positive impacts of currency translation. Robust in-market demand, particularly in South America, as well as favorable pricing drove the increase. The Europe-Middle East segment reported an increase in net sales of approximately 3%, excluding the impact of currency translation, compared to the high level of sales in the third quarter of the prior year. which benefited from the catch-up of deliveries of equipment following the factory shutdowns in the second quarter of 2020. Largest increases occurred in Italy, Turkey, and the U.K., which offset lower sales in Germany and France. Net sales in North America increased approximately 9%, excluding favorable impact of currency translation, compared to the levels experienced in the third quarter of 2020. Increased sales of precision planting products and midsize tractors produced most of the increase. Agco's third quarter net sales in South America grew 37% compared to the third quarter of 2020, excluding currency impacts. Sales were up strongly across all of the South American markets. High-horsepower midsize tractors and grain and protein equipment showed the most increases. Net sales in our Asia-Pacific-Africa segment decreased about 2%, compared to the high level of sales in the third quarter of 2020 on a constant currency basis. Lower sales in China and Australia were nearly offset by improved sales in Africa. Consolidated replacement parts sales were approximately $443 million for the third quarter of 2020, compared to $391 million for the third quarter of 2020. On slide 7, we examine AGCO sales and margin performance. AGCO's adjusted operating margins improved approximately 30 basis points in the third quarter of 2021 compared to the same period in 2020. Margins were supported primarily by higher levels of net sales and production. Our third quarter price increase of approximately 6% was able to offset the significant material and freight cost inflation that Eric discussed. For the remainder of the year, we expect material cost inflation to accelerate, and for net pricing to be approximately break-even. The Europe-Middle East segment reported an increase of approximately $5 million in operating income compared to the third quarter of 2020, resulting primarily from higher net sales and production partially offset by higher engineering expenses. North America operating income decreased approximately $23 million as increased pressure from material inflation resulted in lower gross margins particularly in the steel-intensive grain storage business. A weaker sales mix also contributed to the lower operating income. Operating margins in our South America region reached 11.6% in the third quarter, and operating income improved nearly $28 million from the same period in 2020. Significant increases in in-market demand and a healthy sales mix supported the growth. In our Asia Pacific segment, operating margins expanded to 11.9% in the third quarter, reflecting an improved sales mix. Slide 8 details grain and protein sales by region and product. Sales increased by about 20% in the first nine months of 2021 compared to 2020. Globally, grain equipment sales increased approximately 24%, with our South America and European regions showing the largest increases. Protein production sales grew approximately 16% in 2021, with the strongest growth in the Asia Pacific Africa and South American regions. Grain equipment demand has been stronger, supported by improved grain prices and profitability of farms. However, demand has been muted by significant price increases by manufacturers to cover surging steel costs. The protein production equipment market remains challenged due to labor issues, and higher input costs, such as grain. Protein prices are improved, so profitability is recovering. We're expecting a recovery in the grain and protein sales in 2021 for the full year, following weak sales in 2020, which were heavily impacted by the pandemic. Slide nine addresses AGCO's free cash flow for the first nine months of 2020 and 21, which represented cash used in operating activities, less capital expenditures. Additional working capital requirements this year related to higher inventory levels resulted in lower free cash flow for the first nine months of 2021 versus the same period this year. We expect our year-end raw material and work in process inventory to remain elevated to help us manage through the difficult supply chain environment. We have adjusted our full year free cash flow forecast to reflect an additional $200 million of working capital requirements due to increased inventory levels. AGCO's capital allocation priorities include investments in our precision ag offerings and digital capabilities, as well as opportunistically adding bolt-on acquisitions. We will continue to return cash to shareholders through our regular quarterly dividend payments, share repurchases, and annual variable special dividends. In the third quarter, we repurchased approximately $75 million in shares. 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 included losses on sales of receivables associated with our receivable financing facilities, which are included in other expense net We're approximately $7.4 million for the quarter compared to $6.1 million in the same period last year. Turning to our full-year forecast, our 2021 outlook for the three major regional markets is captured on slide 10. We maintained our market forecast for all regions as we believe production constraints will limit further retail demand upsides. In North America, higher commodity prices and improved farmer sentiment is expected to result in increased 2021 sales. Replacement demand for aged fleets 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 tractor sales to be up approximately 20% in 2021 compared to 2020. European Union farm economics have remained supportive in 2021. Higher commodity prices are expected to support healthy demand from the arable farming segment. Milk prices remain above the 10-year average, and economics are also positive for dairy producers. Western Europe industry demand is expected to remain strong and grow approximately 10% 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 about 15% from 2020 levels. Slide 11 highlights the assumptions underlying our 2021 outlook. Our priorities continue to be maintaining a safe working environment for our employees and and providing proactive support to our customers and our dealers. In addition to focusing on meeting the robust in-market demand, we also make significant investments in the development of new solutions to support our farmer-first strategy. AGCO's results are expected to be heavily influenced by supply chain performance for the balance of the year. Our outlook is based on current estimates of component deliveries. AGCO's results will be impacted if the actual supply chain delivery performance differs from these estimates. Our sales plan includes price increases of approximately 5.5% aimed at offsetting higher material cost inflation during 2021. At current exchange rates, we expect currency translation to positively impact sales by approximately 2%. Engineering expenses are expected to increase by $50 million to $60 million on a constant currency basis compared to 2020. The increase is targeted at investments in smart farming and precision ag products, as well as to continue our rollout of our platform designs. Operating margins are expected to be up 150 basis points from 2020 levels, driven by higher sales and production, favorable pricing, net of material costs, and productivity actions. partially offset by increased investments in smart products and our digital initiatives. We are targeting an effective tax rate ranging from 27 to 29 percent for 2021. Slide 12 lists our view of selected 2021 financial goals. The ability of our company's supply chain to deliver parts and components on schedule is currently difficult to predict. The following outlook is based on AGCO's current estimates of component deliveries. Our results will be impacted if the actual supply chain delivery performance differs from these estimates. We are projecting sales to be in the $10.9 to $11.1 billion range, with 2021 earnings per share targeted in a range of $8.75 to $9 a share. We expect capital expenditures to be approximately $300 million, and free cash flow to be in the $200 to $300 million range. With that, I'll turn the call back over to Greg.
spk12: Thanks, Andy. And this morning, as we move into the Q&A section, we ask that you limit yourselves to one question and one follow-up so that we can expand participation. Shelby, why don't you get us started?
spk01: As a reminder, if you would like to ask a question, please press star 1. That is Star 1 if you would like to ask a question. Your first question is from Joel Tiss of BMO.
spk04: Wow, I never get to be first. I just wondered, it seems like the supply chain issues or the deliveries from your suppliers have been kind of more week to week. You know, you'll have a good week and get a lot of stuff and the next week maybe won't be so good. And it seems like you feel a little more strongly about with your change guidance, that it's going to get lumpier or it's going to get a little bit less reliable. Can you give us a little bit of insight into what you guys are seeing, what's changed? Thank you.
spk13: That's a good read on it. First of all, thanks for the question. It's at the heart of today's topics, really. That's really the situation. A quarter or two ago, we expected that by this time, the supply chain would be healthier than we are seeing it actually to be. And so it's over that time, the overall supply chain has gotten very lean, essentially hand to mouth. So any disruption now is causing problems. And we have seen an increased rate of issues over the last few weeks where a lot of them are semiconductor chip related. But not only those things. There's still issues with tires, plastics, freight, and other things. It's the same issue here. This is not unique to our company. It's not unique to our industry. It's hitting all industries. It's the same thing we're hearing inside the company as you're reading in all the news journals outside the company. So yes, it is more severe than we would have predicted a while ago. It's fairly broad-based. And that's why we took the actions we did in terms of guidance.
spk04: Okay. And if I'm allowed a quick follow-up, I just wanted to ask Andy, with only two months left in the year, how come we have such a wide range on the tax rate? And then I'll go away. Thank you.
spk06: Well, the tax rate really is driven by profitability. And so, you know, given the range of profitability that we're talking about, you know, we're sticking with that wide of a range. So, I think we'll be able to get within that, but that's typically why we give such a wide range.
spk01: Your next question is from Steven Volkman of Jefferies.
spk10: Great. Hi, guys. I'm curious, I guess, sort of in the third quarter, do you have equipment that's sort of parked and waiting for parts but pretty much ready to go that can ship as we move forward?
spk13: Yes, we have actually thousands of machines that have been built and waiting for one, two components, and then ready to invoice to farmers. The big picture here, we have a tremendous order bank. We have six to nine months of orders on average, in some cases much more than that. In some cases, we're sold out for next year. We have very strong market demand. We have strong pricing power in the marketplace to handle the inflation situation that we have been under and we forecast to be under. It's really about the supply chain bottlenecks that we're dealing with, and we feel they're particularly acute right now, and we anticipate that those will ease over time. It's just an unpredictable environment we're in at the moment.
spk10: Okay, great. And that was a perfect setup, actually, Eric, because with so much backlog into 2022, what should we be thinking about in terms of the price impact in 2022? You probably have pretty good visibility there.
spk06: Yes, Steve. You know, we're still obviously making estimates of what we think pricing will require next year. First of all, to cover the inflationary costs and the carryover of the that we're experiencing right now, along with what the market demand is going to be, what pricing can we achieve. This year, as you see in our comments, that we're expecting pricing to be about 5.5%. I would see pricing next year to be at least in that range as well.
spk01: Your next question is from Courtney Yacovanas of Morgan Stanley.
spk00: Hi. Good morning, guys. Just wondering if you can just comment a little bit on how the supply chain issues are comparing globally. You're calling these out, and yet you beat most of our margin assumptions for the rest of the world aside from North America. So is this a North America isolated issue, or is that just more reflective of GSI, what we're seeing in margins there? Just any comment on how it's impacting your production globally.
spk13: Yeah, I think there's actually a couple questions embedded in your question, so I'm going to peel those apart a little bit. One is supply chain disruptions in terms of material flow is not a North America topic. It's hitting us in all regions, perhaps most acutely in Europe. But it's a challenge all over, especially because we have a global supply base. So a supplier may be located in one region but supporting factories in multiple regions. So disruption in terms of flow is global. Then the second point in your question was about GSI. The second issue is component pricing. And because GSI uses so much steel, that's why Andy called it out as they are getting hit by the inflationary impact of steel, which is up between 50% and 150%, depending on where it is. And that's why margins are challenged within GSI this year.
spk00: Okay, great. That's helpful. And then maybe just on South America, you know, you guys – got double-digit margins there this quarter. Can you help us just think about what's the right longer-term margin for that and market, since I think we had historically thought of it as a mid- to high-single-digit margin performer?
spk06: Sure. Yeah, we obviously had a very strong market Third quarter result, we had margins up because of stronger mix. Our grain and protein business, as we called out, had a really strong quarter with good margins. So there was a number of positive things that went on in the quarter. We also still haven't really seen the biggest wave of the cost increases hit our results yet that's coming. We expect that to be part of what happens in the fourth quarter where that high inflationary cost will hit the South America results a little more. So, you know, for the full year, we're looking at our margins in South America to be between, you know, in about the mid-sevens percent. And so I think that's a good target for us for the future. What we've said before is that we don't see South America needing to You know, we think it should be within the corporate average of our margin, so we would expect to drive margin improvement going forward like we expect in the rest of our business.
spk01: Your next question is from Kristen Owen of Oppenheimer.
spk08: Great. Thank you. Good morning. I wanted to follow up on the GSI commentary. There's obviously some strong seasonality to that business in the third quarter. But can you just parse out or put a finer point on the profitability impact on the quarter and talk about just where the backlog stands in that business today?
spk06: Yeah, you're right. The GSI business is typically strongest in the second and third quarters of the year. So we've had sales increases, as we talked about. Sales were up 9 or so percent in the third quarter, up up close to 20 percent for the year to date. We would expect their scale to be up probably 15 to 20 percent for the full year. Our margins are going to be either in line or slightly below last year, all because of what Eric discussed in terms of the surging steel prices, and we've had You know, some of those orders that we fulfilled this year were locked in and we couldn't raise the price, and so we have somewhat of a mismatch between the timing of these cost increases hitting us and the pricing. And so we think the third quarter is kind of the worst that we'll have on that, and it'll start to be better in the fourth quarter and as we move into 2022.
spk08: Great. Thank you for that. And as my follow-up, if I could just summarize, you know, the change in guidance is really about changing timing of deliveries, not demand destruction. You know, you've talked about the favorable farm income backdrop, but we've certainly seen some of the impact of higher input costs on farm sentiment. So can you help us square the circle there and talk to us about what you're hearing from your dealers and any potential for mixed shift or precision application uptake? Thank you.
spk13: Okay, there's a couple questions embedded in there too, so let me address them separately. The first one was about demand. Absolutely, I want to underline, we have extremely strong farmer sentiment leading to extremely strong demand, which has provided a huge order bank, the highest in the company's history. So the demand is absolutely strong. In addition to that demand, we've got strong pricing patterns, We have had, and we expect for it to continue. The demand in the marketplace is strong. They understand the situation. We anticipate that's going to continue forward. We watch our order rate, and it has not slowed down a bit yet. So that's explaining the demand side. The guidance is all about our ability in the short term to build all the orders. We're building them as fast as we can, but that's the situation. Then you also asked about precision ag. Laying on top of the general strong market is a real success story around Agco's precision ag business. The general business is up 24%, but inside of that is a precision ag business that's up 33%. Our smart planter rows are up 42%. Our ideal combines are up 80%. and you've seen us announce the acquisition of a couple of precision ag companies, one in the protein segment and one in the harvesting business. This is an area we continue to invest in, and we're seeing successes from those investments in the eyes of our farmers. They like the technology. They see a real profit-benefit to their operation. So I hope I touched on all the elements of your questions.
spk01: Your next question is from Larry DeMaria of William Blair.
spk05: Okay, thanks. Good morning, everybody. I guess you noted there's price increases coming, and you hope to have, I think, a similar level next year. But you already have half the year booked, and you're sold out for some stuff, as you noted. So all else being equal, can we still expect – you know, pretty decent margin expansion next year? Or is backlog not priced for today's material costs and we have to have further actions on the backlog to catch up maybe in the second half?
spk13: Yeah, Larry, that's a very natural question. And let me explain how we're thinking about it. First of all, we have two different kinds of orders. One is a retail order that's got a farmer name on it. And the other kind of order is a dealer stock order that they would buy a to put it on their lot to be sold later on. We are treating those two different orders differently. The dealer's stock orders or a wholesale order, we are not price protecting. And we are taking them in but not confirming them, meaning we have some flexibility on timing and on pricing conditions. In some situations, We may also apply surcharges on things like freight and other things to the order bank. Those are some of the elements, but in addition to just the general order bank, as we monitor, we constantly monitor the pricing in the order bank compared to the expected inflation in the order bank, and we feel that we're staying ahead of cost with the pricing that's in the order bank that we have today while retaining some of the flexibility through the tools I've talked about. And maybe last comment, in South America, where the inflation rate is the highest, costs are moving faster there, we only open up orders about one quarter at a time. So we're now opening up quarter one to receive orders, and then we'll fill up that order slot so that we don't get too far out in front of the headlights in the most volatile market.
spk05: Okay, thanks very much for that. And if I could ask a follow-up. You call that market share gains, which you kind of do every quarter. But are there any specific areas where material full-year improvements? I mean, ideal is up 80%, but whether that's material to the overall industry market share is unclear. And does the deer strike have any impact on, you know, how you're thinking about going after customers? And I'll leave it there. Thanks.
spk13: Yeah, I think where we're gaining market shares is likely more in North America right now, especially in large ag. And then, let me see, what was the second? Precision planting. And precision planting is certainly growing. Our precision ag business in North America is where we're having our largest success. And then there's a second half of his question.
spk12: Deer strike.
spk13: Deer strike, thank you. You know, I'll leave that for them to comment on. I'll just say a couple brief discussion is that at this point it's only been a strike for a few days. You know, the last one I think that they had was back in 1986. That one lasted 163 days. But that was in a very different market condition. If it lasts a short amount of time, then I don't think there will be a material impact. If it lasts a long time, then there certainly would be. But I'll leave that to them to comment on.
spk01: Your next question is from Nicole DeBlaise of Deutsche Bank.
spk09: Yeah, thanks. Good morning, guys.
spk06: Good morning. Good morning.
spk09: Maybe first just starting off with what you're seeing from a pricing perspective relative to cost. I think you guys mentioned that you were still price cost positive in the third quarter. If you could confirm that and is the expectation that in 4Q you'll be price cost positive? And if you think about the carry forward of both inflation and pricing into 2022, is that also the case?
spk06: In terms of this third quarter, we were slightly positive. And in the fourth quarter, I think it will be fairly neutral. What that does is result in a little bit of a margin deterioration when it's that tight. So we typically want to see a wider range there. But right now what's happening is because of some of these orders that we've price protected and locked in, we can't get the same amount of pricing as what we're seeing in terms of cost increases. So That is affecting our margins here in the third and fourth quarter a little bit. But overall, in terms of dollar coverage, pricing over cost will be fairly neutral in the fourth quarter. And as Eric mentioned, you know, we've got some levers that we can pull going forward in the next year to get more pricing, even within the current order board. There is a big carryover of pricing and cost, and we would expect – We've got a lot of work to do to finalize our plans for next year, but our intention is to make sure that that pricing is covering all the costs.
spk09: Okay, got it. Thanks, Andy. And then you respond to Courtney's question on the outlook for South America margins for the year. Can you also give us a sense of what you're thinking within the context of the full year guidance for North America and for Europe?
spk12: Yes. So Nicole, for North America, we're looking at margins in the 6% to 7% range for the full year. So that implies a nice, I'm sorry, closer to, we're looking at 10% roughly for North America, which implies a nice step up in the fourth quarter, closer to 7% or 8%. For Europe, we're looking somewhere between 11.5% and 12% for the full year. which takes into account some headwinds in the fourth quarter because of higher engineering expense and some of that material inflation that Angie talked about. Our Asia-Pacific margins look to be in the kind of low to mid-10s for the full year, which is about 150 basis points of improvement, and that also implies some cost headwinds in the fourth quarter.
spk01: Your next question is from Jamie Cook of Credit Suisse.
spk03: Hi, good morning. This is Colton Zimmer on for Jamie. Thank you for taking our question. We were wondering if you could just give an update on some of the strategic initiatives you laid out at the end of the day. So, you know, where is market share for the FENT product line? How is that kind of trended relative to your expectations? And then also if you could just comment on
spk13: the order book for some of the higher margin products that you outlined at the analyst day thank you we're really pleased with how the strategy is being implemented we uh all the initiatives that we talked about at the analyst day are on track we highlighted some of our growth businesses those are all growing nicely we're continuing the trend we had from 2020 where North America Large Ag, Fent Growth, Service Parts, and Precision Planting are all growth engines, and we intend to continue to invest to make them grow sustainably. And then we've got some improvement businesses, South America, Massey Ferguson, and you're seeing the results there. Three or four years ago, we were losing money in South America, and now the questions about today are, are we going to be above 10%? certainly our target for all of our businesses to be above 10% in the midterms. So we're very happy with how the strategy is coming together, and we feel like both growth businesses and improvement businesses are on track.
spk03: Great. Thank you.
spk01: Your next question is from Ross Ghilardi of Bank of America.
spk11: Hey, morning, guys. Hi, Ross. I think your new guide implies that margins are down year-on-year in the fourth quarter. How many quarters of year-on-year margin compression do you anticipate? The way it stands now, does it feel like your margins will be down in the first half of 2022?
spk06: We've got a little margin, as you point out, planned for Q4. We don't have... any real guidance yet to give you on 2022. You know, I think it's going to be an assessment based on, you know, how strong the demand is, and Eric's already kind of covered that, and then, you know, what our supply chain capabilities are. And so we're still working through that. You know, again, our long-term ambition is to grow margins, grow these strong margin products, and That'll be a goal for next year as well.
spk11: Dan, do you think you need to see real improvement in supply chain to have margins up in the first half of next year? Or is it really more of a timing issue with incremental pricing and so forth?
spk06: Yeah. You know, it's... There's a growth opportunity if we can get the supply chain ramped up because we do have such a strong order board. And then the other factor, as you mentioned, is where is how much of this cost wave that's coming, how does that match up with the pricing that we can implement? And so those are the key things that we'll be looking at to try to be able to answer your question. Can't really answer it today, but... Our intention, obviously, again, is get that pricing in, get it robust enough to cover these costs and to get margin improvement.
spk11: Okay, thanks a lot.
spk01: Your next question is from Jerry Revich of Goldman Sachs.
spk14: Hi, this is Ashok Sivamo, hand-on for Jerry Revich. I understand you're not providing guidance on year-over-year margin trends, but I'm wondering if you have any thoughts on the margin cadence versus normal seasonality. Do you think we can expect normal seasonality next year in terms of the quarterly margin cadence?
spk06: Well, I think there's nothing unusual that happened here in 2021 like 20 where we had these big, long disruptions in the production that caused 20 to be kind of an unusual year. 21 is more normal seasonality, but again... there are these supply chain constraints. And so that will be kind of the part that we really continue to need to factor in and to understand what is our production going to be, how much product are we able to ship each quarter. And so we're looking at that right now, obviously focused near term on what we can achieve this quarter, but we're also working on plans to try to improve the situation going forward as well.
spk14: Okay. And you mentioned the thousands of machines waiting on one or two components. I'm wondering if you're able to quantify the margin impact based on these manufacturing inefficiencies?
spk06: Well, I really can't. I mean, there have been inefficiencies in our production because, again, as you just pointed out, You run the equipment down the line, and then you have to go touch it again and put new components on. And so that takes an extra amount of cost and labor to be able to achieve that. And we're seeing that, and we expect some of that in the third quarter, and we expect to have some of that in the fourth quarter as well. So we're certainly not running... as efficiently as normally we would. And this environment is causing us to be much more inefficient than normal. It's not the highlight of the quarter or anything like that. It's not causing huge amounts of additional costs, but it is adding up.
spk13: And everybody in our industry is facing the same thing. We've been in this situation ever since COVID hit. Everybody's been challenged with that, and we'll be in it for a little while yet until the supply chain smooths out. Okay. Thanks for the call there.
spk01: Your next question is from Adam Ullman of Cleveland Research.
spk02: Hey, guys. Good morning. I wanted to ask about demand trends in Europe. We've seen fertilizer costs spike over there and, frankly, here in North America as well. Wondering how you're thinking about that and how that might impact equipment demand at all.
spk13: Yeah, so fertilizer is tied to energy. And energy prices, especially in Europe, energy prices have gone up everywhere, but in Europe, most acutely. And so that's why you're hearing a lot of talk, especially from our European farmers, about that challenge. But even in North America, farmers are to some extent hoarding or pulling ahead seed and fertilizer purchases because of their concern of both pricing and availability. So that may cool things off a little bit, which in the end may be a good thing. It could make this demand cycle less spiky and spread it out over a longer time frame. But it's so unpredictable at this stage, it's hard to give you an exact shape of what's going to happen. We think that it's a real pressure on farmers, and it may slightly cool their demand and spread it out over a longer period.
spk02: Okay, gotcha. And then just a clarification. I think it was mentioned that retail sales were lower in Germany and France. this quarter. I assume it's the delayed shipments, but maybe something else is going on there. Could you share what you're seeing in the industry stats?
spk06: Sure. Keep in mind, you have to first go back and remember what last year was like in the third quarter. So we had those production shutdowns in the second quarter, and then we were up in the third, and we actually had You know, it had our normal shutdown periods in the third quarter we were producing last year. So for that reason, it was kind of a catch-up period. So the market was delivering a lot of product last year. This year, we're kind of in a normal shutdown period. We do have the supply chain issues, and so that did affect the overall market. So, you know, in France and the U.K., Both markets, France was up slightly for the industry. Germany was down. And so that affects us because those are two different markets for us. But I think it was more timing of shipments more than overall kind of inherent demand.
spk01: Your final question is from Chad Dillard of Bernstein.
spk15: Hi. Good morning, guys. I just wanted to follow up on production shutdowns and just wanted to understand whether in the fourth quarter in your guidance, if any are baked in outside of the typical holiday shutdowns, if so, how much? And maybe if you can just talk about what, if any, impact there is from an absorption perspective.
spk06: Yeah, so we're really not cutting production too much because of these supply disruptions. As we mentioned, we want to still utilize as much of the production capabilities we have, so we're going to run equipment down the line if possible and wait for those final components. So there's probably some assembly hours we've taken out, but a lot of the fabrication and other aspects are still planned to be done in the fourth quarter. So that's one of the reasons why our inventory is up in the fourth quarter from what we said before. There is some impact to our production levels, but not a significant amount. It's just more timing of when we can get the units shipped.
spk15: Got it. Okay. And then maybe you can give us some early thoughts on just how you're thinking about the farm economics, equipment demand, based on what you're hearing from dealers in North America and South America for 22. Okay.
spk13: Yeah, I mean, so farmer sentiment is still very strong. When you take a look at commodity prices, they aren't at their peak level that they were at spring, but when you look at them relative to the last several years, they're still extremely strong in all cases. And that's projected to stay strong for quite some time. The carryover inventories are in a position where it's somewhat predictable what those commodity prices will be. So farmers... And then you combine that with the fact that we're still exiting a period of pent-up demand where the farmers had restricted the amount they bought for the last several years, and so they're wanting to refresh their fleet as soon as they're able to afford it, and they're able to afford it right now. So you've got that situation combined with the fact that dealer inventories are lower now than they were for the last several years, and in some cases lower than we've ever had them, So you've got a farmer interest and demand situation. You've got a thin pipeline between us and the farmers, and then a commodity grain situation that makes it somewhat sustainable. Having said all that, we're in an unpredictable, uncertain time period in terms of what happens week to week, month to month. How it all plays out exactly is hard to predict because of the supply situation. So that's the main thing. summary of where we stand right now.
spk01: There are no other questions in queue. I'd like to turn it back to Greg Peterson for any closing remarks.
spk13: I'll go ahead and just wrap up and then turn it over to Greg. I appreciate all the questions today. We are very happy with the three quarters of performance for the year. You saw we've turned in a strong quarter three, and we're sitting on top of a very strong order bank, strong pricing power. We're arm and arm with our dealers, managing through this situation with our farmers to keep farmers farming. And we have a strong market in front of us with very lean inventories in the pipeline in the marketplace. We're managing through the supply chain. This is a situation not specific to AGCO, not specific to the industry. It's hitting all sectors. What we're hearing inside the company is the same thing you're reading about across all the industrials. And because of that, it's getting a lot of attention from governments, from private industry, and so on, to solve these problems, solve these bottlenecks, and get more capacity flowing more efficiently. That's why we have confidence and expectation that this will get solved, and we'll be able to get the product our customers are demanding to them. The challenge is just predicting with the amount of uncertainty exactly how that will play out, and so that's why we've signaled our guidance for the quarter, but big picture, we've got a very strong situation for the company overall. Thanks for your investments in the past and your questions for today. Turn it over to Greg. Thank you.
spk12: Thank you, Eric, and we appreciate y'all's participation today and encourage you to follow up with us later if you have remaining questions. Thank you.
spk01: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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