AGCO Corporation

Good day, everyone, and welcome to the AGCO 2022 Second Quarter Earnings Release Conference Call. Today's call is being recorded. And now at this time, I'd like to turn the call over to Greg Peterson, AGCO Head of Investor Relations. Please go ahead, sir.

Thanks, April, and good morning. Welcome to those of you joining us for AGCO's Second Quarter 2022 Earnings Conference Call. This morning, we will refer to a slide presentation that's posted on our website at www.agcocorp.com. The non-GAAP measures that we'll use in the slide presentation are reconciled to GAAP metrics in the appendix of those slides. We'll also make forward-looking statements this morning, including demand, product development and capital expenditure plans, production levels, engineering expense, exchange rates, pricing, shareable purchases, dividends, future commodity prices, crop production or supply chain, inflation, component deliveries, retail revenue, 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 company's Form 10-K for the year ended December 31, 2021. 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, including plant closings, workforce availability, and product demand, supply chain disruption, 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. We will have a replay of this call on our corporate website later today. On the call with me this morning are Eric Cansodia, our Chairman, President, and Chief Executive Officer, Damon Adia, our Senior Vice President and Chief Financial Officer, and Andy Beck, our former CFO and now Senior Vice President and Senior Advisor. With that, Eric, please go ahead.

Thank you, Greg, and good morning. We appreciate your interest in AGCO and your participation on the call today. Our second quarter results, summarized on slide three, exceeded our updated forecast. I'm really, really proud of the strong effort our team put forth to mitigate the impacts of the cyber attack, significant currency headwinds, and a difficult supply chain environment. Despite these challenges in the quarter, we maintained our full-year financial targets that include strong revenue growth, margin expansion, and absolute record earnings per share. We expect to deliver these results even with the continued supply chain and logistics challenges, as well as material and freight cost inflation, which are being muted by strong pricing. For our markets, although commodity prices have pulled back from the extremely high levels earlier this year, They remain at levels that still support healthy farm income. Overall demand in AGCO's major end markets remains robust. Our order boards are ahead of last year's high levels, and our production plan supports sales growth in the balance of the year. Interest in our precision ag solutions is strong, very strong, and we have increased our technology and digital investments to support further growth. Slide four details industry unit retail sales by region for the first half of 2022. Weather and geopolitical conflicts are pressuring crop production this year. Estimates for lower year-end grain inventories are supporting crop prices, resulting in healthy farm economics and elevated demand across all major markets. Industry retail sales continue to be negatively impacted by supply chain constraints, which is limited equipment production during the first half of 2022. We continue to believe that the weaker year-to-date industry sales on this slide are a result of supply chain challenges and not softening end market demand. North American industry retail tractor sales were down approximately 7% in the first six months of 2022 compared to last year. Smaller tractors declined from their record levels of 2021. while increased sales of high horsepower units offset some of the decline. Industry retail tractor sales in Western Europe, which also were restricted by supply chain challenges, decreased by approximately 10% in the first half of 2022 compared to strong levels in the first six months of 2021. Farmer sentiment has been negatively impacted by the conflict in Ukraine, as well as input cost inflation. but forecasts for healthy farm income in Western Europe are expected to support solid retail demand for equipment throughout 2022. In South America, industry sales increased during the first six months of 2022 in both Brazil and Argentina. Strong crop production levels, as well as elevated commodity prices, are supporting positive economic conditions for farmers who continue to replace an age fleet. AGCO's 2022 factory production hours are shown on slide five. As a consequence of the cyber attack, we suspended production in the majority of our production facilities for up to two weeks during the month of May, while we successfully restored our systems. This caused our second quarter production hours to be down about 8% compared to the second quarter of 2021 and resulted in lower sales in the quarter than our original targets. We expect to recover the second quarter production losses by increasing production in both the third and fourth quarter. For the full year of 2020-22, we currently project production hours to increase approximately 5% to 7% compared to the 2021 levels. Our current July production rates are solidly on track to deliver the higher production plan in the months ahead. The supply chain issues have impacted our ability to complete and ship units, as well as contributed to labor inefficiencies. The volatile supply chain environment is still requiring us to keep higher than normal levels of raw material and work and process inventory on hand. We are facing supplier bottlenecks and delays in all regions, and although trending slightly better in some markets, we expect continued challenges in the quarters ahead. However, the combination of increased production in the second half and the current volume of semi-finished products gives us strong confidence in our full year sales outlook. At quarter end, AGCO's order board remains extended. Orders for tractors and combines are higher in North America and Europe, and we're down modestly in South America compared to a year ago. But please note that we are continuing to limit our order board in Brazil at three months to give ourselves more pricing flexibility. Many of you were with us for our sustainable technology event in Germany a few weeks ago where we showcased our precision ag capabilities. Slide six highlights one of the key themes from the event, our focus on high margin growth. The first focus area is taking our Fendt full line brand global. Historically, Fendt has been a very strong tractor business in Europe. We are working to grow the business along two vectors. The first, expanding Fendt product line beyond tractors, and the second taking the Fent full line products global. Interest is growing in our premium Fent product lines in both North and South America. Our Fent branded sales in the first half of 2022 have increased over 20% compared to the first half of 2021. And we expect these growth rates to improve in the second half based on our current production plan. Our Fenton Challenger sales in North and South America are expected to double in 2022 as compared to 2020. Our ambitious target is to double them again over the next five to seven years. The second focus area involves precision agriculture. At AGCO, we address the precision ag market in two ways. First is through our precision planting business, which has become one of the fastest growing ag tech companies in the world. Precision planting has been successful in providing automation and intelligence to planters, and now they're growing well beyond planters into other parts of the crop cycle, like spraying, harvesting, and even others. In addition to their impressive technology, precision planting success is generated through their unique retrofit approach, which reduces the farmer's upfront investment and increases their ROI. By offering solutions through a retrofit approach, we expand the addressable market beyond agco brands to all industry brands. The other way we address the precision ag opportunity is our business called Fuse, which provides OEM solutions for our agco equipment. Options like telemetry, guidance, field mapping, and other precision ag capabilities make our agco machines smarter and more productive for the farmer. FUSE is also on an accelerated growth curve as farmers are looking to add features to become more capable, more intelligent, and more productive. I'll touch on the financial impacts of AGCO's precision ag in a minute. The third high-margin focus area is our global parts and service business. AGCO is already in a leading position relative to having the part there when the farmer needs it. We call that parts fill. we're building from a solid foundation to capture more of the dealer and farmer's business. We're helping dealers become better and more proactive with their service and parts offering with our smart solutions and expanding our digital capabilities. As a result, we expect after sales and parts business to grow and have higher penetration. Combined, these three opportunities provide significant growth potential at higher margins and less variability during cyclical downturns. It's a real win-win-win for farmers, investors, and AGCO. Slide 7 covers another key message from our meeting in Germany. A big part of our growth story is the significant expansion of our addressable market thanks to precision ag capabilities. As we focus on delivering value to farmers, we see the opportunities to add value across all aspects of the crop cycle. We are now focused on delivering value to customers to help them improve yields while reducing input costs like labor, fuel, seed, and fertilizer. It's why we're investing in Precision Ag and why we see this as a significant growth opportunity for Agco. By addressing solutions across the crop cycle, Agco's leading Precision Ag solutions will allow us to expand our reach and capture a larger share of the value created from our innovations. Slide eight details how this comes together with our growth ambitions for our precision ag business. At our analyst meeting in early 2021, we talked about doubling our precision ag business by growing our precision planting and our fuse businesses. We committed to growing from 400 million in sales per year to 800 million per year by 2025. So far, we are ahead of schedule to reach the original goal. Through strong execution and the great reception our products are receiving from our farmer customers, we have delivered a compound annual growth rate of over 20% in our precision ag business since 2018. With that strong performance, we are now targeting over $900 million in revenue from our precision ag portfolio by 2025, while maintaining the strong margin performance I continue to be very, very excited about the future of our precision ag business, not only for us, but for our farmers as well. And now it's my pleasure to introduce our new CFO, Damon Audia, who is replacing Andy, who has decided to retire from Agco after 28 years of fantastic service with the company. As many of you already know, Damon comes to us from Cana Metal. We are very excited to have Damon joining our management team and meet with you over the coming many months. Andy is helping with the transition and will be on hand to help with Q&A today. With that, Damon, please go ahead.