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spk37: Good morning and welcome to the AGCO 4th Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key, followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your touchtone phone. To withdraw from the question queue, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Greg Peterson, AGCO Head of Investor Relations. Please go ahead.
spk20: Thanks, Anthony, and good morning. Welcome to those of you joining us for AGCO's fourth quarter 2022 earnings conference call. We will refer to a slide presentation this morning that's posted on our website at www.agcocorp.com. The non-GAAP measures used in that presentation are reconciled to GAAP metrics in the appendix of that presentation. We'll also make forward-looking statements this morning on our call, with respect to demand, product development and capital expenditure plans, production levels, engineering expense, exchange rates, pricing, share repurchases, dividends, interest rates, future commodity prices, crop production, supply chain disruption, inflation, component delivery, sales, 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 31st, 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, such as plant closings, workforce availability, and product demand. They also include 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. 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 Damon Audia, our Senior Vice President and Chief Financial Officer. With that, Eric, please go ahead.
spk22: Thanks, Greg. Good morning. It's great to be with you. We finished 2022 incredibly well from both an operational and financial perspective. But before we get into those details, I want to start with a quick recap of the Investor Day we hosted in December. Those of you that attended will recognize this slide from that meeting. It's the foundation of our strategy all on one page. The purpose, vision, and overarching strategy we laid out at the 2021 investor meeting haven't changed. We are concentrated on delivering farmer-focused solutions to sustainably feed our world. These solutions are more than machinery. They are all about the data, technology, connectivity, and digital solutions around the machines. Sustainability is also key to who we are. It weaves through our day-to-day activities and is a cornerstone of our strategy. Finally, feeding the world energizes our purpose. While our strategy hasn't changed, we are doubling down on our key strategic initiatives, growing faster than the market, optimizing our business, and fostering a culture that enables success. We've raised the bar on our technology commitments and our financial performance. particularly in our operating margin performance. You'll see that as we move to our fourth quarter results. This focus is already paying off in terms of strong top-line growth and a very healthy margin expansion. Slide four highlights our great finish to 2022. We posted a record fourth quarter and full year in terms of sales, operating margin, and earnings. I would like to deeply thank AGCO's 25,000 employees for their hard work that resulted in the world-class support for our farmer customers throughout this challenging year. These efforts helped deliver fourth-quarter sales growth of 24%, with adjusted operating margins expanding by 340 basis points to 12%. For the full year, our net sales reached almost $12.7 billion. Adjusted operating margins improved 120 basis points to 10.3%, and adjusted earnings per share hit $12.42. Now, these are all records for AGCO. During 2022, while delivering record results, we also executed an ambitious investment plan to expand our smart farming solutions and enhance our digital capabilities through increased engineering spend and several key acquisitions. Overall, I could not be prouder of our team. These record results are a testament to our focused execution on our strategy while continuing to deal with supply chain challenges during the year. While the supply chain has improved over the last couple quarters, we continue to experience significant component shortages that are impacting our production volumes. The encouraging news is that despite the global supply bottlenecks and inflationary pressures, farmer economics remain healthy. and a global end market demand remains strong. We expect supportive market conditions to continue into 2023. Our financial outlook for 23 reflects this optimism, which will allow us to accelerate technology-related investments as well as continue to return cash to our shareholders. Slide five details industry unit retail sales by region for the full year of 2022. Support of farm economics resulted in robust demand for larger agricultural equipment as farmers continued to replace aging machines during the year. Supply chain constraints, limited industry production, and dealer inventory levels of new and used large ag equipment remain well below normal levels across the industry. For 2022, global industry retail sales of farm equipment were lower in North America and Europe despite significantly higher sales of larger machines. North America industry retail tractor sales were down approximately 5% for the full year compared to 2021. Smaller tractor sales declined from record levels in 2021, while increased sales of higher horsepower units helped dampen the decline. Industry retail tractor sales in Western Europe, which also were restricted by supply chain challenges, decreased approximately 9% in 2022 compared to robust levels in 2021. In South America, industry retail tractor sales increased 3% during 2022. Strong growth in Argentina and the smaller South American markets offset modestly lower overall sales in Brazil despite strong demand for large ag equipment. Healthy crop production and favorable margins are supporting farm profitability. These supportive economics are expected to drive healthy demand in South America again throughout 2023. We are very positive about the underlying ag fundamentals supporting strong industry demand in 2023. Stocks to use levels of grain all around the world remain at very low levels, supporting healthy commodity prices. With China's reopening, we don't think that'll change anytime soon. The dealer channel for new and used equipment is still below target levels from the constrained supply. Input costs like fertilizer and fuel are down significantly from their peaks last year. While farm income may be down modestly in 2023 from record levels in 22, we think it will remain at a very good level in 2023 and be supportive for industry demand. Currently, We don't see that changing much for 2024. AGCO's 2022 factory production hours are shown on slide six. You can see that our production increased in 2022 in line with our expectations. Although we continued to face supply chain and logistics challenges, we were successful in reducing our inventory as semi-finished products. In the fourth quarter, we reduced the work in process inventory by nearly $275 million compared to the level at the end of the third quarter. For the full year, production hours increased approximately 6% compared to the 2021 levels, as we worked to satisfy the strong demand. Based on our industry and market share forecasts, we are projecting a 3% to 5% increase in production hours for 2023. At year end, AGCO's Global Order Board remained extended and is approximately flat compared to the strong December of 2021 level. Orders for tractors and combines were higher in Western Europe and South America compared to a year ago. In North America, orders were down from 2021 levels as we have elected to limit our order intake to improve our on-time delivery rates. Our order coverage extends through the third quarter of 2023 in Western Europe and North America and through the second quarter of 2023 in Brazil, where we continue to limit our orders to around one quarter in advance to give ourselves more pricing flexibility. The bottom line? Demand for our farmer-focused products remains very strong. You'll recognize slide seven, which highlights our focus on three high-margin growth areas. These opportunities provide significant growth potential at higher margins and less variability during the cyclical downturns. The first focus area is taking our Fent full line brand global. We continue to grow the business along two vectors. The first, we expanded the Fent product line beyond tractors to now include key products like sprayers, planters, combines, and more. The second mention is taking this full line of Fent products global. As you can see in our results, interest continues to grow for our premium Fendt product lines in both North and South America. In 2022, our Fendt branded sales in those markets increased over 31% compared to 2021. Our Fendt and Challenger sales in North and South America are expected to double over the next four to six years. The second focus area is our global parts and service business. AGCO is already in a leading position in fill rates, which is just effectively having the right part at the right place when the farmer needs it. We're building from a solid foundation to capture more of the dealer's and farmer's business. We're helping dealers become better and more proactive with their service and parts offerings with our smart solutions and expanding digital capabilities. As a result, we expect our high margin after sales and parts business to continue to grow and have higher penetration rates. The third 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 most successful ag tech companies in the world. Precision planting has been a leader in providing automation and intelligence to planters. Over the last couple of years, it's growing beyond planters into the other parts of the crop cycle, like spraying, soil testing, and harvesting. In addition to its impressive technology, precision planting success is generated through their unique OEM-agnostic retrofit approach, which reduces the farmer's upfront investment and increases their ROI, regardless of the equipment brand that they own. By offering solutions through this retrofit approach, we are expanding the addressable market well beyond agco brands to all industry brands. The other way we address the precision ag opportunity is FUSE, which provides OEM solutions for our agco equipment. Regarding advanced technology, we remain focused on driving technology innovations that help our farmers improve their productivity, profitability, and sustainability. As we have seen multiple times, these types of innovations are receiving strong recognition in the form of industry awards. Just recently, AGCO won 10 innovation AE50 awards from ASABE, which recognizes the best innovations and technologies for agriculture, food, and biological systems. Not only was this the most awards of any company, but more than our top two competitors combined. Going a little deeper into our technology, our unique retrofit approach caters to a huge audience. There is nowhere better to showcase this and to educate our farmers than our Precision Planting Winter Conference, which held its annual event last month. At this event, we hosted nearly 7,000 of the best farmers in the world to hear directly from our engineers and agronomists about product development and research we have done in the field. I attend this program myself every year. I had the chance to have lunch with farmers from Kazakhstan, Ukraine, and Poland. All those that attended had the opportunity to see the latest precision planting technologies and learn how these advancements can help improve the productivity on their farms. Historically, the new product introductions had been focused on planters. However, starting last year, precision planting broke from that tradition and made a big announcement as they brought five needed solutions to the sprayer, including adding a neural network onto the 2020 architecture, leveraging artificial intelligence capabilities, for targeted spraying solutions. The team continued their momentum of solving the farmers biggest problems this past summer by announcing it was revolutionizing soil testing with the introduction of Radical Agronomics soil testing technology. Radical boasts the world's first fully automated soil laboratory and one of the AE50 award winners this year. This new product disrupts the 100 year old soil testing model and puts the capability into the hands of local agronomists with faster and more reliable results. Understanding how to improve soil health is great for farm productivity, but also great for the emerging need of carbon sequestration. At this year's conference, our precision planting team made another disruptive launch with their new Panorama Data app. The new app, pictured on slide 9, makes precision planting data the most usable, portable, and shareable planter information on the planet. Panorama modernizes the way our 2020 controller interacts with the world. It helps farmers better utilize collected data by allowing for easy uploads to the platform of their choice. Panorama allows farmers an unobstructed view of the data collected in their cab, whether on their app or through moving data to the platform of their choice. Panorama will feature map viewing, reporting, and the ability for a farmer to allow their precision planting dealer to provide remote technology support. We are very excited about continuing to bring these types of precision ag technologies to our farmer customers, with our core focus of trying to solve their biggest challenges, which will also contribute to our growth and margin expansion goals for Agco. With that, I'll now hand over the call to Damon, who will provide you more information about our fourth quarter results.
spk15: Thank you, Eric, and good morning, everyone. I will start on slide 10 with an overview of AGCO's regional net sales performance for the fourth quarter and the full year. Net sales were up approximately 33% in the quarter compared to the strong fourth quarter of 2021 when excluding the negative effects of currency translation. Pricing in the quarter, which was around 13%, contributed to higher sales along with strong growth in high-horsepower tractors, combines, and precision ag products. By region, the Europe-Middle East segment reported an increase in net sales in the fourth quarter of approximately 38%, excluding the negative effect of currency translation compared to the prior year. The increase in sales was the result of solid execution of product deliveries coupled with favorable pricing and strong retail demand in Germany, France, and Turkey. In South America, net sales in the fourth quarter grew approximately 58% year over year, excluding favorable currency translation, driven by significant pricing, as well as increased volume and positive mix. Sales were up strongly across the South American markets, with high horsepower tractors and combines showing the largest increases. Net sales in North America increased approximately 23%, excluding the unfavorable impact of currency translation compared to the fourth quarter of 2021. The increase resulted from higher sales of large tractors, precision planting products, and combines, as well as strong year-over-year price increases. On a constant currency basis, net sales in our Asia-Pacific-Africa segment decreased about 15% compared to the fourth quarter of 2021. Delays of shipments from our European factories resulted in lower sales across the Asia-Pacific Africa markets relative to the strong fourth quarter last year. Finally, consolidated replacement part sales were approximately $366 million for the fourth quarter, approximately flat year over year. Unfavorable currency effects were around 10% during the fourth quarter. Turning to slide 11, the fourth quarter adjusted operating margin improved by approximately 340 basis points versus 2021. Margins in the quarter benefited from higher sales and production, a richer mix, and positive net pricing compared to the fourth quarter of 2021. Price increases in the quarter of approximately 13% more than offset significant material and freight cost inflation on a dollar basis and were positive on a margin basis. For the full year, net pricing was positive and contributed to the overall margin improvement. By region, the Europe-Middle East segment reported an increase of approximately 100 million in operating income compared to the fourth quarter of 2021, and margins improved approximately 250 basis points. Higher sales and healthy products mix contributed to the improvement. North American operating income for the fourth quarter increased approximately $37 million year over year. Higher sales of margin-rich products more than offset higher operating expenses. Operating margins in South America reached 20% in the fourth quarter, and operating income improved over $85 million versus the same period in 2021. Continued significant increases in end market demand along with strong pricing and a healthy sales mix supported the year-over-year growth. Finally, in our Asia-Pacific-Africa segment, operating income declined approximately $19 million in the fourth quarter, reflecting the delivery timing challenges I mentioned earlier. With margin expansion in the last two years in our North American, South American, Asia-Pacific-Africa regions, from our strategy execution and discipline pricing, we expect AGCO's margin profile to be more balanced across the globe in the years ahead. Slide 12 summarizes our precision ag business. As you can see, we are focused on expanding our addressable market from just traditional agricultural machinery spend, which today is in the low to mid teens. With our precision ag portfolio, our sites are set around 70% for all non-land areas. We believe that the investment in precision ag positions us well as it will play a major role in achieving global sustainability targets that are being established while simultaneously helping our farmers improve their profitability. Finally, we recorded $700 million in precision ag revenue in 2022, a 29% increase from 2021. Unfavorable foreign currency effects were around 3% in 2022. As we announced during our December Investor Day, we now expect our high margin precision ag business to grow to $1 billion by 2025. Slide 13 details our full year free cash flow for 2022 and 2021. As a reminder, free cash flow represents cash used in or provided by operating activities, less capital expenditures, and free cash flow conversion is defined as free cash flow divided by adjusted net income. While we made significant sequential progress in reducing our work and process inventory in the fourth quarter and generated over $1 billion in free cash flow, working capital requirements related to supply chain challenges continue to result in higher than traditional inventory levels. This affected free cash flow in both 2021 and 2022. Despite that, ADCO generated $450 million in free cash flow in 2022, up 15% versus 2021. For 2023, we expect our raw material and work-in-process inventory to remain somewhat elevated given supply chain challenges, but we expect it to be a modest source of cash versus 2022. We expect our free cash flow conversion to range from 75 to 100% of adjusted net income, a significant increase from 2022. Our capital allocation priorities remain unchanged. and will continue to include investments in our precision ag offerings and digital capabilities, as well as opportunistically adding bolt-on acquisitions to help position AGCO for long-term success. In addition, we remain focused on our direct returns to investors during 2022, with a regular quarterly dividend that we increased 20% to $0.24 per share and a variable special dividend of $4.50 per share. Future returns of cash to shareholders will be based on cash flow generation, our investment needs, which include capital expenditures and acquisition opportunities, as well as our market outlook. Slide 14 highlights our 2023 retail market forecast for our three major regions. Globally, driven by strong commodity prices, we expect healthy farm economics to support another year of strong end market demand. For North America, we expect similar demand compared to the healthy levels in 2022. We expect continued growth in high horsepower row crop equipment segment to be offset by softer demand for smaller equipment after the several years of strong growth. Increasing interest rates are expected to continue to slow the smaller equipment segment of the market. In South America, we expect industry sales to be flat to up 5%, moderated by supply chain constraints. This region remains one of the strongest end markets, especially in Brazil, where they are forecasting record production and strong farmer profitability, which we expect to drive demand for large ag equipment beyond 2023. As grain exports from Brazil are expected to increase over the next several years and they continue to increase arable land, we expect the demand for our large ag equipment to remain strong. Shifting to Western Europe, The industry is forecasted to be relatively flat compared to 2022. Farm fundamentals in the region are generally healthy, with grain prices continuing to outpace input inflation. Meanwhile, supply chain constraints last year are extending the equipment replacement into 2023. Slide 15 highlights a few key assumptions underlying our 2023 outlook. In addition to focus on meeting the robust and market demand, we will also make significant investments in the development of new solutions to support our farmer first strategy. Although we see strong market demand, AGCO's results will still be dependent upon our supply chain performance in 2023. Our sales plan includes market share gains along with price increases of approximately 8% aimed at offsetting material cost inflation. We expect currency translation to negatively impact sales by about 1%. Engineering expenses are expected to increase by approximately 20% compared to 2022. The increase is targeted at investments in smart farming and precision ag products. Operating margins are expected to improve to around 10.5%, driven by higher sales and production, favorable pricing net of material costs, and improved factory productivity, partially offset by increased investments in our engineering and digital initiatives, as well as inflationary cost pressures. With increasing interest rates and higher sales forecasted, we expect other expenses, mainly related to accounts receivable sales, to increase approximately $50 million year-over-year, with the majority of that in the first half of 2023. We are targeting an effective tax rate in the range of 27% to 28%. Turning to slide 16, our financial goals remain unchanged from what we highlighted at our December Investor Day. We are currently expecting net sales to be in the range of $14 billion. Earnings per share should be around $13.50 in 2023. We are targeting capital expenditures of $375 million. As I mentioned earlier, Free cash flow conversion should be in the range of 75% to 100% of adjusted net income consisted with our long-term target.
spk14: With that, I'll turn the call back to Greg for Q&A.
spk20: Thanks, Damon. As Anthony organizes our Q&A list, we'll ask that you limit yourselves to one question and one follow-up in order to increase participation. Anthony, with that, please get us started.
spk37: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchstone phone. If using a speakerphone, please pick up your handset before pressing the keys. Again, please limit yourself to one question and one follow-up. To withdraw your question from the queue, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question will come from Jamie Cook with Credit Suisse. You may now go ahead.
spk04: Good morning. Good morning and congrats on a nice quarter. I guess my first question just, you know, South America, I don't think I've ever seen a 20% margin for you guys in South America, but just, you know, as we think about the margin performance that you put up in 2022, how much is sort of structural or related to, you know, increased sales of FEN or aftermarket or precision ag versus, you know, just pricing power. And I'm just wondering how I think about those margins longer term, just given the strength you guys have seen in 2022 and, And then my second question, again, strong margin performance. You know, what parts of the portfolio are underperforming? If any, perhaps, you know, GSI, can you help us with where GSI margins ended this year versus, you know, the opportunity going forward? Thank you.
spk15: Yeah, sure, Jamie. So if we look at South America, your first point, as we've said for the last couple quarters now, the margins have been exceptional, you know, and really twofold. One has been the structural improvements that we've made in South America over the last several years to really move to the higher horsepower type tractors, introducing Fent there. And that has created some structural differences to our overall operating performance. That, coupled with probably the strongest end market that we have right now around the world, is really catering to stronger pricing. So, like you said, the 20% in the quarter was exceptional. As we tried to guide, we do think margins will come down a little bit here in 2023 as our pricing, our team down there has done a really good job in pricing in advance of material cost rising. So we know that will come down. What we would say is longer term, we do expect to see South America structurally different and sort of in that low to mid teens for the long term. So again, a lot of improvement over the past couple years, but we're at sort of a high point and we continue to expect to see that at least for the foreseeable future, but a little bit lower as we move into 2023. To your second part of your question on some of the underperforming areas, I think we would say the grain and protein group did struggle a little bit relative to what we were expecting. It was sort of challenged by a couple things in the start of the year with the steel prices really affected here in North America. We dealt with the cyber event, as you recall, in the second quarter, which really put an incremental pressure on grain and protein here in North America. And then the Asia Pacific part of grain and protein was really challenged by the challenges in China with the COVID lockdowns affecting a lot of the business there. So those two parts of grain and protein, I would say, were below what we were hoping. South America grain and protein did quite well, was a contributor there. We've taken some structural actions, as you know, to really improve that business. We've done some factory closures. We've added some technology-type acquisitions as part of that portfolio. So as we move into 2023, we are expecting it to improve profitability. It was profitable here in 2022. I would say low single digits, but again, overall profitable business with a big improvement or bigger improvement expected here in 2023.
spk04: Thank you very much. I'll get back to you.
spk37: Our next question will come from Tammy Zakaria with JP Morgan. You may now go ahead.
spk27: Hi, thanks. This is Sean McLaughlin. I'm for Tammy. Last quarter, I think you mentioned around 300 million of sales that got pushed into 4Q. Can you just provide an update on where kind of red-tag units stand today and whether that all got worked through at year-end? And then also, in your prepared remarks, you mentioned the missed shipments in APA. Can you provide just some quantification or details on whether that all kind of gets delivered in 1-2?
spk15: Yes, Sean. So I think the team did a really good job in working through the semi-finished inventory around the world. Asia, I'd say Europe did an exceptional job where very little, if any, left over there. I'd say the one region where we still have a little bit of semi-finished inventory was here in North America. And again, that was driven more by some supply challenges. As things are getting better, there are still one or two suppliers that pop up. And so we had a little bit of semi-finished inventory here in North America. But overall, the teams around the world did a very good job My comment about the in-transit inventory, again, as we work through some of the products, again, a couple hundred million are probably on the water here that we would expect to move through the system depending on the selling season, more likely in the first half of 2023 rather than just the first quarter. But again, that's more of hopefully a timing issue for us than anything.
spk27: Great. Thanks, Damon. And my second question is more focused on precision ag. Can you just kind of give the split of kind of your expectations for growth this year as well as kind of precision planning versus views? And then also, do you expect kind of more normal seasonality for precision planning this year?
spk15: Yeah, I think, Sean, historically it was much more of a first-half weighted sales given the planting season. Last year with the strong demand, some supply chain disruptions, we saw more of an equal cadence of sales. I would tell you as we look at the demand right now, we're probably going to see something similar to what we had in 2022, so a little bit more balanced than the historical first half, second half, but overall still strong demand there. Precision planting itself was up around 39% last year, so very strong demand, a little bit stronger than what we saw in FUSE again. And that's given that OEM agnostic backdrop where we're able to cater to all OEMs from a retrofit basis. So very strong demand there. And again, as we think about that growth from $700 million this year to our target of $1 billion by 2025, A lot of that is coming from our precision planting business, so we see good growth coming here in 23 as well.
spk26: Great, thanks. I appreciate it, Tyler.
spk37: Our next question will come from Jerry Revich with Goldman Sachs. You may now go ahead.
spk28: Yes, hi. Good morning, everyone. Eric, I wonder if we just talk about in North America, you know, considering how strong the margins are of the precision planting product, you know, it looks like on the legacy tractor products you folks might be running in the mid-single-digit margin range. And so given the Fent rollout, can you just talk about how much line of sight do you have to use the Fent rollout as a tool to take North America margins higher? What's an opportunity set there?
spk22: Yeah, the demand generation is well on track for Fent in North America and South America, a globalization of the full Fent product line. We're step-by-step establishing more and more dealers that meet the stringent qualifications of being a Fent dealer, and so that's in place. In reality, we underserved that demand in 2022. We could have sold a lot more, and we've actually got a few dealers that are frustrated. They want to grow with this new product line, and we weren't able to. feed that enough. So we're working very hard in 23 to make sure that we can match supply and demand more closely. But so far what we're seeing is the Fent experience, the brand value proposition is being maintained in terms of the best of the best for product and support. The dealers are doing a great job of delivering that. The products are living up to the expectations. And it's really about us just feeding the channel.
spk28: Okay, and can I ask in terms of on the used inventory side, you know, over the past, call it three months, we've seen increases in 100 to 200 horsepower used tractor inventories in North America. Is that what you're seeing as well? Can you just comment on the demand cadence for those product lines? Specifically, I know you spoke about large ag being very healthy. I'm wondering, can you address that product range specifically?
spk22: Yeah, I would say there's an inflection point right around 150 horsepower. So below 150 horsepower, the market is softening, and it's tied more directly to GDP. There's a lot of over COVID time, there's a lot of pull-ahead buying, we would say, strong market demand there for low-horsepower tractors. That's cooled off, and we've been seeing that now for a few quarters, that that order rate is cooling off. Dealer inventory levels are back closer to target on the low-horsepower tractors. When you get above 150 horsepower, the demand is still strong. There's just simply not enough grain in the marketplace, and so prices are staying high. Fertilizer prices and fuel prices are coming down off their peaks from last year. So even though the grain prices have moderated a little bit, so have some of the input costs. So farmer profitability was very strong in 2022. We expect it to be very strong in 2023, and we expect large ag growth. purchase power to be strong, and the channel is still lean, both in new and used, and we don't expect that to change throughout the full 2023 season.
spk28: Thank you.
spk22: You're welcome.
spk37: Our next question will come from Kristen Owen with Oppenheimer. You may now go ahead.
spk23: Hi, good morning. Thank you for the question. I was wondering if you could talk a little bit about your expectations for margin cadence in 2023. I mean, you noted some of the unusual seasonality and precision planting, obviously the cyber issue in 2Q. Just help us in terms of how you're thinking about the cadence for margins and incremental margins as we go through the year. Thank you.
spk15: Yeah, I think, Kristen, maybe a couple – I would say a couple – Differences year-over-year, again, to you alluded to Q2, I would say given the cyber event we experienced last year, you would expect to see a significant improvement in margin in Q2 year-over-year. I would say Q4, so the very strong performance that we just delivered here based on South America, the pricing, maybe not as much of an incremental increase year-over-year. So I think those are probably two unique quarters. If I think about the pricing, the 8% pricing that we talked about, A lot of that is carryover. So as you move through the year here, you're going to see probably a little bit pricing stronger in the first half. We'll assess the markets as we always do. But then as we look at that carryover sort of tailing off in the back half of the year, so you'll see the pricing sort of tail out. And then the other income and expense line, in my opening comments, I said would be up around $50 million. The majority of that would be in the first half of the year as well. And then you'll start to see that come back down year over year as we start to lap some of these higher interest rates. So that's sort of how we're thinking through the sequential or the movements year over year on a quarterly basis.
spk23: That's really helpful. Thank you. And then just as a follow-up to one of the previous questions, at a high level, you talked about doubling North and South American Fed revenue over the next four to six years. Just help us understand how much of that incremental penetration is baked into your outlook for market share gains in 2023. Thank you.
spk15: So we do have market share growth planned in both North America and South America related to the Fent rollout, as Eric alluded to, for one of our challenges is getting more products to our dealers and our farmers here. I don't think we're going to give a specific forward-looking market share gain plan, but we do have plans to grow that in both regions in Fent next year or this current year.
spk37: Our next question will come from Tim Thien with Citigroup. You may now go ahead.
spk08: Yeah, thanks. Damon, just to piggyback on the last one, as you kind of sum up everything you mentioned, just from a bottom-line perspective, in first quarter, you would expect to be up – presume on a year-over-year basis. Is that correct? I know that it's a pretty big headwind from an other expense, but should we be thinking first quarter compared to the 239 first quarter of this year? Should that be up year-over-year?
spk15: Yeah, Tim. I think even with the incremental operating expenses, we do see good pricing. As I said, alluded to, we're going to have a strong pricing in the first quarter. Um, you know, so hopefully we would expect to be up Q1 versus the prior year.
spk08: Got it. Okay. And then, yeah, maybe one for you, Eric, just, um, you know, I, I forecasting these, these markets, I'm asking specifically about large ag can be challenging for a number of reasons, you know, in terms of predicting things like the weather, you know, geopolitical events, but you know, as you look out and you talk to dealers and customers, You know, how are you thinking about managing the business as you look beyond? I mean, I think it's pretty clear what kind of the demand profile appears to be this year. But how are you thinking about, you know, as you think about staffing and just running the business, it's kind of the longevity of the cycle, which we know has been unique for a number of reasons. But, you know, again, just trying to get your perspective for, how this cycle potentially, you know, it kind of shapes up looking beyond this year. I'd be interested in any thoughts you have on that. Thank you.
spk22: Yeah, the way we view this cycle is that it's been peak shaved because of capacity. So we likely would have sold more in 2021 and 2022 if we could have built more, but we couldn't, and neither could our competitors. And so the whole market was starved, which essentially pushes that peak down out into the future. And so 2023, we've got the order board solid already right now into quarter three for most of our products, especially for large ag. And the channel is very light on inventory. And our order rates continue strong. You say, well, what are the underlying leading indicators you look at? Well, there's still drought conditions in much of the production ag portions of the world. That suggests, and we're still in the La Nina weather cycle, which suggests drier weather in the production areas. So until the market can replenish those stocks, they're all in many year, it's like five to eight year lows for the stock to use ratios on all the primary greens, wheat, soybeans, corn. Until those can get replenished, the prices are likely to stay high. And if the prices stay high and as long as these input costs continue to moderate, the farmer profitability will be strong. So we are expecting 23 to be very strong. And right now, unless something dramatic happens, we think 24 will also be a good year. But that's a ways out. So a lot of things will come into play. We'll be watching how the spring harvest goes in the southern hemisphere, see how much grain comes in through that, and then watch the demand for 24 and how the planting season happens in the northern hemisphere. Those are good indicators for six to 18 months out.
spk06: Great. Thanks a lot. You bet.
spk37: Our next question will come from Larry DeMaria from William Blair. You may now go ahead.
spk03: Thank you. Good morning, everybody. And they prepared you, Mark, to mention future cash returns based on cash flow gen investment needs, obviously. Given the strong outlook, balance sheet, et cetera, Can you discuss how you're thinking about it this year? Are we leaning towards special dividend, maybe some buyback, or is there potential M&A out there?
spk15: Yeah, Larry, I think for us, you know, as I said in my remarks, we'll stay disciplined in how we've approached this. You know, we'll look at our quarterly dividend on an annual basis as we normally have. Last year we raised that 20%. You know, we'll look at that relative to our sustainable cash flow generation, see whether that 24 cents still makes sense. You know, as we talked before, we have an active M&A pipeline, you know, looking for opportunities to accelerate our technology where we can buy that rather than having to invest and build it. And so we do have an active pipeline and we'll look at the potential costs associated with those acquisitions. along with the macro outlook. And as Eric said, we expect 23 to be good. We expect 24 to be good based on we see it today. And so based on those things, that would sort of drive what we come down to on any sort of special variable dividend that we were to pay in 2023. Historically, our repurchases have been more in the line of keeping our shares outstanding at around 75 million shares. And so, again, I expect as we look at 23 to probably follow that similar path, and we'll revisit the special variable dividend probably more in the Q2 timeframe as we have the last couple years.
spk03: Okay, that makes sense. Thank you. And then, you know, we've heard a lot about Fendt, and you guys have obviously grown that business quite a bit and more to go. But can you sort of layer in the ideal combine. How's that doing? What's the performance like? And, you know, are you bundling the combine with the Fendt tractors or just maybe an overall update on there? Because we've heard a lot about that for a couple of years and now we hear obviously a lot more about Fendt tractors. Thank you.
spk22: Yeah, the ideal combine, we walked ourselves slowly into the market to make sure that we had both great productivity and great reliability. This past year was the year where we really turned the corner on – we've always had a great performing machine, but we had some early reliability issues in the first couple years. 2022 was a year where we felt really great about reliability in all the major markets. And so now we're ready to allow that product to ramp up more aggressively. And so we've got plans over the next couple years to put more capacity in place and things like that. We generally don't bundle it with other products. The bundling that would happen would be with our Momentum planter and attractor. Those two often get bundled together. But the combine is one that will stand on its own and sell based on its own performance.
spk15: And, Larry, just to maybe give you a couple statistics of the strength of the ideal combine, in both North America and South America, it was up over 70% in sales in 22 versus 21. So it's a very strong demand and performing quite well.
spk06: Very good. Thank you.
spk37: Our next question will come from Seth Weber with Wells Fargo Securities. You may now go ahead.
spk29: Hey, guys. Good morning.
spk31: I wanted to – Just to ask about, there was a comment in the prepared remarks about limiting the order intake in North America. I wanted to just see if you could expand on that. Is that supply chain driven? Is it AGCO's production constraints driven? Or just any more color around that? Thanks.
spk22: Yeah, I talked about there's a couple of dynamics at play here. One is that we're launching the Fendt product line, bringing on new dealers, and getting that business accelerating. While we're doing that, we're taking on new customers as well with that product. And so we want to have a great first impression. The product impression has been great, and the dealer service has been great. The fly in the ointment in that whole system has been our ability to deliver on time. That's been our biggest negative in our ramp-up opportunity. And so because of that, we decided to, instead of having an open order book, we shortened the order book window to be able to give higher reliability on our commitment dates. And this is happening with some of our competitors as well. It's the volatility that still remains in the supply chain of suppliers having issues that then constrain our ability to finish the machine and delay the production. So it's all around that issue, nothing else.
spk31: And that, Eric, that's primarily a North America issue, though, just on the supply chain?
spk22: Well, it's because that's a growth market. The supply chain in South America, the order book, we already were going one quarter at a time, so that was in place. Europe is a bit more of a stable market strategy, whereas North America and South America with Fent, it's a conquest. We're adding a new brand to the market, and so we're establishing more new first impressions there. and we wanted to be a little bit more cautious and certain with the delivery dates that we're giving in those markets because we're first engaging with new customers. We wanted the entire experience to be positive. We had deep relationships. Yeah, the relationships in Europe are deep and long-lasting, and they understand the one issue. They already know the product. They already know the dealer. It's delivery uncertainty, and we feel like we can manage that in the relationship there. But we wanted to... tighten it up in North and South America.
spk31: Got it. Okay. Thank you. And then just, um, there are a couple of times your comments around the strength in Brazil. I just wanted to, you know, make sure your, your guys, your dealers, the guys on the, on the, you know, feet on the street, you're not hearing anything about any hiccups related to the election or any changes in sentiment around or pausing just around the, the election that, that occurred down there.
spk22: I mean, at a tactical level for a short period, there were disruptions in transportation and a few things like that because some of the streets were blocked. But that is very tactical, short-lived, kind of spot-related. Big picture, farmers are still making fantastic profits in South America. They're the ones adding more ground into production to feed the global demand gap that exists. And so... Farmer profitability extremely strong, demand pulling from that market, continuing to grow. We expect a very strong year in 2023. And we don't see anything of significance structurally coming from the new government to try and slow down that vital part of their economy.
spk30: I appreciate it, guys. Thank you very much. You're welcome. Thank you.
spk37: Our next question will come from Meg Dobre with Baird.
spk25: You may now go ahead. Thank you. Good morning. I also want to ask a question on the orders. You know, you talked about them being relatively flat to 2020 relative to the prior year, but obviously there's quite a few limitations that you still have in a way your structured order book. Is there a way to talk about it on an apples-to-apples basis to kind of have a better sense for where the underlying demand is? And what do you need to see in order to be able to maybe open these order books a little bit further?
spk22: Well, right now, what we need to see is more stability in our supply chain. That's it. It's pretty easy. straightforward in that regard. We continue to see macro overall easing of the supply chain challenges, but not enough to where it's stable. It's getting better and better every quarter, but it's still our number one challenge to having a predictable supply chain system. So I think that's what we would say. Anything else? No.
spk25: And as far as talking about this order book on a kind of an apples-to-apples basis, can you help us there?
spk20: Mick, I think, you know, the two markets probably that had somewhat have changed a little bit just in terms of how we're handling orders is North America. And I think Damon and Eric did a nice job explaining how we're limiting there. In South America, last year we really curtailed order intake to handle inflation and pricing. that situation maybe is getting a little better. So maybe we're a little looser in South America and a little tighter in North America. But on balance, I'd say it's not too far from apples and apples.
spk25: Okay. Then my follow-up, just a question on the margin outlook. I don't know if I understand you properly, but it seems that Latin America, we're going to see lower margins in 2023. Is it fair to assume that the other segments are going to see margin expansion?
spk15: Yeah. I think, Meg, if I think about the margins in 23 versus 22, I think the two primary drivers that will dampen the improvement year over year, one is the engineering. So we're going to be increasing engineering spend approximately $100 million in year over year. So that's going to tamp down the margins. That's sort of global, more in the North America, Europe markets. But we're doing that. And then the second primary driver is going to be this sort of contraction in our South American margins. So those two things, coupled with a couple one-offs here and there about the euro-dollar exchange of importing European products, are sort of what's tamping down a little bit of the margins. But generally, it's going to be engineering in those couple regions, and then South America.
spk40: Appreciate the call, Eric. Thanks.
spk37: Our next question will come from Stephen Volkman with Jefferies. You may now go ahead.
spk32: Great. Thanks for fitting me in here. Damon, I think it was you who said that as we go forward, you would expect margins to be more balanced among the regions. I guess for that to happen, North America probably has to make the strongest positive move. So is that just all about sort of mix and more fence and more precision, or is there just something else that you guys can do to help the North American margins get better?
spk15: Yeah, I think, Steve, it's a couple things. It's continuing the growth of our big three, so Fence, growth in North America, Precision Ag, growth in North America, and then Parts. I think the other two drivers there is, remember, grain and protein is a business that really struggled in 22 in North America, given the steel costs, given the cyber event. We still see good recovery there, good margin, which will help enhance the underlying margin. And then the Massey Ferguson Group, it's been turning around its performance over the last couple years, did really well. We still see opportunities for cost improvements in the Massey brand as well. So those two coupled with the big three growth initiatives are sort of the drivers for North America.
spk32: Okay, great. And maybe a quick follow-up for Eric about bringing GSI, let's call it, and the I'm curious, you know, you've been in your seat for a while now, but you sort of inherited this thing. You know, is this sort of core to your plans going forward? Does it really fit with the rest of the strategy in your view? Just how are you thinking about GSI sort of over the longer?
spk22: Yes, Steve. It's core to our business today. We are putting a lot of scrutiny on that business, though, to extract the value out of the transformation. You know, we... We launched two major transformations over the last couple of years in addition to the growth engines. The South America transformation has delivered, and now it's also had some nice tailwinds of a strong market, but it's delivered, and we've got that business turned around nicely. Grain and protein have gone through the actions. This year we just had a lot of headwinds, China shutdowns, deal prices, cyber attacks. But we've made moves. We've consolidated factories, reduced the amount of brands, reduced the amount of businesses, things like that. We think that will shine through in 23. But we also recognize that it's got to deliver. And the team is very, very clear about needing to deliver strong results and earn the right to grow further. Got it. Thank you, guys. Thank you.
spk37: Our last question will come from Nicole de Blasio with Deutsche Bank. You may now go ahead.
spk05: Yeah, thanks. Good morning, guys. Thanks for fitting me in.
spk02: Good morning, Nicole.
spk05: I think Kristen already asked about the quarterly cadence of margins, and that was some helpful color. But anything on the quarterly cadence of revenue, should we expect the normal seasonal pattern versus disruption over the past several years?
spk15: Yeah, again, I would say, Nicole, again, similar to the margin, Q2, again, given the cyber event, you might see a little bit of an above traditional. And then Q4, we had a very strong quarter here, sort of outpacing our own expectations that you might see a little bit of a less smaller sort of year-over-year change relative to Q1 and Q3, but nothing significant.
spk05: Okay, thank you. And then working capital, what have you guys embedded for working capital improvement in the conversion guidance or free cash flow conversions for the full year?
spk15: Yeah, I think as I said in my scripted remarks, we expect it to be a modest positive investment. in 23. In 22, it was a use of cash as we had built up some inventory given the supply chain challenges. I think we were about $350 to $400 million of a use of working capital in 2022. We still expect inventories to be elevated, but as we see supply chain hopefully improving, I think what I said is a modest positive in 23. Thank you.
spk37: This concludes our question and answer session. I would like to turn the conference back over to Eric and Socia for any closing remarks.
spk22: Well, I'll just close today by saying thank you very much for your participation and your support of AGCO. We're really, really proud of what we've accomplished in 2022. It was a record year in many, many ways. If you peel back the onion, you'll see that the key success areas are right at the core of the strategy that we shared with you in December, and the origin of it was back in 2021. Our focus is on growing our margin-rich businesses like Fent, Parts and Service, and our Precision Ag Smart Machine business. We've also committed to you to improve some of our other businesses, like Massey Ferguson and our grain and protein business. In 23, you'll see the results come through in all of those, whether they are improvement businesses or our growth businesses. We've been investing heavily in the last few years, and in 23, we're making even bigger investments to continue the development of these farmer-focused solutions that are solving the critical farmer problems with many of them with very short paybacks. We target essentially one year, two max. We're seeing take rates that are very high, and the margins are very high. We are also seeing our innovations receive strong recognition in the form of industry awards, most recently the 10 Innovation Awards at AE50 that I mentioned earlier in my comments. We're using our precision ag tools to really engage strongly on sustainability, putting more and more of our technology efforts there, capturing a lot more data, helping our farmers make the transition to not only more productive farming, but more sustainable farming. Lastly, the large ag markets are very strong globally. Farm fundamentals are healthy and supporting farmers' investments. So we're excited about 2023 and beyond. We're convinced that the best days of agco are still in front of us. Thank you for your partnership all along the journey. I appreciate the call today.
spk37: The conference is now concluded. Thank you for attending today's presentation.
spk36: You may now disconnect. Bye. Thank you. Bye.
spk37: Good morning and welcome to the AGCO fourth quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one of your touch-tone phone. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Greg Peterson, AGCO Head of Investor Relations. Please go ahead.
spk20: Thanks, Anthony, and good morning. Welcome to those of you joining us for AGCO's fourth quarter 2022 earnings conference call. We will refer to a slide presentation this morning that's posted on our website at www.agcocorp.com. The non-GAAP measures used in that presentation are reconciled to GAAP metrics in the appendix of that presentation. We'll also make forward-looking statements this morning on our call, with respect to demand, product development and capital expenditure plans, production levels, engineering expense, exchange rates, pricing, share repurchases, dividends, interest rates, future commodity prices, crop production, supply chain disruption, inflation, component delivery, sales, 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 31st, 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 such as plant closings, workforce availability, and product demand. They also include 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. 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 Damon Audia, our Senior Vice President and Chief Financial Officer. With that, Eric, please go ahead.
spk22: Thanks, Greg. Good morning. It's great to be with you. We finished 2022 incredibly well from both an operational and financial perspective. But before we get into those details, I want to start with a quick recap of the Investor Day we hosted in December. Those of you that attended will recognize this slide from that meeting. It's the foundation of our strategy all on one page. The purpose, vision, and overarching strategy we laid out at the 2021 investor meeting haven't changed. We are concentrated on delivering farmer-focused solutions to sustainably feed our world. These solutions are more than machinery. They are all about the data, technology, connectivity, and digital solutions around the machines. Sustainability is also key to who we are. It weaves through our day-to-day activities and is a cornerstone of our strategy. Finally, feeding the world energizes our purpose. While our strategy hasn't changed, we are doubling down on our key strategic initiatives, growing faster than the market, optimizing our business, and fostering a culture that enables success. We've raised the bar on our technology commitments and our financial performance. particularly in our operating margin performance. You'll see that as we move to our fourth quarter results. This focus is already paying off in terms of strong top-line growth and a very healthy margin expansion. Slide 4 highlights our great finish to 2022. We posted a record fourth quarter and full year in terms of sales, operating margin, and earnings. I would like to deeply thank AGCO's 25,000 employees for their hard work that resulted in the world-class support for our farmer customers throughout this challenging year. These efforts helped deliver fourth quarter sales growth of 24%, with adjusted operating margins expanding by 340 basis points to 12%. For the full year, our net sales reached almost 12.7 billion. Adjusted operating margins improved 120 basis points to 10.3%, and adjusted earnings per share hit $12.42. Now, these are all records for AGCO. During 2022, while delivering record results, we also executed an ambitious investment plan to expand our smart farming solutions and enhance our digital capabilities through increased engineering spend and several key acquisitions. Overall, I could not be prouder of our team. These record results are a testament to our focused execution on our strategy while continuing to deal with supply chain challenges during the year. While the supply chain has improved over the last couple of quarters, we continue to experience significant component shortages that are impacting our production volumes. The encouraging news is that despite the global supply bottlenecks and inflationary pressures, farmer economics remain healthy. and a global end market demand remains strong. We expect supportive market conditions to continue into 2023. Our financial outlook for 23 reflects this optimism, which will allow us to accelerate technology-related investments as well as continue to return cash to our shareholders. Slide five details industry unit retail sales by region for the full year of 2022. Support of farm economics resulted in robust demand for larger agricultural equipment as farmers continued to replace aging machines during the year. Supply chain constraints, limited industry production, and dealer inventory levels of new and used large ag equipment remain well below normal levels across the industry. For 2022, global industry retail sales of farm equipment were lower in North America and Europe despite significantly higher sales of larger machines. North America industry retail tractor sales were down approximately 5% for the full year compared to 2021. Smaller tractor sales declined from record levels in 2021, while increased sales of higher horsepower units helped dampen the decline. Industry retail tractor sales in Western Europe, which also were restricted by supply chain challenges, decreased approximately 9% in 2022 compared to robust levels in 2021. In South America, industry retail tractor sales increased 3% during 2022. Strong growth in Argentina and the smaller South American markets offset modestly lower overall sales in Brazil despite strong demand for large ag equipment. Healthy crop production and favorable margins are supporting farm profitability. These supportive economics are expected to drive healthy demand in South America again throughout 2023. We are very positive about the underlying ag fundamentals supporting strong industry demand in 2023. Stocks to use levels of grain all around the world remain at very low levels, supporting healthy commodity prices. With China's reopening, we don't think that'll change anytime soon. The dealer channel for new and used equipment is still below target levels from the constrained supply. Input costs like fertilizer and fuel are down significantly from their peaks last year. While farm income may be down modestly in 2023 from record levels in 22, we think it will remain at a very good level in 2023 and be supportive for industry demand. Currently, We don't see that changing much for 2024. AGCO's 2022 factory production hours are shown on slide six. You can see that our production increased in 2022 in line with our expectations. Although we continued to face supply chain and logistics challenges, we were successful in reducing our inventory as semi-finished products. In the fourth quarter, we reduced the work in process inventory by nearly $275 million compared to the level at the end of the third quarter. For the full year, production hours increased approximately 6% compared to the 2021 levels, as we worked to satisfy the strong demand. Based on our industry and market share forecasts, we are projecting a 3% to 5% increase in production hours for 2023. At year end, AGCO's Global Order Board remained extended and is approximately flat compared to the strong December of 2021 level. Orders for tractors and combines were higher in Western Europe and South America compared to a year ago. In North America, orders were down from 2021 levels as we have elected to limit our order intake to improve our on-time delivery rates. Our order coverage extends through the third quarter of 2023 in Western Europe and North America, and through the second quarter of 2023 in Brazil, where we continue to limit our orders to around one quarter in advance to give ourselves more pricing flexibility. The bottom line, demand for our farmer-focused products remains very strong. You'll recognize slide seven, which highlights our focus on three high-margin growth areas. These opportunities provide significant growth potential at higher margins and less variability during the cyclical downturns. The first focus area is taking our Fent full line brand global. We continue to grow the business along two vectors. The first, we expanded the Fent product line beyond tractors to now include key products like sprayers, planters, combines, and more. The second mention is taking this full line of Fent products global. As you can see in our results, interest continues to grow for our premium Fendt product lines in both North and South America. In 2022, our Fendt branded sales in those markets increased over 31% compared to 2021. Our Fendt and Challenger sales in North and South America are expected to double over the next four to six years. The second focus area is our global parts and service business. AECO is already in a leading position in fill rates, which is just effectively having the right part at the right place when the farmer needs it. We're building from a solid foundation to capture more of the dealer's and farmer's business. We're helping dealers become better and more proactive with their service and parts offerings with our smart solutions and expanding digital capabilities. As a result, we expect our high margin after sales and parts business to continue to grow and have higher penetration rates. The third 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 most successful ag tech companies in the world. Precision planting has been a leader in providing automation and intelligence to planters. Over the last couple of years, it's growing beyond planters into the other parts of the crop cycle, like spraying, soil testing, and harvesting. In addition to its impressive technology, precision planting success is generated through their unique OEM-agnostic retrofit approach, which reduces the farmer's upfront investment and increases their ROI, regardless of the equipment brand that they own. By offering solutions through this retrofit approach, we are expanding the addressable market well beyond agco brands to all industry brands. The other way we address the precision ag opportunity is FUSE, which provides OEM solutions for our agco equipment. Regarding advanced technology, we remain focused on driving technology innovations that help our farmers improve their productivity, profitability, and sustainability. As we have seen multiple times, these types of innovations are receiving strong recognition in the form of industry awards. Just recently, AGCO won 10 Innovation AE50 awards from ASABE, which recognizes the best innovations and technologies for agriculture, food, and biological systems. Not only was this the most awards of any company, but more than our top two competitors combined. Going a little deeper into our technology, our unique retrofit approach caters to a huge audience. There is nowhere better to showcase this and to educate our farmers than our Precision Planting Winter Conference, which held its annual event last month. At this event, we hosted nearly 7,000 of the best farmers in the world to hear directly from our engineers and agronomists about product development and research we have done in the field. I attend this program myself every year. I had the chance to have lunch with farmers from Kazakhstan, Ukraine, and Poland. All those that attended had the opportunity to see the latest precision planting technologies and learn how these advancements can help improve the productivity on their farms. Historically, the new product introductions had been focused on planters. However, starting last year, precision planting broke from that tradition and made a big announcement as they brought five needed solutions to the sprayer, including adding a neural network onto the 2020 architecture, leveraging artificial intelligence capabilities, for targeted spraying solutions. The team continued their momentum of solving the farmers' biggest problems this past summer by announcing it was revolutionizing soil testing with the introduction of Radical Agronomics soil testing technology. Radical boasts the world's first fully automated soil laboratory and one of the AE50 award winners this year. This new product disrupts the 100-year-old soil testing model and puts the capability into the hands of local agronomists with faster and more reliable results. Understanding how to improve soil health is great for farm productivity, but also great for the emerging need of carbon sequestration. At this year's conference, our precision planting team made another disruptive launch with their new Panorama data app. The new app, pictured on slide 9, makes precision planting data the most usable, portable, and shareable planter information on the planet. Panorama modernizes the way our 2020 controller interacts with the world. It helps farmers better utilize collected data by allowing for easy uploads to the platform of their choice. Panorama allows farmers an unobstructed view of the data collected in their cab, whether on their app or through moving data to the platform of their choice. Panorama will feature map viewing, reporting, and the ability for a farmer to allow their precision planting dealer to provide remote technology support. We are very excited about continuing to bring these types of precision ag technologies to our farmer customers, with our core focus of trying to solve their biggest challenges, which will also contribute to our growth and margin expansion goals for Agco. With that, I'll now hand over the call to Damon, who will provide you more information about about our fourth quarter results.
spk15: Thank you, Eric, and good morning, everyone. I will start on slide 10 with an overview of AGCO's regional net sales performance for the fourth quarter and the full year. Net sales were up approximately 33% in the quarter compared to the strong fourth quarter of 2021 when excluding the negative effects of currency translation. Pricing in the quarter, which was around 13%, contributed to higher sales along with strong growth in high-horsepower tractors, combines, and precision ag products. By region, the Europe-Middle East segment reported an increase in net sales in the fourth quarter of approximately 38%, excluding the negative effect of currency translation compared to the prior year. The increase in sales was the result of solid execution of product deliveries coupled with favorable pricing and strong retail demand in Germany, France, and Turkey. In South America, net sales in the fourth quarter grew approximately 58% year over year, excluding favorable currency translation, driven by significant pricing, as well as increased volume and positive mix. Sales were up strongly across the South American markets, with high horsepower tractors and combines showing the largest increases. Net sales in North America increased approximately 23%, excluding the unfavorable impact of currency translation compared to the fourth quarter of 2021. The increase resulted from higher sales of large tractors, precision planting products, and combines, as well as strong year-over-year price increases. On a constant currency basis, net sales in our Asia-Pacific-Africa segment decreased about 15% compared to the fourth quarter of 2021. Delays of shipments from our European factories resulted in lower sales across the Asia Pacific Africa markets relative to the strong fourth quarter last year. Finally, consolidated replacement part sales were approximately 366 million for the fourth quarter, approximately flat year over year. Unfavorable currency effects were around 10% during the fourth quarter. Turning to slide 11, the fourth quarter adjusted operating margin improved by approximately 340 basis points versus 2021. Margins in the quarter benefited from higher sales and production, a richer mix, and positive net pricing compared to the fourth quarter of 2021. Price increases in the quarter of approximately 13% more than offset significant material and freight cost inflation on a dollar basis and were positive on a margin basis. For the full year, net pricing was positive and contributed to the overall margin improvement. By region, the Europe-Middle East segment reported an increase of approximately $100 million in operating income compared to the fourth quarter of 2021, and margins improved approximately 250 basis points. Higher sales and healthy products mix contributed to the improvement. North American operating income for the fourth quarter increased approximately $37 million year over year. Higher sales of margin-rich products more than offset higher operating expenses. Operating margins in South America reached 20% in the fourth quarter, and operating income improved over $85 million versus the same period in 2021. Continued significant increases in end market demand along with strong pricing and a healthy sales mix supported the year-over-year growth. Finally, in our Asia-Pacific-Africa segment, operating income declined approximately $19 million in the fourth quarter, reflecting the delivery timing challenges I mentioned earlier. With margin expansion in the last two years in our North American, South American, Asia-Pacific-Africa regions, from our strategy execution and discipline pricing, we expect AGCO's margin profile to be more balanced across the globe in the years ahead. Slide 12 summarizes our precision ag business. As you can see, we are focused on expanding our addressable market from just traditional agricultural machinery spend, which today is in the low to mid teens. With our precision ag portfolio, our sites are set around 70% for all non-land areas. We believe that the investment in precision ag positions us well as it will play a major role in achieving global sustainability targets that are being established while simultaneously helping our farmers improve their profitability. Finally, we recorded $700 million in precision ag revenue in 2022, a 29% increase from 2021. Unfavorable foreign currency effects were around 3% in 2022. As we announced during our December investor day, we now expect our high margin precision ag business to grow to $1 billion by 2025. Slide 13 details our full year free cash flow for 2022 and 2021. As a reminder, free cash flow represents cash used in or provided by operating activities, less capital expenditures, and free cash flow conversion is defined as free cash flow divided by adjusted net income. While we made significant sequential progress in reducing our work and process inventory in the fourth quarter and generated over $1 billion in free cash flow, working capital requirements related to supply chain challenges continue to result in higher than traditional inventory levels. This affected free cash flow in both 2021 and 2022. Despite that, ADCO generated $450 million in free cash flow in 2022, up 15% versus 2021. For 2023, we expect our raw material and work-in-process inventory to remain somewhat elevated given supply chain challenges, but we expect it to be a modest source of cash versus 2022. We expect our free cash flow conversion to range from 75 to 100% of adjusted net income, a significant increase from 2022. Our capital allocation priorities remain unchanged. and will continue to include investments in our precision ag offerings and digital capabilities, as well as opportunistically adding bolt-on acquisitions to help position AGCO for long-term success. In addition, we remain focused on our direct returns to investors during 2022, with a regular quarterly dividend that we increased 20% to $0.24 per share and a variable special dividend of $4.50 per share. Future returns of cash to shareholders will be based on cash flow generation, our investment needs, which include capital expenditures and acquisition opportunities, as well as our market outlook. Slide 14 highlights our 2023 retail market forecast for our three major regions. Globally, driven by strong commodity prices, we expect healthy farm economics to support another year of strong end market demand. For North America, we expect similar demand compared to the healthy levels in 2022. We expect continued growth in high horsepower row crop equipment segment to be offset by softer demand for smaller equipment after the several years of strong growth. Increasing interest rates are expected to continue to slow the smaller equipment segment of the market. In South America, we expect industry sales to be flat to up 5% moderated by supply chain constraints. This region remains one of the strongest end markets, especially in Brazil, where they are forecasting record production and strong farmer profitability, which we expect to drive demand for large ag equipment beyond 2023. As grain exports from Brazil are expected to increase over the next several years and they continue to increase arable land, we expect the demand for our large ag equipment to remain strong. Shifting to Western Europe, The industry is forecasted to be relatively flat compared to 2022. Farm fundamentals in the region are generally healthy, with grain prices continuing to outpace input inflation. Meanwhile, supply chain constraints last year are extending the equipment replacement into 2023. Slide 15 highlights a few key assumptions underlying our 2023 outlook. In addition to focus on meeting the robust and market demand, we will also make significant investments in the development of new solutions to support our farmer first strategy. Although we see strong market demand, AGCO's results will still be dependent upon our supply chain performance in 2023. Our sales plan includes market share gains along with price increases of approximately 8% aimed at offsetting material cost inflation. We expect currency translation to negatively impact sales by about 1%. Engineering expenses are expected to increase by approximately 20% compared to 2022. The increase is targeted at investments in smart farming and precision ag products. Operating margins are expected to improve to around 10.5%, driven by higher sales and production, favorable pricing net of material costs, and improved factory productivity, partially offset by increased investments in our engineering and digital initiatives, as well as inflationary cost pressures. With increasing interest rates and higher sales forecasted, we expect other expenses, mainly related to accounts receivable sales, to increase approximately $50 million year-over-year, with the majority of that in the first half of 2023. We are targeting an effective tax rate in the range of 27% to 28%. Turning to slide 16, our financial goals remain unchanged from what we highlighted at our December Investor Day. We are currently expecting net sales to be in the range of $14 billion. Earnings per share should be around $13.50 in 2023. We are targeting capital expenditures of $375 million. As I mentioned earlier, Free cash flow conversion should be in the range of 75% to 100% of adjusted net income consisted with our long-term target.
spk14: With that, I'll turn the call back to Greg for Q&A.
spk20: Thanks, Damon. As Anthony organizes our Q&A list, we'll ask that you limit yourselves to one question and one follow-up in order to increase participation. Anthony, with that, please get us started.
spk37: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchstone phone. If using a speakerphone, please pick up your handset before pressing the keys. Again, please limit yourself to one question and one follow-up. To withdraw your question from the queue, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question will come from Jamie Cook with Credit Suisse. You may now go ahead. Good morning.
spk04: uh good morning and congrats on a nice quarter um i guess my first question just you know south america i don't think i've ever seen a 20 margin for you guys in south america but just you know as we think about the margin performance that you put up in 2022 how much is sort of structural or related to you know increased sales of fen or or aftermarket or precision ag versus you know just pricing power and i'm just wondering how i think about those margins longer term just given the strength you guys have seen in 2022 And then my second question, again, strong margin performance. You know, what parts of the portfolio are underperforming, if any? Perhaps, you know, GSI. Can you help us with where GSI margins ended this year versus, you know, the opportunity going forward? Thank you.
spk15: Yeah, sure, Jamie. So if we look at South America, your first point, as we've said for the last couple quarters now, the margins have been exceptional, you know, and really twofold. One has been the structural improvements that we've made in South America over the last several years to really move to the higher horsepower type tractors, introducing Fent there. And that has created some structural differences to our overall operating performance. That, coupled with probably the strongest end market that we have right now around the world, is really catering to stronger pricing. So, like you said, the 20% in the quarter was exceptional. As we tried to guide, we do think margins will come down a little bit here in 2023 as our pricing, our team down there has done a really good job in pricing in advance of material cost rising. So we know that will come down. What we would say is longer term, we do expect to see South America structurally different and sort of in that low to mid teens for the long term. So again, a lot of improvement over the past couple years, but we're at sort of a high point and we continue to expect to see that at least for the foreseeable future, but a little bit lower as we move into 2023. To your second part of your question on some of the underperforming areas, I think we would say the grain and protein group did struggle a little bit relative to what we were expecting. It was sort of challenged by a couple things in the start of the year with the steel prices really affected here in North America. We dealt with the cyber event, as you recall, in the second quarter, which really put an incremental pressure on grain and protein here in North America. And then the Asia Pacific part of grain and protein was really challenged by the challenges in China with the COVID lockdowns affecting a lot of the business there. So those two parts of grain and protein, I would say, were below what we were hoping. South America grain and protein did quite well, was a contributor there. We've taken some structural actions, as you know, to really improve that business. We've done some factory closures. We've added some technology-type acquisitions as part of that portfolio. So as we move into 2023, we are expecting it to improve profitability. It was profitable here in 2022. I would say low single digits, but again, overall profitable business with a big improvement or bigger improvement expected here in 2023.
spk04: Thank you very much.
spk37: I'll get back to you. Our next question will come from Tammy Zakaria with JP Morgan. You may now go ahead.
spk27: Hi, thanks. This is Sean McLaughlin. I'm for Tammy. Last quarter, I think you mentioned around $300 million of sales that got pushed into 4Q. Can you just provide an update on where kind of red-tag units stand today and whether that all got worked through at year-end? And then also, in your prepared remarks, you mentioned the missed shipments in APA. Can you provide just some quantification or details on whether that all kind of gets delivered in 1Q?
spk15: Yes, Sean. So I think the team did a really good job in working through the semi-finished inventory around the world. Asia, I'd say Europe did an exceptional job where very little, if any, left over there. I'd say the one region where we still have a little bit of semi-finished inventory was here in North America. And again, that was driven more by some supply challenges. As things are getting better, there are still one or two suppliers that pop up. And so we had a little bit of semi-finished inventory here in North America. But overall, the teams around the world did a very good job My comment about the in-transit inventory, again, as we work through some of the products, again, a couple hundred million are probably on the water here that we would expect to move through the system depending on the selling season, more likely in the first half of 2023 rather than just the first quarter. But again, that's more of hopefully a timing issue for us than anything.
spk27: Great. Thanks, Damon. And my second question is more focused on precision ag. Can you just kind of give the split of kind of your expectations for growth this year as well as kind of precision planning versus views? And then also, do you expect kind of more normal seasonality for precision planning this year?
spk15: Yeah, I think, Sean, historically it was much more of a first-half weighted sales given the planting season. Last year with the strong demand, some supply chain disruptions, we saw more of an equal cadence of sales. I would tell you as we look at the demand right now, we're probably going to see something similar to what we had in 2022, so a little bit more balanced than the historical first half, second half, but overall still strong demand there. Precision planting itself was up around 39% last year, so very strong demand, a little bit stronger than what we saw in FUSE again, and that's given that OEM agnostic backdrop where we're able to cater to all OEMs from a retrofit basis. So very strong demand there, and again, as we think about that growth from 1%, $700 million this year to our target of $1 billion by 2025. A lot of that is coming from our precision planting business, so we see good growth coming here in 23 as well.
spk26: Great, thanks. I appreciate the color.
spk37: Our next question will come from Jerry Revich with Goldman Sachs. You may now go ahead.
spk28: Yes, hi. Good morning, everyone. Eric, I wonder if we just talk about in North America, you know, considering how strong the margins are of the precision planting product, you know, it looks like on the legacy tractor products you folks might be running in the mid-single-digit margin range. And so given the Fent rollout, can you just talk about how much line of sight do you have to use the Fent rollout as a tool to take North America margins higher? What's an opportunity set?
spk22: Yeah, the demand generation is well on track for Fent in North America and South America, a globalization of the full Fent product line. We're step-by-step establishing more and more dealers that meet the stringent qualifications of being a Fent dealer, and so that's in place. In reality, we underserved that demand in 2022. We could have sold a lot more, and we've actually got a few dealers that are frustrated. They want to grow with this new product line, and we weren't able to. feed that enough. So we're working very hard in 23 to make sure that we can match supply and demand more closely. But so far what we're seeing is the Fent experience, the brand value proposition is being maintained in terms of the best of the best for product and support. The dealers are doing a great job of delivering that. The products are living up to the expectations. And it's really about us just feeding the channel.
spk28: Okay, and can I ask in terms of on the used inventory side, you know, over the past, call it three months, we've seen increases in 100 to 200 horsepower used tractor inventories in North America. Is that what you're seeing as well? Can you just comment on the demand cadence for those product lines? Specifically, I know you spoke about large ag being very healthy. I'm wondering, can you address that product range specifically?
spk22: Yeah, I would say there's an inflection point right around 150 horsepower. So below 150 horsepower, the market is softening, and it's tied more directly to GDP. Over COVID time, there's a lot of pull-ahead buying, we would say, a strong market demand there for low-horsepower tractors. That's cooled off, and we've been seeing that now for a few quarters, that that order rate is cooling off. Dealer inventory levels are back closer to target on the low-horsepower tractors. When you get above 150 horsepower, the demand is still strong. There's just simply not enough grain in the marketplace, and so prices are staying high. Fertilizer prices and fuel prices are coming down off their peaks from last year. So even though the grain prices have moderated a little bit, so have some of the input costs. So farmer profitability was very strong in 2022. We expect it to be very strong in 2023, and we expect large ag growth. purchase power to be strong. And the channel is still lean, both in new and used, and we don't expect that to change throughout the full 2023 season.
spk28: Thank you.
spk22: You're welcome.
spk37: Our next question will come from Kristen Owen with Oppenheimer. You may now go ahead.
spk23: Hi, good morning. Thank you for the question. I was wondering if you could talk a little bit about your expectations for margin cadence in 2023. I mean, you noted some of the unusual seasonality and precision planting, obviously the cyber issue in 2Q. Just help us in terms of how you're thinking about the cadence for margins and incremental margins as we go through the year. Thank you.
spk15: Yeah, I think, Kristen, maybe a couple comments. I would say a couple – Differences year over year, again, to you alluded to Q2, I would say given the cyber event we experienced last year, you would expect to see a significant improvement in margin in Q2 year over year. I would say Q4, so the very strong performance that we just delivered here based on South America, the pricing, maybe not as much of an incremental increase year over year. So I think those are probably two unique quarters. If I think about the pricing, the 8% pricing that we talked about, A lot of that is carryover. So as you move through the year here, you're going to see probably a little bit pricing stronger in the first half. We'll assess the markets as we always do. But then as we look at that carryover sort of tailing off in the back half of the year, so you'll see the pricing sort of tail out. And then the other income and expense line, in my opening comments, I said would be up around $50 million. The majority of that would be in the first half of the year as well. And then you'll start to see that come back down year over year as we start to lap some of these higher interest rates. So that's sort of how we're thinking through the sequential or the movements year over year on a quarterly basis.
spk23: That's really helpful. Thank you. And then just as a follow-up to one of the previous questions, at a high level, you talked about doubling North and South American spent revenue over the next four to six years. Just help us understand how much of that incremental penetration is baked into your outlook for market share gains in 2023. Thank you.
spk15: So we do have market share growth planned in both North America and South America related to the FENT rollout, as Eric alluded to, for one of our challenges is getting more products to our dealers and our farmers here. I don't think we're going to give a specific forward-looking market share gain plan, but we do have plans to grow that in both regions in FENT next year or this current year.
spk37: Our next question will come from Tim Thien with Citigroup. You may now go ahead.
spk08: Yeah, thanks. Damon, just to piggyback on the last one, as you kind of sum up everything you mentioned, just from a bottom-line perspective, in first quarter, you would expect to be up – presume on a year over year basis. Is that is that correct? I know that the pretty big headwind from other expense, but should we be thinking first quarter, you know, compared to the 239 first quarter this year? Should that be up year over year?
spk15: Yeah, Tim, I think we're even with the incremental operating expenses. We do see good pricing, as I said, alluded to. We're going to have a strong pricing in the first quarter, you know, so hopefully we'd expect to be up Q1 versus the prior year.
spk08: Got it. Okay. And then, yeah, maybe one for you, Eric, just, you know, forecasting these markets and asking specifically about large ag can be challenging for a number of reasons, you know, in terms of predicting things like the weather or geopolitical events. But as you look out and you talk to dealers and customers, how are you thinking about managing the business as you look beyond? I mean, I think it's pretty clear what kind of the demand profile appears to be this year. But how are you thinking about, as you think about staffing and just running the business, It's kind of the longevity of the cycle, which we know has been unique for a number of reasons. But again, just trying to get your perspective for how this cycle potentially kind of shapes up looking beyond this year. I'd be interested in any thoughts you have on that. Thank you.
spk22: Yeah, the way we view this cycle is that it's been peak shaved because of capacity. So we likely would have sold more in 2021 and 2022 if we could have built more. But we couldn't, and neither could our competitors. And so the whole market was starved, which essentially pushes that peak out into the future. And so 2023, we've got the order board solid already right now into quarter three for most of our products, especially for large ag. And the channel is very light on inventory. And our order rates continue strong. You say, well, what are the underlying leading indicators you look at? Well, there's still drought conditions in much of the production ag portions of the world. That suggests, and we're still in the La Nina weather cycle, which suggests drier weather in the production areas. So until the market can replenish those stocks, they're all in many year, it's like five to eight year lows for the stock-to-use ratios on all the primary greens, wheat, soybeans, corn, until those can get replenished, the prices are likely to stay high. And if the prices stay high, and as long as these input costs continue to moderate, the farmer profitability will be strong. So we are expecting 23 to be very strong. And right now, unless something dramatic happens, we think 24 will also be a good year, but that's a ways out. So a lot of things will come into play. We'll be watching how the spring season Harvest goes in the southern hemisphere, see how much grain comes in through that, and then watch the demand for 24 and how the planting season happens in the northern hemisphere. Those are good indicators for six to 18 months out.
spk06: Great. Thanks a lot. You bet.
spk37: Our next question will come from Larry DeMaria from William Blair. You may now go ahead.
spk03: Thank you. Good morning, everybody. And then prepared you, Mark, to mention future cash returns based on cash flow jet investment needs, obviously. Given the strong outlook, balance sheet, et cetera, discuss how you're thinking about it this year. Are we leaning towards a special dividend, maybe some buyback, or is there potential M&A out there?
spk15: Yeah, Larry, I think for us, as I said in my remarks, we'll stay disciplined in how we've approached this. We'll look at our quarterly dividend on an annual basis as we normally have. Last year we raised that 20%. We'll look at that relative to our sustainable cash flow generation, see whether that $0.24 still makes sense. As we talked before, we have an active M&A pipeline looking for opportunities to accelerate our technology where we can buy that rather than having to invest and build it. And so we do have an active pipeline, and we'll look at the potential costs associated with those acquisitions. along with the macro outlook. And as Eric said, we expect 23 to be good. We expect 24 to be good based on we see it today. And so based on those things, that would sort of drive what we come down to on any sort of special variable dividend that we were to pay in 2023. Historically, our repurchases have been more in the line of keeping our shares outstanding at around 75 million shares. And so, again, I expect as we look at 23 to probably follow that similar path. And we'll revisit the special variable dividend probably more in the Q2 timeframe as we have in the last couple years.
spk03: Okay, that makes sense. Thank you. And then, you know, we've heard a lot about Scent, and you guys have obviously grown that business quite a bit and more to go. But can you Sort of layering the ideal combine, how's it doing? What's the performance like? And are you bundling the combine with the Fendt tractors? Or just maybe an overall update on there, because we heard a lot about that for a couple of years, and now we hear obviously a lot more about Fendt tractors. Thank you.
spk22: Yeah, the ideal combine, we walked ourselves slowly into the market to make sure that we had both great productivity and great reliability. This past year was the year where we really turned the corner on – we've always had a great performing machine, but we had some early reliability issues in the first couple years. 2022 was a year where we felt really great about reliability in all the major markets. And so now we're ready to allow that product to ramp up more aggressively. And so we've got plans over the next couple years to put more capacity in place and things like that. We generally don't bundle it with other products. The bundling that would happen would be with our Momentum planter and attractor. Those two often get bundled together. But the combine is one that will stand on its own and sell based on its own performance.
spk15: And, Larry, just to maybe give you a couple statistics of the strength of the Ideal Combine, in both North America and South America, it was up over 70% in sales in 22 versus 21. So it's a very strong demand and performing quite well.
spk06: Very good. Thank you.
spk37: Our next question will come from Seth Weber with Wells Fargo Securities. You may now go ahead.
spk29: Hey, guys.
spk31: Good morning. I wanted to – Just to ask about, there was a comment in the prepared remarks about limiting the order intake in North America. I wanted to just see if you could expand on that. Is that supply chain driven? Is it AGCO's production constraints driven? Or just any more color around that? Thanks.
spk22: Yeah, I talked about there's a couple of dynamics at play here. One is that we're launching the Fendt product line, bringing on new dealers, and getting that business accelerating. While we're doing that, we're taking on new customers as well with that product. And so we want to have a great first impression. The product impression has been great, and the dealer service has been great. The fly in the ointment in that whole system has been our ability to deliver on time. That's been our biggest negative in our ramp-up opportunity. And so because of that, we decided to, instead of having an open order book, we shortened the order book window to be able to give higher reliability on our commitment dates. And this is happening with some of our competitors as well. It's the volatility that still remains in the supply chain of suppliers having issues that then constrain our ability to finish the machine and delay the production. So it's all around that issue, nothing else.
spk31: And that, Eric, that's primarily a North America issue, though, just on the supply chain?
spk22: Well, it's because that's a growth market. The supply chain in South America, the order book, we already were going one quarter at a time. So that was in place. Europe is a bit more of a stable market strategy, whereas North America and South America with Fent, it's a conquest. We're adding a new brand to the market. And so we're establishing more new first impressions markets. and we wanted to be a little bit more cautious and certain with the delivery dates that we're giving in those markets because we're first engaging with new customers. We wanted the entire experience to be positive. We had deep relationships. Yeah, the relationships in Europe are deep and long-lasting, and they understand the one issue. They already know the product. They already know the dealer. It's delivery uncertainty, and we feel like we can manage that in the relationship there. But we wanted to tighten it up in North and South America.
spk31: Got it. Okay, thank you. And then just there are a couple times your comments around the strength in Brazil. I just wanted to, you know, make sure your guys, your dealers, the guys on the, you know, feet on the street, you're not hearing anything about any hiccups related to the election or any changes in sentiment around or pausing just around the election that occurred down there?
spk22: I mean, at a tactical level for a short period, there were disruptions in transportation and a few things like that because some of the streets were blocked. But that is very tactical, short-lived, kind of spot-related. Big picture, farmers are still making fantastic profits in South America. They're the ones adding more ground into production to feed the global demand gap that exists. And so... Farmer profitability extremely strong, demand pulling from that market, continuing to grow. We expect a very strong year in 2023. And we don't see anything of significance structurally coming from the new government to try and slow down that vital part of their economy.
spk30: I appreciate it, guys. Thank you very much. You're welcome.
spk37: Our next question will come from Meg Dobre with Baird. You may now go ahead.
spk25: Thank you. Good morning. I also want to ask a question on the orders. You know, you talked about them being relatively flat to 2020 relative to the prior year, but obviously there's quite a few limitations that you still have in your structure, the order book. Is there a way to talk about it on an apples-to-apples basis to kind of have a better sense for where the underlying demand is? And what do you need to see in order to be able to maybe open these order books a little bit further?
spk22: Well, right now, what we need to see is more stability in our supply chain. That's pretty... Straightforward in that regard. We continue to see macro overall easing of the supply chain challenges, but not enough to where it's stable. It's getting better and better every quarter, but it's still our number one challenge to having a predictable supply chain system. So I think that's what we would say. Anything else? Nope.
spk25: And as far as talking about this order book on a kind of an apples-to-apples basis, can you help us there?
spk20: Mick, I think, you know, the two markets probably that had somewhat have changed a little bit just in terms of how we're handling orders is North America. And I think Damon and Eric did a nice job explaining how we're limiting there. In South America last year, we really curtailed order intake to handle inflation and pricing. that situation maybe is getting a little better. So maybe we're a little looser in South America and a little tighter in North America. But on balance, I'd say it's not too far from apples and apples.
spk25: Okay. Then my follow-up, just a question on the margin outlook. I don't know if I understand you properly, but it seems that Latin America, we're going to see lower margins in 2023. Is it fair to assume that the other segments are going to see margin expansion?
spk15: Yeah. If I think about the margins in 23 versus 22, I think the two primary drivers that will dampen the improvement year over year, one is the engineering. So we're going to be increasing engineering spend approximately $100 million over year over year. So that's going to tamp down the margins. That's sort of global, more in the North America, Europe markets. But we're doing that. And then the second primary driver is going to be this sort of contraction in our South American margins. So those two things, coupled with a couple one-offs here and there about the euro-dollar exchange of importing European products, are sort of what's tamping down a little bit of the margins. But generally, it's going to be engineering in those couple regions, and then South America.
spk40: Appreciate the call, Eric. Thanks.
spk37: Our next question will come from Stephen Volkman with Jefferies. You may now go ahead.
spk32: Great. Thanks for fitting me in here. Damon, I think it was you who said that as we go forward, you would expect margins to be more balanced among the regions. I guess for that to happen, North America probably has to make the strongest positive move. So is that just all about sort of mix and more fence and more precision, or is there something else that you guys can do to help the North American margins get better?
spk15: Yeah, I think, Steve, it's a couple things. It's continuing the growth of our big three, so Fent, growth in North America, Precision Ag, growth in North America, and then Parts. I think the other two drivers there is, remember, Green and Protein is a business that really struggled in 22 in North America, given the steel costs, given the cyber event. We still see good recovery there, good margin, which will help enhance the underlying margin. And then the Massey Ferguson Group, it's been turning around its performance over the last couple years, did really well. We still see opportunities for cost improvements in the Massey brand as well. So those two coupled with the big three growth initiatives are sort of the drivers for North America.
spk32: Okay, great. And maybe a quick follow-up for Eric about Brain GSI, let's call it, and the I'm curious, you know, you've been in your seat for a while now, but you sort of inherited this thing. You know, is this sort of core to your plans going forward? Does it really fit with the rest of the strategy in your view? Just how are you thinking about GSI sort of over the longer?
spk22: Yes, Steve. It's core to our business today. We are putting a lot of scrutiny on that business, though, to extract the value out of the transformation. You know, we We launched two major transformations over the last couple of years in addition to the growth engines. The South America transformation has delivered, and now it's also had some nice tailwinds of a strong market, but it's delivered, and we've got that business turned around nicely. Grain and protein have gone through the actions. This year we just had a lot of headwinds, China shutdowns, deal prices, cyber attacks. But we've made moves. We've consolidated factories, reduced the amount of brands, reduced the amount of businesses, things like that. We think that will shine through in 23. But we also recognize that it's got to deliver. And the team is very, very clear about needing to deliver strong results and earn the right to grow further. Got it. Thank you, guys.
spk32: Thank you.
spk37: Our last question will come from Nicole de Blasio with Deutsche Bank. You may now go ahead.
spk05: Yeah, thanks. Good morning, guys. Thanks for fitting me in.
spk02: Good morning, Nicole.
spk05: I think Kristen already asked about the quarterly cadence of margins, and that was some helpful color. But anything on the quarterly cadence of revenue, should we expect the normal seasonal pattern versus disruption over the past several years?
spk15: Yeah, again, I would say, Nicole, again, similar to the margin, Q2, again, given the cyber event, you might see a little bit of an above traditional. And then Q4, as we had a very strong quarter here, sort of outpacing our own expectations that you might see a little bit of a less smaller sort of year-over-year change relative to Q1 and Q3, but nothing significant.
spk05: Okay, thank you. And then working capital, what have you guys embedded for working capital improvement in the conversion guidance or free cash flow conversions for the full year?
spk15: Yeah, I think as I said in my scripted remarks, we expect it to be a modest positive investment. in 23. In 22, it was a use of cash as we had built up some inventory given the supply chain challenges. I think we were about $350 to $400 million of a use of working capital in 2022. We still expect inventories to be elevated, but as we see supply chain hopefully improving, I think what I said is a modest positive in 23. Thank you.
spk37: This concludes our question and answer session. I would like to turn the conference back over to Eric and Socia for any closing remarks.
spk22: Well, I'll just close today by saying thank you very much for your participation and your support of AGCO. We're really, really proud of what we've accomplished in 2022. It was a record year in many, many ways. If you peel back the onion, you'll see that the key success areas are right at the core of the strategy that we shared with you in December, and the origin of it was back in 2021. Our focus is on growing our margin-rich businesses like Fent, Parts and Service, and our Precision Ag Smart Machine business. We've also committed to you to improve some of our other businesses, like Massey Ferguson and our grain and protein business. In 23, you'll see the results come through in all of those, whether they are improvement businesses or our growth businesses. We've been investing heavily in the last few years, and in 23, we're making even bigger investments to continue the development of these farmer-focused solutions that are solving the critical farmer problems with many of them with very short paybacks. We target essentially one year, two max. We're seeing take rates that are very high, and the margins are very high. We are also seeing our innovations receive strong recognition in the form of industry awards. Most recently, the 10 innovation awards at AE50 that I mentioned earlier in my comments. We're using our precision ag tools to really engage strongly on sustainability, putting more and more of our technology efforts there, capturing a lot more data, helping our farmers make the transition to not only more productive farming, but more sustainable farming. Lastly, the large ag markets are very strong globally. Farm fundamentals are healthy and supporting farmers' investments. So we're excited about 2023 and beyond. We're convinced that the best days of agco are still in front of us. Thank you for your partnership all along the journey. I appreciate the call today.
spk37: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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