AGCO Corporation

Good day, and welcome to the AGCO Second Quarter 2023 Earnings Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. In consideration of time, please limit yourself to one question and one follow-up. To ask a question, you may press star, then 1 on your touchtone phone. To withdraw your question, 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.

Thanks, and good morning. Welcome to those of you joining us for AGCO's second quarter 2023 earnings call. We will refer to a slide presentation this morning that's posted to our website at www.aggocorp.com. The non-GAAP metrics used in the presentation are reconciled to GAAP measures in the appendix of the presentation. We'll also make forward-looking statements this morning with respect to strategic plans, demand, product development, and capital expenditure plans, production levels, engineering expense, exchange rate impacts, pricing, dividends, interest rates, future commodity prices, crop production, farm income, supply chain disruption, inflation, component delivery, sales, margins, earnings, inventories, cash flow tax rates, and other financial metrics. We wish to caution you that these statements are predictions and that actual events may differ materially. We refer you to the periodic reports that we file from time to time with the Securities and Exchange Commission including the company's Form 10-K for the year ended December 31, 2022. 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, supply chain disruption, weather, exchange rate volatility, commodity prices, and changes in product demand. We disclaim any obligation to update 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 is Eric Cansodia, our Chairman, President, and Chief Executive Officer, and Damon Audia, our Senior Vice President and Chief Financial Officer. With that, Eric, please go ahead.

Thanks, Greg, and good morning. We appreciate your interest in AGCO and your participation on the call today. This morning we reported another record quarter in terms of sales, operating margin, and earnings. The continued execution on our Farmer First strategy yielded second quarter sales growth of almost 30%, with adjusted operating margins expanding by 420 basis points to 13%. This makes four consecutive quarters with operating margins above 10.5%, which is evidence of how we have structurally transformed our business and further demonstrates the progress we are making towards our mid-cycle 12% operating margin target. We are seeing excellent demand for our technology-rich Fent tractors, our precision egg solutions, and replacement parts. North and South American fence sales are ahead of our growth targets as we expand our distribution networks into the regions to give more farmers access to the industry's best equipment. Compared to June year-to-date 2022, AGCO's precision ag sales were up 23%, and ideal combine sales increased 76%. We've also made significant progress with our efforts to optimize our South American operations and improve margins there. This quarter marks the fourth consecutive quarter with South American operating margins over 19%, which is a testament to the team's execution and industry-leading products. Our customers' growing interest in AGCO's Precision Ag Solutions is supporting extended order boards. We expect solid market conditions to continue. Our improved financial outlook for 2023 reflects this optimism. As we look at the second half of the year, we have increased our full year sales, operating margin, earnings, and free cash flow forecast. Slide four details industry unit retail sales by region for quarter two, 2023. Supportive farm economics resulted in robust demand for large agricultural equipment as farmers continued to replace aging machines. While dealer inventory of smaller equipment has increased versus 2022 levels, larger machinery is still at or below targeted levels. North American industry retail tractor sales were down approximately 2% through June year-to-date versus 2022. Smaller tractor sales continued to decline from the higher levels in 2022 as increased interest rates and overall economic conditions have slowed demand. Strong demand and increased sales of greater than 100 horsepower units helped partially offset the decline. Industry retail tractor sales in Western Europe decreased approximately 1% through June year-to-date 2023 compared to 2022. Farmer sentiment continues to be negatively influenced by the ongoing war in Ukraine, as well as input cost inflation. However, forecasts for healthy farm income in Western Europe are expected to continue to support solid retail demand for equipment throughout 2023. In South America, industry retail tractor sales decreased 3% through the first six months of 2023 compared to 2022. Retail demand in Brazil was negatively affected by the depletion of the subsidized loan program prior to the June 30th fiscal year end. With new funding recently announced, positive farmer economics, supportive exchange rates, and continued expansion in planted acreage, we are still anticipating modest growth for the South America tractor industry in 2023, compared to the very strong levels of last year. The combine industry was up in North America 57%, and in Western Europe by 44%, through June year-to-date versus 2022, due primarily to improved supply chains. Combines in South America declined slightly in the first six months of 2023 compared to the prior year. We remain positive about the underlying ag fundamentals supporting strong industry demand in 2023. Stocks to use levels are a bit higher than the recent lows, but they remain at a level that supports profitable commodity prices. While there has been recent volatility in commodity prices over the last quarter related to weather uncertainty, they are still above the historical averages and favorable for farmers. As the world demand for clean energy grows, the demand for vegetable oil-based diesel will grow strongly. This is a demand driver for our farmers that will be supportive of commodity prices. Equipment in the field is aged and due for replacement. By our calculations, the current average age of high horsepower tractors in the U.S. is approximately seven and a half years old, which is a year older than the historical average. Across all regions, new dealer inventory of large ag equipment remains at or below targeted levels, while small ag dealer inventory is up from last year. Input costs like fuel and fertilizer are down significantly from their peaks last year. We expect farm income to be down modestly in 2023 from record levels in 2022. However, we believe that it will remain at very good levels in 2023 and be supportive for industry demand, assuming that normal crop production continues. The team has continued to do a great job managing supply chain challenges over the last few years. We are no longer using brokers to acquire semiconductors. This is not only a cost savings, but it also allows us to move products to finished goods inventory and on to customers faster. While the supply chain has improved from where we were a year ago, there are still components that are affecting our production volumes. The encouraging news is that even with these hurdles, capacity is improving. At the same time, farmer economics remain healthy and global end market demand remains strong. especially in the large farm segment. AGCO's 2023 factory production hours are shown on slide five. We grew our production in quarter two by approximately 18% versus 2022. Part of this increase is due to the cyber event we experienced in quarter two in 2022, which depressed production volumes last year and shifted production to the second half of 2022. Because of this phasing and our focus on managing inventories, we are planning for a relatively flat production level in the back half of this year versus 2022. Based on our industry and market share forecast for 2023, we are projecting a 4% to 5% increase in production hours for the year. As of the end of June 2023, demand for our farmer-focused products remains very strong. and our order boards remain elevated across all regions. In Europe, tractors have order coverage into the first quarter of 2024, with large ag orders up double digits and small ag orders down double digits compared to last year. In South America, we have order coverage through September of 2023, where we continue to limit our orders to around one quarter in advance to give ourselves more pricing flexibility. We plan to begin accepting fourth quarter orders in Brazil in mid-August. In North America, our orders for tract tractors, combines, and application equipment extend well into 2024 as the demand in big farm market continues to be strong. As we outlined last quarter, orders remain below last year's levels as we have elected to limit order intake to improve our on-time delivery rates. We currently have around nine months of order coverage for both large and small ag. Moving to slide six. Over the last several years, we have been providing insight into our recent acquisitions and where they fit into our tech stack. For those that were present at our recent 2023 technology event in Kentucky, you saw many of the cutting-edge advancements that these companies have helped to accelerate and enable here at AGCO. With the products and technologies we demonstrated at the event, we showcased how we have been able to execute on integrating these companies by giving them the opportunity to be entrepreneurial and creative while leveraging AGCO's scale and go-to-market expertise. Among some of the highlights were precision planting starting the journey with us in 2017. And they are the cornerstone of our technology stack. They have perfected planters. which we have leveraged into the industry-leading Momentum planter. And now they're taking their know-how beyond planting to areas like sprayers and soil testing. JCA was acquired a year ago, and its technology was on full display at our technology event with the autonomous grain cart running next to the Fent Combine. We are excited to launch this product into the market in 2025. Slide 7 recaps the key messages from our recent technology event. The event highlighted all three of our key growth levers, the global Fent full line, growing our parts and service business, and growing our precision ag business. On that Kentucky farm, we demonstrated a number of our technology-rich Fent products, from a momentum planter to a round baler to an ideal combine. We discussed the ways we're meeting the farmer where they want to do business through our ag revolution dealership model. which blends a brick and mortar presence with over 30 mobile service trucks capable of performing most services right on the farm. This mobile service model will help us further grow our parts penetration by utilizing the telemetry data coming off of our machines and proactively performing maintenance before it becomes a problem. We are bringing parts and service to the farmer instead of requiring them to always come into the dealer store. We also showcase much of our precision ag portfolio and how we're helping to sustainably feed our world, while also helping farmers increase their net farm income by at least 20% across the entire crop cycle. Our new Radical Agronomics automated soil sampling lab got a lot of attention at the Tech Days for how it is revolutionizing the entire soil sampling value chain and lowering farmer costs. We also reiterated the target dates of when we'll be having cutting edge products in the market. For autonomous solutions, we demonstrated how we have automated many of the tasks in the cab on our path to full autonomy. We demonstrated examples of the full crop cycle from the teach-in headland feature on the tractor pulling the momentum planter to the ideal drive on the combine. The ideal combine automates more tasks than any other in the industry, resulting in less fatigue for the operator and a cleaner harvest with improved yield. We'll have autonomous retrofit solutions by 2025, supporting tillage and grain cart applications. We'll follow that with fully autonomous solutions across the crop cycle by 2030. For targeted spraying, we demonstrated precision plantings Symphony Vision, a retrofit solution which will be available for any brand of equipment starting in 2024. We'll follow that up with an OEM solution by 2026. And for clean emissions, we highlighted the paths we're taking to reduce emissions by investing in electric tractors and launching the E100 model in 2024, with more electrified platforms to follow. We also highlighted some of our other paths we're exploring, like biomethane and hydrogen. When you look at it all, there's just never been a more exciting time to be in the ag space. For those of you that were with us, we want to thank you for your attendance at the event and your interest in AGCO. We hope that you saw how we are driving innovative solutions that are focused on helping improve our farmers' profitability. And with that, I'll hand it over to Damon.