AGCO Corporation

Good day and welcome to the AGCO third 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.

Good morning. Welcome to those of you joining us for AGCO's third quarter 2023 earnings call. This morning, we'll refer to a slide presentation that's posted to our website at www.agcocorp.com. The non-GAAP measures used in the slide presentation are reconciled to GAAP metrics in the appendix of that presentation. We'll make forward-looking statements this morning, including statements about our strategic plans and initiatives, as well as our financial impacts. We'll discuss demand. product development and capital expenditure plans, and timing of those plans, and our expectations with respect to the costs and benefits of those plans, and timing of those benefits. We'll also discuss future revenue, crop production and farm income, production levels, price levels, margins, earnings, cash flow, and other financial metrics. All of these are subject to risks that could cause actual results to differ materially from those suggested by the statements. These risks include, but are not limited to, adverse developments in the agricultural industry, including those resulting from COVID-19, supply chain disruption, inflation, weather, commodity prices, changes in product demand, interruptions in supply of parts and products, the possible failure to develop new and improved products on time, including premium technology and smart farming solutions within budget and with expected performance and price benefits, difficulties in integrating the Trimble Ag business in a manner that produces the expected financial results, reactions by customers and competitors to the transaction, including the rate at which Trimble Ag's largest OEM customer reduces purchases of Trimble Ag equipment, and the rate of replacement by the joint venture of those sales. Introduction of new or improved products for our competitors and reductions in pricing by them. The war in the Ukraine, difficulties in integrating acquired businesses and in completing expansion and modernization plans on time in a manner that produces the expected financial results and adverse changes in financial and foreign exchange markets. Actual results could differ materially from those suggested in these statements. Further information concerning these and other risks is included in ADCA's filings with the Securities and Exchange Commission, including its Form 10-K for the year ended December 31, 2022, and subsequent Form 10-K and Q filings. ADCA disclaims any obligations to update any forward-looking statements except as required by law. We'll make a replay of this call available on our corporate website. On the call with me this morning is Eric Hansodia, 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. ADCO has consistently delivered record results over the last two years, and I'm pleased to tell you that the third quarter of 2023 is no different. ADCO delivered $3.5 billion in third quarter sales. nearly 11% higher than the third quarter of 2022. Operating margins in the quarter were 12.3% and 12.6% on an adjusted basis. That's 190 basis points better than 2022. This marks the fifth consecutive quarter 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 today. towards our mid-cycle 12% operating margin target. This strong financial performance reflects the continued success of our Farmer First strategy, focused on growing our precision ag business, globalizing a full line of our Fent branded products, and expanding our parts and service business. Our North and South American Fent sales are ahead of our growth targets as we expand our distribution networks in the regions to give more farmers access to the industry's best equipment, and we continue to have the best parts fill rates in the industry. Our strategy is generating strong growth in each of these margin-rich businesses, providing the foundation for 2023 to be another record year in sales, operating margin, earnings per share, and free cash flow. Our expanding tech stack is taking our products to new levels of performance and efficiency, putting us in a winning position as farmers' most trusted partner for industry-leading smart farming solutions. The recently announced joint venture with Trimble is truly transformational for Agco and for farmers. It also aligns perfectly with our strategy of focusing on a greater percentage of our business on the high-margin, high-growth precision ag segment of our industry. We'll talk more about the Plan JV in a few minutes. Slide four details industry unit retail sales by region for the first nine months of 2023. As harvest draws towards completion in the northern hemisphere, higher production is driving up grain inventories, weighing on prices. Farm income is still relatively strong, and with positive cash flow for most growers, demand for our equipment is at a relatively high level. What is retreating from the highs seen in 2022 and earlier this year? While still supportive, lower commodity prices and a fleet age trending younger are causing farmers to become more selective about their equipment and technology investments. North American industry retail tractor sales were down approximately 2% through September year to date versus 2022. Smaller tractor sales continue to decline from higher levels in 2022 as higher interest rates and overall economic conditions have slowed demand. Strong demand for greater than 200 horsepower in four-wheel drive units helped partially offset the decline. Industry retail tractor sales in Western Europe decreased approximately 2% through September 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 support good retail demand for equipment throughout the remainder of 2023. In South America, industry retail tractor sales decreased 8% for the first nine months of 2023 compared to 2022. Retail demand in Brazil was negatively affected by the depletion of government subsidized loan program prior to the June 30th fiscal year end. But with loans now being processed, we're hopeful this will help drive improved retail sales for the balance of the year. Although there are increasing signs of caution, retail demand in Brazil and Argentina remained at above average levels in 2023, with particular strength in the high horsepower segments. However, weaker commodity prices from strong crop yields and concerns about dry weather are creating concern for some farmers. The combine industry was up 23% in North America and 30% in Western Europe through September versus 2022. due primarily to improving supply chains. Combines in South America declined 20% in the first nine months of 2023 compared to the prior year. Although market conditions continue to soften off the extremely strong conditions over the last couple of years, we remain positive about the underlying ag fundamentals supporting long-term industry demand for several reasons. First, stock-to-use levels are higher than recent lows but they remain supportive of profitable commodity prices versus historical levels. Second, as the demand for clean energy grows, the need for solutions like renewable aviation fuel and vegetable oil-based diesel will grow strongly, driving demand for our farmers that will further support commodity prices. And third, input costs such as fuel and fertilizer are down from their peaks last year, We expect farm income to be down modestly in 2023 from the record levels of 2022. In aggregate, we believe that it will remain at attractive levels in 2024 and be supportive for industry demand. AGCO's supply chain has improved significantly over the last year. Our suppliers' on-time delivery performance to AGCO's factories has gotten better, and our on-time product delivery to our farmer customers has improved every month since March 2023. Another benefit of this more normalized production environment is lower inventory. We have been able to reduce our raw material and work in process inventory by 14% since September of 2022. AGCO's 2023 factory production hours are shown on slide five. Our production decreased in quarter three by approximately 2% versus 2022. Recall that last year's third quarter production was exceptionally high as we were recovering from the cyber attack in the second quarter. Given this phasing and our focus on managing 2023 inventories, we are planning for relatively flat production levels in the fourth quarter versus last year, resulting in a 5% increase in production hours for the full year. As of the end of September 2023, demand for our farmer-focused products remains strong. and our order boards remained higher than historical average across all regions. In Europe, tractors have six months of order coverage, taking us into the second quarter of 2024. Dealer inventories are up approximately three quarters of a month versus September of 2022. We're now at our targeted level of around four months on average, with certain products like Fendt high horsepower tractors still below the optimal levels in certain areas. In South America, we have order coverage through December 2023, where we continue to limit our orders to around one quarter in advance, giving ourselves more pricing flexibility. We opened our fourth quarter order boards for all brands in South America, and they filled up within a matter of days. In North America, our orders for tractors, planters, and application equipment are fully booked for model year 2024, as the demand in the big farm market continues to be strong. We continue to limit order intake on some products to improve our on-time delivery rates, though other products are returning to a more normal order bank management. We currently have approximately seven months of order coverage for both large and small ag. Moving to slide six. At our Investor Day in December 2022, we discussed our three high-margin growth levers that would help AGCO achieve its margin aspirations and outgrow the industry by 4% to 5%. To reiterate, those three levers are globalization and full-line product rollout of our Fendt brand, focusing on global parts business and increasing the market share of genuine AGCO parts. And the third is growing our precision ag business. which supports not only factory fit technology, but also significantly focuses on the mixed fleet retrofit solutions. These three growth engines will help AGCO achieve 12% operating margins at mid-cycle by year 2026 and will drive AGCO's growth above the overall industry performance. Slide 7 recaps the planned transformational joint venture between AGCO and Trimble that we announced a few weeks ago. in which AGCO will acquire an 85% interest in Trimble's portfolio of agricultural assets and technologies. By layering Trimble Ag on top of our already strong portfolio, we will fast-track AGCO's technology transformation. The joint venture will allow AGCO to be a key player in guidance by offering advanced hardware and correction services. It enables us to automate even more activities for the farmer through Trimble's automated steering system, and enable farmers to connect with all of their data via Trimble's farm management software, all of which will be controlled by AGCO. This combination provides a full suite of advanced technologies for farmers everywhere, regardless of the brand. With our combined solutions, we further expand our mixed-fleet offerings throughout the entire crop cycle and are able to put technology on more than 10,000 different models from almost any OEM, This JV announcement, combined with our existing precision planting business, reinforces our commitment to brand agnostic retrofit solutions and will help position AGCO as the hub of the mixed fleet solutions. Lastly, AGCO's multi-channel distribution approach will drive increased adoption of Trimble's portfolio of technology across the machinery population, allowing farmers more locations to access next-generation technology. This multi-channel access is a key lever to doubling the EBITDA in five years. Looking at slide eight, the business combination will create meaningful commercial growth opportunities for AGCO through access to expanded geographies and channels. Through September, AGCO's precision ag sales have increased 16% on a year-to-date basis, putting us solidly on track to hit our long-term 15% growth target and taking Agco's Precision Ag sales to $1 billion by 2025. When we overlay Trimble Ag's 2023 expected revenues, the effective pro forma sales would be approximately $1.3 billion already in 2023. With the combination of revenues from Agco's Precision Ag and Trimble Ag JV, we expect to deliver over $2 billion in combined Precision Ag revenues by 2028. To conclude, we would likely expect this deal to close in the first half of 2024, subject to regulatory approval and customary closing conditions. With that, I'll hand it over to Damon.