AGCO Corporation

All participants will be in a 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 one on your touch-tone phone. To withdraw your question, 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, sir.

Thanks, and good morning. Welcome to those of you joining us for AGCO's third quarter 2024 earnings 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 the slide presentation are reconciled to GAAP measures in the appendix of that presentation. We will make forward-looking statements this morning, including statements about our strategic plans and initiatives, as well as their financial impacts. We'll discuss demand, product development, and capital expenditure plans and timing of those plans and our expectations concerning the costs and benefits of those plans and timing of those benefits. We'll also cover future revenue, crop production, farm income, production levels, price levels, margins, earnings, operating income, cash flow, engineering expense, tax rates, 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, supply chain disruption, inflation, weather, commodity prices, changes in product demand, the possible failure to develop new and improved products on time, including premium technology and smart farming solutions within budget and with the expected performance and price benefits, difficulties in integrating the PTX Trimble business in a manner that produces the expected financial results, reactions by customers and competitors to the transaction, including the rate at which PTX Trimble's largest OEM customer reduces purchases of PTX Trimble equipment and the rate of replacement by the joint venture of those sales. Introduction of new or improved products by our competitors and reduction in pricing by them. The war in the Ukraine, difficulties in integrating acquired businesses and in completing expansion and modernization plans on time, and in a manner that produces the expected financial results, and adverse changes in the financial and foreign exchange markets. Actual results could differ materially from those suggested by these statements. Further information concerning these and other risks is included in AGCO's filings with the Securities and Exchange Commission, including its Form 10-K for the year ended December 31, 2023, and subsequent Form 10-Q filings. ECHO disclaims any obligation to update any forward-looking statements except as required by law. We will 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 Adia, Senior Vice President and Chief Financial Officer. With that, Eric, please go ahead.

Thanks, Greg, and good morning. I wanted to touch on a few highlights from AGCO's performance against the backdrop of the cyclical downturn we're seeing in the industry before I get into the results for the quarter. 2024 has brought a significant contraction in the ag industry compared to the highly profitable years farmers saw from 2021 to 2023. The significant contraction is not uncharacteristic of prior downturns. What is different this time is how we are addressing it. We are focused on reducing inventory and cutting production faster than in prior downturns. We have been much more aggressive in reducing costs to better align our operations with the weak market environment. Despite these challenges, we remain focused on being the most farmer-focused company in the industry. Our three high-margin growth levers, which include the Fendt Full Line Globalization, Precision Ag, and Parts, are central to this commitment. Although this quarter was challenging in some ways, we are confident that the steps we are taking along with these growth engines will help us deliver higher trough margins than before and will increase the durability and resilience of AGCO's earnings through the cycle. The thoughtful and efficient growth of our North America Fent distribution network through our farmer core model is progressing. We saw dealer consolidation in Ohio, Missouri, and Wisconsin in the quarter. These new locations can serve farmers on the farm where they want to do business with the mobile fleet approach to sales and service. In addition, through the FarmerCorps approach, Agco dealers have also expanded their presence in Louisiana and Georgia. We are now on track to improve Fent market coverage to over 80% this year. The momentum for Fent continues as dealers and farmers recognize the value of the Fent full line of products. This was evident in the third quarter when major agco dealers across five U.S. states in the Midwest adopted our Fent full-line strategy. They removed competitive harvesting product lines and selected the Ideal Combine as their preferred product offering to help farmers maximize performance during their harvest. This is yet just another example of the opportunities ahead for us as more and more farmers see the value of our industry-leading and award-winning Fent products. Fent's improved distribution and technology-rich full product line has been translating into improved market share, particularly in Europe this year. Also, the rebuilding of the PTX Trimble dealer network remains a top priority for us. Over the past several months, hundreds of dealers have signed distribution contracts directly with PTX Trimble to continue serving their customers with the innovative products they are seeking. Although sales and margins for PTX Trimble have been lower than we expected this year, given the rapid decline in our industry, we are energized to continue integrating, innovating, and growing the PTX portfolio of products and services. Leveraging the strength of the PTX Trimble portfolio, along with a farmer-first mindset and award-winning products from Precision Planting and our equipment brands, we are poised to reach new heights. I want to reiterate that AGCO's unique retrofit strategy allows us to offer an industry-leading suite of advanced technology solutions for farmers around the world looking to save on inputs or increase yields, regardless of their brand of equipment. This is especially impactful in a year when farm income is down, and we can help farmers with new technology at a lower price than a brand new piece of equipment. Finally, I want to take a moment to extend my sincere thanks to the grain and protein team for their hard work during the past year with the completion of the divestiture on November 1st. We couldn't have done it without them. I wish them well and look forward to their continued success. This portfolio change supports our strategic transformation and allows AGCO to focus on core agricultural machinery and precision ag technology. The PTX Trimble joint venture addition and the grain and protein divestiture are major strategic shifts that will provide margin tailwinds for AGCO over the long term. Let's transition now to AGCO's third quarter performance in slide three, which shows our sales down approximately 25% and an adjusted operating margin of 5.5%. Lower sales and reduced operating leverage related to significant production cuts and a difficult pricing environment were the primary factors in our lower margins this quarter. In this environment, AGCO continues to focus on controlling the things we can manage. The restructuring announced in June is progressing well, and we are continuing to explore new ways to leverage technology and global centers of excellence to optimize our operating model. Since the announcement, we have begun to see some of these savings materialize this quarter, and we are confident in achieving the full $100 to $125 million of run rate cost savings midway through 2025. The biggest challenge for AGCO this past quarter was destocking the dealer inventory channel. Despite the significant production cut in Q3 2024, which was the largest year-over-year AGCO cut has ever taken in over a decade, the market conditions have made the outlook more challenging. I want to touch on these details later, but I wanted to provide some context for now on how we're aggressively trying to right-size dealer inventories. Slide four details industry unit retail sales by region for the first nine months of 2024. Global industry retail sales of farm equipment continued to be weak in all of AGCO's key markets. North American industry retail tractor sales decreased 11% for the first nine months of 2024 compared to the first nine months of 2023. Sales declines were relatively consistent across the horsepower categories, with higher horsepower categories declining more in recent months. In Western Europe, industry retail tractor sales decreased 6% during the first nine months of 2024 compared to the first nine months of 2023. South American industry retail tractor sales decreased 9% during the first nine months of 2024 compared to the first nine months of 2023. Demand in Brazil was negatively impacted by the floods in Rio Grande do Sul, where a while a challenging first harvest in the Cerrado region continues to affect farmers' buying behavior. Following three strong years of retail demand in South America, it's expected to remain soft in 2024 as a result of lower commodity prices and weaker farm income. The combine industry was down significantly in all regions through the first nine months of 2024, ranging between 19% and 35% down year over year, depending on the region. Despite the current down cycle of the agricultural industry, AGCO is well positioned to capitalize on the long-term growth in our sector. Farmers are being asked to produce more crops with fewer acres as the world's population grows and food security becomes increasingly more important. We have also taken decisive steps to focus our product portfolio on precision ag technology with the PTX Trimble joint venture and precision plantings. complemented by an industry-leading machinery that is the best in AGCO's history. While commodity prices are down compared to the recent past, the cost of farm inputs have also come down, though not to the same degree. With AGCO's tech stack, farmers can further reduce their expenses with precise application of fertilizer, seeds, and by leveraging data analytics with our tools. AGCO's mixed fleet retrofit solutions typically offer a one to two year payback and are available at a significantly lower cost compared to buying a new machine. AGCO's 2024 factory production hours are shown on slide five. Our production decreased in the third quarter by approximately 35%, which was 19% more than we anticipated in our third quarter guidance. Significant reductions were made in all regions, with the biggest reductions occurring in South America and North America. Reducing dealer and company inventory remains a key priority for us as the market continues to soften. While we have brought dealer inventory down by 6% on a unit basis, sequentially from Q2 to Q3 with our significant production cuts, Further weakening end market retail demand has resulted in an increase in months of supply on a forward-looking basis. In response, we are cutting production even further. Our new 2024 production guidance now reflects a 25% year-over-year reduction in production hours. Even with this more aggressive reduced production schedule, our current outlook for 2025, North America and South America, will likely result in production less than retail demand in the first part of 2025. Diving into the regional breakdown. In Europe, tractors have approximately three months of orders, which is down from last quarter. Dealer inventories rose roughly half a month and are now closer to five months of supply, above our target level of four months. Massey Ferguson and Valter dealer inventories are a bit higher and Fendt a bit lower than the average. in part due to strong share gains on FEMP. In South America, we have order coverage through December 2024, where we continue to limit our orders to one quarter in advance due to inflationary pressures. Despite our aggressive production cuts and the reduction in the number of units at the dealers, our 12-month sales outlook results in around five months of dealer inventory across all products as the industry conditions continue to remain weak. Our goal is to have around three months of dealer inventory, which will likely require further reduced production in 2024 and 2025 based on the current environment. In North America, we currently have approximately four months of order coverage. Smaller rural lifestyle equipment has the lowest order coverage, while bigger equipment is higher. Like the challenge in South America, Our dealer inventory increased by one month compared to last quarter as industry conditions have continued to weaken and is now approximately nine months of supply. Our North American targets for dealer inventory range from four to six months depending on the product. We will continue to focus on underproducing retail demand coupled with retail market share execution to bring dealer inventories in line with our targeted range. The current environment will result in lower production levels in the fourth quarter and and in 2025. moving to slide six where you'll see our three high margin growth levers aimed at improved improving our mid-cycle operating margins 12 and outgrowing the industry by four percent to five percent annually to reiterate these three growth levers are number one globalization and full-line product rollout of our front brand number two focusing on accelerating our global parts business and increasing the market share of genuine ag coparts. And number three, growing our precision ag business. We continue to execute on each of these initiatives, and I wanted to highlight a few of the most recent new product introductions supporting our growth plans. Slide seven spotlights the products we have brought to North America market at the Farm Progress Show in late August. On the technology front, we officially launched the OutRun Retrofit Autonomy Kit, available through PTX Trimble. OutRun is the first commercially available autonomous retrofit grain cart solution in the market, and the latest offering that demonstrates our commitment to retrofit first and mixed fleets. The autonomous grain cart allows a single combine driver to operate two pieces of machinery simultaneously. The combine driver can stage the autonomous tractor on the field, call the tractor so it can pull alongside the combine, and receive the grain on the go. And finally, send the tractor to an unload zone, all without requiring a driver in the tractor cab. The outrun hardware is available initially on two tractor brands with more to follow. This kit will be the backbone of AGCO's system to allow fully autonomous solutions across the crop cycle by 2030. This is just the first step of many. As we showed at our technology days earlier this year, we are already working on the next phase where the combine can operate two grain carts simultaneously. As more phases of the crop cycle are automated, the same outrun hardware can be used, which allows for a simple unlock from a farmer standpoint. This product will also bring AGCO a recurring revenue stream, where farmers will be billed for every active task hour where the tractor is running in autonomous mode. Farmers can purchase hours a few different ways. Pay-as-you-go, hourly bundle, or unlimited. We're very excited about this launch and helping farmers drive increased efficiency during one of their most critical points in the season. On the machinery side, North America is getting several new products in the coming year, starting with the new Massey Ferguson 9S tractor, which completes Massey Ferguson's tractor lineup. This new product delivers an industry-leading cost-of-ownership experience for our farmers through field-proven technology, better dependability, and better fluid efficiency. The MF9S enables our dealers to deliver a solution for farmers that optimizes yield, reduces operator training, and enhances field efficiency. We also launched the Fence 600, which brings an uncompromising product that perfectly blends power and versatility. It's a great option for those looking for a machine that can handle a wide range of jobs, from the row crop farming, to loader work, to transport, and anything in between. And finally, the new Gleaner T-Series Combine has been refreshed, offering a lightweight, performance, superior control, and premium grain quality for the best value in farmers' fields. This straightforward and dependable product complements our premium Fent Ideal Combine in North America and allows our dealers to offer several options to their customers. As I mentioned earlier, AGCO's product lineup is the best it's ever been. The innovation and performance of these new offerings is a testament to our continued investment in R&D over the years and our farmer-first focus. I'll now hand it over to Damon to walk you through some of the finances from the quarter.

Thank you, Eric, and good morning, everyone. Slide 8 provides an overview of regional nut sales performance for the third quarter. Net sales were down approximately 26% in the quarter compared to the third quarter of 2023 when excluding the negative effect of currency translation and positive impact of acquisitions. By region, the Europe Middle East segment reported sales down roughly 21% in the quarter compared to the same period in 2023, excluding the impact of favorable currency translation and favorable impacts of acquisitions. Sales were down in nearly all countries, with declines in France, Germany, and Italy showing the largest reduction. The product segments showing the most significant declines were mid-range tractors, high horsepower tractors, and hay equipment. Parts showed modest growth. South American net sales decreased approximately 44%, excluding the impact of unfavorable currency translation and favorable impact of acquisitions. The market continues to be very challenged, and we continue to underproduce relative to retail demand. Tractors, combines, and implements all showed large reductions. In the corner, there was significant negative mix year over year as the high horsepower segment of the tractor market underperformed the medium and low horsepower segments. The Brazilian market was down the most, while Argentina was modestly down. Net sales in North American region decreased approximately 22%, excluding the impact of unfavorable currency translation and favorable impacts of acquisitions. Lower farm income continues to pressure farmer purchasing behavior. High horsepower tractors and hay equipment saw the largest declines. Net sales in Asia Pacific Africa decreased 15% excluding favorable currency translation impacts and favorable impact of acquisitions due to weaker end market demands and lower production volumes. The most significant declines occurred in Africa, China, and Australia. Finally, consolidated replacement parts sales were approximately $488 million for the third quarter, up 4% on a reported basis, and up approximately 5% year-over-year when excluding the effect of negative currency translation. Turning to slide 9. The third quarter adjusted operating margin declined by 710 basis points versus a record third quarter of 2023. Margins in the quarter were heavily affected by the significant decline in production, reflective of the increasingly weak industry conditions, along with the higher discounts given the weak retail demand across the world. By region, the Europe Middle East segment income from operations decreased by 116 million, and operating margins decreased by 620 basis points compared to the same period in 2023. The reduced margins were primarily a result of lower sales volume, factory underabsorption from reduced production, and increased discounts. North American income from operations decreased approximately $87 million year-over-year, and operating margins were 7.2%. The decrease resulted from lower sales volume and increased factory underabsorption, increased warranty expenses, and higher SG&A expenses associated with the consolidation of the PTX Trimble business. Operating income in South America decreased by approximately $105 million. This decrease was primarily a result of continued weak market conditions resulting in lower sales and significantly lower production volumes, as well as increased discounts year over year. The operating margins in the quarter were 11.8%, driven by cost savings measures at the factories and in SG&A expenses, as well as a one-time tax benefit in Argentina that flowed through cost of goods sold that contributed approximately 200 basis points of margin improvement. Lastly, income from operations in our Asia-Pacific-Africa segment decreased by approximately $12 million due to lower sales and production volumes. Slide 10 details our September year-to-date free cash flow for 2023 and 2024. As a reminder, free cash flow represents cash used in or provided by operating activities, less purchases of property, plant, and equipment, and free cash flow conversion is defined as free cash flow divided by adjusted net income. We used $387 million of cash through September of 2024. approximately $232 million more than the same period of 2023. Lower net income in 2024 is the primary driver of the year-over-year change. For the full year, we continue to expect our free cash flow to be in the upper half of our long-term targeted range of 75% to 100% of adjusted net income, putting us between $435 to $580 million. We remain committed to a balanced capital allocation plan, which includes reinvesting back in the business, repaying debt to maintain our investment-grade credit ratings, and rewarding investors with direct returns. On November 1st, we repaid the $500 million outstanding under the term loan facility, utilizing the proceeds from the grain and protein business. In addition to the regular quarterly dividend of $0.29 per share, as a reminder, we also paid a special variable dividend of $2.50 per share in the second quarter. ADCO has paid over $1.2 billion in special variable dividends over the last four years. We will remain focused on deploying capital in the most effective ways for our long-term shareholders. Slide 11 highlights our 2024 market forecast for our three major regions, which has not changed from the last quarter. For North America, we still expect demand to be 10% to 15% lower compared to the levels in 2023. For Western Europe, we continue to expect the industry to be down 5% to 10% compared to 2023. Farmer sentiment and other indices have been hovering at historic lows since for a few months now due to reduced commodity prices and higher input costs. Our forecast for South America remains unchanged, indicating a 25% to 30% industry decline in 2024. Slide 12 captures the assumptions related to our 2024 outlook, which now reflect the divestiture of the grain and protein business as of November 1st. Despite the weakening market conditions, our sales plan includes market share gains. We are updating our full-year pricing to reflect about a negative 1.5% year-on-year. This pricing assumption is comprised of positive pricing in North America, offset by negative pricing in South America, and modestly negative pricing in Europe. Our raw material costs have stabilized and declined in certain cases. We are continuing to pursue cost savings and look to be about break-even on a net pricing basis. We expect currency translation to have no meaningful effect on our sales year over year, where our prior guidance had assumed about a negative 1% adverse effect on sales year over year. Engineering expenses are now expected to be down 5% in 2024 compared to 2023, including PTX Trimble, and 11% excluding PTX Trimble. We are reaffirming our adjusted operating margin target of approximately 9%, which we view as achievable given the sales outlook and cost savings initiatives we have executed, coupled with the structural changes we've made to our business. We see 2024 as being around 90% of mid-cycle, almost 15% below 2023, where ADCO saw a record adjusted operating margin of 12%. Despite the challenges in the third quarter, we are confident the Agco team can deliver the 9% on a full-year basis. This would represent among the highest adjusted operating margins ever achieved, not only well above the prior trough of 4.1% adjusted operating margins we saw in 2016, but also higher than previous peak margins before we began executing our current strategy. We will provide updated long-term mid-cycle operating margin targets at our December 19th analyst meeting to account for the performance of PTX Trimble and the divestiture of our grain and protein business. Our effective tax rate is anticipated to be approximately 30% for 2024 in line with our prior guidance. Turn to slide 13 for our revised 2024 outlook. Our full year net sales outlook is now $12 billion down from our previous outlook reflective of the market environment and the elimination of the grain and protein sales for the balance of the year. We are reducing our adjusted earnings per share forecast to $7.50, down from our prior guidance of $8, which is also reflective of the market environment and the elimination of the grain and protein sales for the balance of the year. Given the weak market environment, we are modestly reducing our CapEx spending to approximately $450 million. Our free cash flow conversion should be at the upper end of our targeted 75% to 100% of adjusted net income, consistent with our long-term target. On slide 14, you can see the details for our 2024 analyst event, where we will provide sell-side analysts and investors an update on our business. We hope you will join us, and we look forward to seeing you there. With that, I'll turn it back over to the operator for Q&A.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. Again, please limit yourself to one question and one follow-up. We will now pause for just a moment to assemble our roster. And our first question today comes from Jamie Cook with Truist. Please go ahead.

Hi, good morning. I guess two questions. First, on the guide for 2024, you're maintaining your margin guide. Pricing is an incremental headwind relative to the previous guide. Your sales forecast is lower, and so it sort of implies margins in the fourth quarter have to reach 10% versus 5.5% in the third quarter. So just trying to understand the margin ramp there and what would be driving that. And then my second question just on Agco dealer inventories. I mean, it sounds like you're saying, you know, the market is getting weaker. Your dealer inventories are still bloated yet, but you haven't changed your retail sales forecast. So I'm just trying to understand what's Agco specific versus the industry. And like, to what degree is there any way you could frame the production cuts in South America and North America in the first half of 2025? Thank you.

Sure. So Jamie, um, We'll go to your first question on the 10% outlook for the fourth quarter. Again, if I think about how I would look at it, the third quarter where you alluded to the 5.5%, I think there's a couple of key differences here as we go into the fourth quarter. One is the production levels in Europe will be higher in the fourth quarter than they were in the third quarter. In fact, they should be up at around 40% from Q4 versus Q3. We made the decision in the third quarter to really elongate some of the seasonal shutdown there, given the inventory. And we're still seeing fairly good demand in many parts of Europe. So we will see a little bit higher production in the fourth quarter in Europe specifically. Third quarter, we did do some things strategically related to a large European dealer who was dealing with some financial challenges that was a little bit uncertain in the third quarter. For the most part, they have worked through that. We have much better clarity and we expect to see a little bit of incremental volume related to that flowing from what would have been in Q3 flowing into Q4. So those would be a couple of things. In addition to that, you know that Q4 is always our seasonally strongest quarter that we'll see some improvements there. And then internally specific to AGCO, the cost actions that we've been implementing, we continue to see those pick up as we move month to month and we start to take out more of the associates. And our warranty, again, we had a little bit of a spike here in the third quarter. We expect that to get more into the normalized rates here as we go into the fourth quarter. So at the end of the day, we feel good. We know the teams are working to drive the retail sellout, even in the weakening environment. I would make your comment on pricing. You know, probably the effective offset to that is FX. is a little bit more of a tailwind for us here relative to where we were at the end of the third quarter, and those two sort of washed themselves out a little bit. But overall, we feel good. On the dealer inventory levels, as Eric alluded to in his comments, we are taking significant reductions in our production, working to reduce the dealer inventory units on hand. As you know, our inventory months is a forward 12-month forward looking. And so as we do see the market continuing to be weak into 2025, that's reducing the retail sale outlook here for us, thus increasing the months of supply on hand. We are taking significant incremental production cuts around the world year over year. South America, again, will be the biggest one after back-to-back 50-plus percent cuts in Q2 and in Q3. We see South America down again, and that's lapping a very strong production cut last year in the fourth quarter, just given the very weak industry environment that we're seeing there. But we're also cutting production overall in Europe and in North America. So we sort of see that happening in the fourth quarter. We're not ready to give an outlook on what the production schedules will look like for early 2025 for South America or North America yet. We want to get through the fourth quarter, see how the retail traffic is, see how our share plays out, get our overall industry outlook in alignment. But as we sit here today, again, our confidence is that we will likely have to underproduce at least in the early part of 2025, just given what we see the industry and the current dealer inventories looking like right now.

And our next question today comes from Kristen Owen with Oppenheimer. Please go ahead.

Hi, good morning. Thank you for the question. A little bit of a follow-up on that. Just help us understand, I mean, you talked about some of the moving pieces in Europe around the production, around some dealer things. Can you help us understand what pricing looks like in Europe and how to square that circle with some of the market share gains that you've seen? And then I'll have a follow-up.

Yeah. So, Kristen, overall pricing in the quarter for Europe was modestly negative. I would tell you it's a little bit on the volume brands, but even a little bit more in cent. If I break that down a little bit further, it's really focused on the transition that we're going through with the fence 700 gen 6 and the gen 7 you've heard us talk about introducing the new gen 7 earlier this year we are still producing the the gen 6 you know we'll transition through that in 2025 at some point in time but as you would expect as we still are offering dealers and farmers the opportunity to choose between a gen 7 700 And a Gen 6, you know, that Gen 6 is coming at a lower price point. And year over year, that's factoring into negative price in Europe. Again, I think when you look at our overall pricing being down at around 50 basis points year over year, I think it's important to understand the geographic mix. We're still seeing very good pricing here in North America. That has continued for the year, and we expect that to continue. South America, we've been forecasting negative price now for a year. That's continuing to materialize, I would tell. It's sort of in the low single digits this year as that market has continued to be weak. And then Europe is a little bit negative, as I said on Mike. My comments, and again, a lot of that is to do with this larger volume product in the Fence 700 Gen 6 translating into the negative year-over-year price there in Europe.

Okay. That's really helpful. Thank you for that, Damon. And then just generally speaking on the lowered outlook for the full year, if I back out grain and protein fourth quarter of last year, that represents, let's call it, half growth. the $500 million delta in the top line. Can you help us understand what that does for the bottom line? How much of a benefit is that to your year-over-year margin in the fourth quarter? Just a little bit more on the moving pieces of grain and protein in the revised guidance.

Yeah, so I think on the revenue outlook, Kristen, you're right. I would tell you What we saw in the third quarter, the miss in grain and protein and where we sit here in the fourth quarter, that's about 200 million. About 150 of that, I would say, directionally would be in the fourth quarter specifically. So that's the revenue. Operating margin-wise right now, as we sit here at this 9% with the sale happening November 1st, I can tell you it really has a de minimis effect on the operating margin. EPS-wise, it's about $0.10 of our guide down in the EPS is related to the elimination of the grain and protein business here for the balance of the year.

And our next question today comes from Stephen Volkman with Jefferies. Please go ahead.

Hi, good morning, guys. So can we just start off with Trimble, Eric? And you mentioned that things were sort of weaker, I guess, as the channels sort of changed there. It was a little weaker than I expected. What's your outlook there? I mean, could Trimble be up next year, sort of irrespective of end markets, as that channel shift sort of changes?

Yes, so it's an interesting situation in that the activities that we're monitoring, many of them are on track in that we're signed up over 200 new dealers. We've transformed how we're sourcing product or sourcing receivers on our own machines. We used to have two suppliers, majority of which was another supplier, not Trimble. We've converted that over to predominantly Trimble now. So those types of things are happening and on track, maybe even a little bit ahead of schedule. This big air pocket that we've talked about of the last time buy from one of the top customer from Trimble is still feeding the market. So even though we've signed up all those dealers, they're really not ordering that much yet. We expect that to work its way through by the end of this year. And that's still on track with what we said last time. And then we can start seeing the activity come through from these dealers that we've signed up. Will next year be higher than this year? We're still working through our expectations for next year. The things we're putting in place, we feel good about. It depends on what the market does. The broad ag indices are at their low points. You look at Purdue was at its low point and now bounced back today, came up a little bit. That's just one data point. Will that be a trend? Don't know yet. The SEMA index in Europe is at its all-time low point. So we're certainly close to sentiment being at the very bottom. Now, that's not meaning the market's at its very bottom, but that's usually a good indicator of what the next few months look like. So we're trying to sort out where is that inflection point and what will happen with 25. We're not We're not speaking to that in big specifics yet, but what we're trying to focus on is what's in our control, driving those things in the channel and with the product to make sure that we're ready when the market's there.

Steve, the one comment I would add, and you probably are familiar... cnh the oe business we know that that is coming down this year we've talked about them moving away from the trimble business that's transitioning out in 2024 that's continuing so that'll be a year-over-year headwind um if you remember at the time of the acquisition we announced that we would be moving as eric alluded to moving trimble as our base offering in our receipt as in our oe in our oe production that will help mitigate some of that. But when I give you the reported sales, remember the C&H sales today is reported in that number. But if I'm transitioning that into an Agco product, it won't report as an external sale of this inner company. And so similar to precision planting, where you'll hear us give one number, we'll try to overlay sort of what's inner company for this technology. Again, we see part of that being mitigated, but just in absolute terms, that'll be a headwind on reported numbers year over year.

Got it. That's helpful. Thanks. And then as a follow-up, you've been having sort of a semi-public debate with your largest shareholder and some changes in that relationship, I think, relative to production and so forth. Is that taking a significant amount of your time and any sort of update you can give from your perspective?

Yeah, just as a reminder, this is 1% of our sales, and it's really only for a few markets. So the rest of the organization is focused on the core of our business and is marching forward trying to serve farmers and deliver on our farmer-first strategy. There's a few of us that are trying to manage this in a professional way, and I think it's been handled that way well. We're looking for a smooth settlement to this overall situation. We put on the table some, we think, very generous offers to get it to resolve smoothly. The ball's really in Tafi's court now. But no, it's a small impact on the business. We're trying to keep it focused that way. And the organization is really focused on delivering precision ag solutions to production farmers all around the world. And we're going to have, and we've got, plenty of activity underway to replace those tractor sales as well. So we feel fine about that. The channel is served today. We've got inventory in the channel for those products. So dealers are served today. We've got backfill options that we're working, and we have confidence in those. We've got open lines of communications with TAFE, offered a few very reasonable deals and generous deals. We're just hoping that they'll take those and we can resolve this.

And our next question today comes from Joel Jackson with BMO Capital Markets. Please go ahead.

Hi, good morning. Thanks for taking my question. I wanted to follow up on Europe a bit more. You did address some of this already a few minutes ago on a prior question. But like in trying to look through into early 25, which you've given just a little bit of outlook on that, you know, trying to figure out how transient the step-down in margins are in Europe in Q3, again, you gave some color. But should we expect kind of a ramp back over a couple quarters on margin in Europe? Or should we expect, you know, first half margins in Europe 25 to be, you know, a lot less than we saw first half of 24? Because it does mean a lot for you guys. Thanks.

Well, Joe, I think it's a little bit too early for us to – we're not going to get into the outlook for 2025 yet. But I think if you step back at the more macro level, Europe, from an industry standpoint, tends to be the least volatile of all of the three major regions that we sell in. That continues to lend itself to better stability in our order patterns. You don't see as much variability like you do in North America, South America anymore. You know, we know year over year where we've seen the SEMA index, which is, Eric alluded to the Purdue barometer here, the SEMA index is at a historic low point right now. When you look at that index, it usually doesn't stay at that point for a long time. It usually hits there and then starts to recover. We're not ready to call industry bottom yet. But again, when we look at some of the indicators in the marketplace, we feel like we're hitting near the bottom from a sentiment standpoint. Our big challenge next year as we think about 2025 is going to be the overall industry. How does that play out? Pricing, and then what do we do to make sure that we're adjusting the dealer inventories to get back to that four months? Again, we said we were up about a half a month here from the second quarter to the third quarter. Again, fairly manageable for us to work that down, especially with the fourth quarter. you know, being a strong sales month for us. But farmer sentiment's a big point and, you know, that will influence the other things. And so I mentioned on one of the prior questions, you know, we do have a couple of products that we're transitioning out here with the Fent 700 Gen 6, you know, that will move down, you know, which will hopefully year over year improve the pricing. But, you know, again, the market will really dictate sort of how 2025 shapes out in Europe for us.

But, Joel, we do expect our fourth quarter margins in Europe to bounce back similar to what they look like in the first half of the year. Okay, that's helpful. Thank you.

And just another question. Trying to compare slides 4 and 11 from today's deck. So slide 11, you've maintained what it was three months ago. You've maintained all of your market outlook for tractors across the three regions that you show. So maintain that. But on slide 4... especially for tractors, you know, the nine-month performance year-to-date, you know, contraction for tractors in North America and in Europe are worse versus the six-month performance. South America, I think, is a bit better. But can you explain that a bit, reconcile that a bit, how you've been able to keep a full year outlook the same, but there's contractions gotten worse, and then you thought, well, contraction trends are worse. through nine months versus six. Thanks.

So, Joel, essentially we've moved to kind of the top end of the range in terms of the markets going down year over year. There's a little bit of a disconnect in South America in that our outlook is on wholesale as opposed to retail because that's what we have more visibility on and in terms of industry being reported. So South America looks a little bit different just because we're looking at wholesale versus retail.

And our next question today comes from Meg Dobre with RW Barrett. Please go ahead.

Yes, good morning, everyone. So I'm trying to sort of put the pieces together here on dealer inventories and demand. I mean, if I heard you correctly, dealer inventories declined 6% sequentially in terms of units in Q3. But then, you know, you're also talking about having on average about an extra month of dealer inventories based on how you're thinking about forward demand. Given the fact that you haven't really changed your outlook for demand for 2024, are we sort of to infer here that what's baked in here is maybe like a kind of a mid-teens decline in 2025? Is my math correct? And if so, can you give us some color by geography in terms of where you're experiencing more weakness, we should be thinking roughly about 25.

Yeah, so again, we're not going to give an outlook for 2025 just yet. We want to get through the fourth quarter, see how the retail demand plays out, work through our analytics for the full year here. But I think what we are alluding to, and Eric has said this in a couple prior calls, when you look at our historical outlook, industry changes. We usually go through one very large transitional year, and that's what we're going through this year. We're moving down directionally around 15% from where we were last year to where we are this year. And then historically, the industry floats in that general vicinity. As we look at where we're sitting here today, we are expecting the market to be down next year. Again, we're not expecting large declines. Again, the industry historically doesn't do that, but we are expecting to see some weakness again next year, probably in most parts of the world. If I look at where the biggest challenges have been, South America continues to be the one that we're seeing the most industry challenge right now. And I think there's a couple of pieces here. You see us cutting the production again for four quarters now from Q4 last year through the third quarter of this year. We've been cutting production anywhere from 30 to 50 percent. We're planning another large production cut here in the fourth quarter of this year. really trying to take the production down. I think it's important that when you see these numbers, even in South America, it's a little bit of two parts to the story there. When you look at the numbers being down in South America, the high horsepower segment of the market in the third quarter was down significantly more than the overall industry, and that there's a negative mix happening right now, and that the very low horsepower, say the 79 horsepower and below, was actually up. in the third quarter. And so when you're looking at that mix, you're seeing the overall units don't look as bad. But for where AGCO is really focused, where we're making the profit, that part of the market was down significantly in the quarter and mitigated by some of these lower horsepower segments. So South America definitely continues to be a big challenge for us because we know this is the biggest, most volatile market we deal in. It always has been and likely always will be. North America, I would then say is second. We're seeing the large ag segment of the market really be challenged right now. And so we're cutting the production there. And we're seeing, you know, sort of the dealer inventory levels continue to creep up, not based on units. Units are down, but we're seeing it just based on the forward look. So, again, we would expect probably in the early part of the year, again, more challenges for our production to deal with some of that North American market share as well or North American dealer inventory as well. And then Europe, I would say, on the back end of that is going to be more product specific or country specific issues.

Understood. Maybe just to follow up on that. I'll just build on a little bit and then take your follow up. You know, to put some numbers behind this, our last cycle in terms of Agco's sales mix around the world, we went from a peak of 115 down to a trough of 85. At the peak, we were not supply constrained, nor was the industry. This time, our peak only got up to 109. Because everybody was supply constrained during COVID. So we believe then that the trough won't be as deep potentially, nor as long potentially as the last trough was. As I said, the last trough was 885. In 2024, we've gone from about 105 down to about 90. It's the big correction year that Damon talked about. So you compare that 90 to the previous trough that we think is probably as deep as it would get, which was 885. That kind of sizes what we're trying to assess of what 25 looks like. We expect it to float near somewhere between 2024's results and the previous trough, and we'll clarify that in more detail in December. But at least that gives you some bookends to frame it.

Well, thank you for that. My follow-up is on your production slide, slide 5. And the guidance there, I mean, considering the fact that you're dealing with excess inventory still, I'm wondering when we're not seeing more pressure on production in the fourth quarter. I mean, you're cutting production 25%. I understand that year over year. But it certainly looks stable, if not up a little bit sequentially. And I'm wondering why we're not seeing more of this action being taken in the fourth quarter rather than 2025. Thank you.

Yeah, so I tell you, we are being extremely aggressive in many different parts of the market and many of the different product types. Again, when you look at our production hours, that includes more than just tractors. It would include combines, sprayers, planters. So we are significantly reducing production in many aspects. I think what you're seeing in that visual there is mainly Europe. As I mentioned, Europe, we extended the shutdowns in the third quarter to really sort of be better optimizing the cost structure. And then we're picking up a little bit here in the fourth quarter. And again, when you think about what we're seeing is there is still retail demand out there. And if you look at the dealer inventories, what's on the dealer's lots? may not always be exactly what the farmers are looking at coming to order. And again, go back to my comment on South America, where the high horsepower ag market is really challenged right now. That's sitting on the dealer's lots, but these lower horsepower segments are doing actually pretty well in South America. So we have orders and demand for those products. We're running the production to service that need. And again, similar in North America or in Europe, there may be product lines or retail demand that we're working to produce. We're not producing to put more onto the dealer lot, but we think about what we're producing is really more of a pass-through to the end farmer where we see the demand. So, again, I realize that the numbers look different, but when you factor in what's happening in Europe, sequentially or year over year versus what's happening in other parts like South America, we are rapidly reducing the production hours in most of our factories.

Our next question today comes from Tammy Zacharia with JP Morgan. Please go ahead.

Hey, good morning. Thank you so much. So I think I heard you say you expect North America pricing to continue to be strong. Can you help us understand, do you expect any incremental discounting needed to clear the channel? And what's really driving this expectation of pricing growth in North America? Is it mixed or are you raising prices due to cost inflation? Anything to call out there, what underpins this expectation of positive pricing in North America against, you know, suboptimal demand backdrops?

Yeah, you know, Tammy, we've had positive pricing in North America for the full year or year to date, I should say. I'd say it's really a couple of variables here. One is the year-over-year price increases with certain new products that we're getting. And I would say as we think about the back half of this year, what we're seeing this quarter, fourth quarter, is really being a lot more selective here. on discounting, especially in some of the lower horsepower segments of the market, the rural lifestyle. As you know, a lot of these tractors are financed. And so as interest rates are coming down, we're trying to take advantage of that, you know, where we can drive better discounting decisions, thus reducing the overall cost to AGCO. And that's helping improve sort of the sequential pricing in North America and significantly as we move from Q2 into Q3 and now into Q4 and into 2025. But those are really the couple of big variables that are driving the pricing in North America.

Got it. That's helpful. And my second question is, can you remind what's your plan in terms of deleveraging the balance sheet and should we expect more debt pay down in the coming quarters? I think you paid down $150 million last with the proceeds, but any more plans of debt paid on in the next few quarters?

Yeah, so we did pay down the five, we had a $500 million term loan in place as part of the funding for the Trimble joint venture. So that has been repaid with some of the proceeds from the grain and protein business. We have about a quarter of a billion dollars of debt that will mature I think in March, April timeframe, Tammy, I think as we sit here today, we would likely just pay that down with the balance of the Trimble proceeds coupled with some free cash flow. Those will be the two big things. And then we'll look to see if there's anything else that may make sense. But that'll happen, I think, March, April timeframe.

And our next question today comes from Jerry Revich with Goldman Sachs. Please go ahead.

Hi, this is Clay, I'm for Jerry. Can you update us on your expectations for the plan of business as we move into next year, you know, given some of the early order conversations you're having?

Yeah, I think overall early order program is given the market environment that we're seeing here in North America. I think the early order program has gone relatively well for planters and for sprayers. I think we're not as strong as we were last year this time, but we're out through the first half of 2024 with orders for planters and sprayers. So if you remember, Clay, our early order program sort of rolls from start of Q4, you know, Q3 to Q3. So almost the full year booked right now, but not quite on those particular products. But overall, pretty good.

Thanks. And as a quick follow-up, on dealer inventories, can you compare, you know, levels now on an absolute basis in North America, you know, versus, you know, the pre-COVID? And I'd be curious to hear about other regions as well.

Yeah, well, if we look at the pre-COVID levels, I think that's before the massive decline, you know, ideally they would have been around in that five to six month range for North America. We're sitting here obviously higher than that, but, you know, that's what we keep talking about, reducing the production cuts is to get that dealer inventory right around that six month mark here as soon as possible in early 2025.

And our final question today will come from Chad Dillard with Bernstein. Please go ahead. Oh, it looks like Chad's line has disconnected. This will conclude our question and answer session. I would like to turn the conference back over to Eric and Sodia for any closing remarks.

I'll close today by saying that in the short term, we are focused on reducing inventory and aggressively controlling cost to better align our operations with the current weak market environment. Our 9% operating profit is far above the previous trough, what was closer to 4%, and even above the last peak margin that was close to 8%. But we're striving to do even better. Our org efficiency and restructuring activities that we've already implemented so far this year will deliver 100 to 125 million of savings right on target that we projected when we took those actions. And despite all the current challenges, we remain focused on continued execution of our Pharma First strategy. The strategic actions we've taken over the last nine months, big ones like forming the PTX Trimble Joint Venture, divesting our grain and protein business, and implementing our organizational efficiency efforts to take control, take advantage of tools like automation and AI will enhance and accelerate the benefits of our farmer-first strategy. Over the last few quarters, we've touched on many factors supporting our markets, including growing populations, changing diets, low stock-to-use levels, increased demand for biofuels, and relatively healthy commodity prices. All these trends give us confidence in the long-term health of our industry. And while cycles are typical in the industry, how we react and weather to them will illustrate how we are structurally changing agco to be higher performing, regardless of market conditions. We look forward to seeing you at our upcoming analyst meeting on December 19th. Thank you and have a good day.

Thank you for joining the AGCO Third Quarter 2024 Earnings Call. The call has now concluded. Have a nice day.