AGCO Corporation

Good day and welcome to the AGCO 2026 Quarter 2 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, Anne. Good morning. Welcome to those of you joining us for AGCO's second quarter 2026 earnings call. We will refer to a slide presentation this morning that's posted on our website at www.agacorp.com. The non-GAAP measures used in the slide presentation are reconciled to GAAP measures 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 their financial impacts. We'll also 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 forward-looking statements are subject to risks that could cause actual results to differ materially from those suggested by the statements. These risks are further described in the Safe Harbor included on slide two in the accompanying presentation. Actual results could differ materially from those suggested in these statements. Further information concerning these and other risks is included in ACCO's filings with the SEC, including its Form 10-K for the year ended December 31st, 2025, and subsequent Form 10-Q filings. Agco disclaims any obligations to update any forward-looking statements except as required by law. We will make a replay of this call available on our corporate website later today. On the call with me this morning is Eric Hansotia, our Chairman, President, and Chief Executive Officer, and Damon Audia, Senior Vice President and Chief Financial Officer.

With that, Eric, please go ahead. Thank you, Greg. Good morning, everyone, and thank you for joining us. Agco's second quarter results reflect our continued focus on delivering products and technologies that make farmers more productive and profitable while driving efficiencies across our business and also improve Agco's profitability through the cycle. While sales in Europe and Latin America progressed below our expectations and farmers were increasingly cautious amid current market dynamics, we acted decisively to align production with retail demand, manage dealer inventory, and maintained strong discipline on operating expenses and working capital. Net sales for the quarter were approximately $2.6 billion, 1% lower year over year. Our teams executed well and maintained consistent performance throughout the quarter, gaining market share in key regions. This is reflected in our adjusted earnings per share of $1.43, an increase of 8 cents over the prior year. Operating income was $140.7 million for the quarter, a decrease of 14% year over year, with reported operating margins decreasing by 80 basis points to 5.4%, and an adjusted basis operating margin decreased 170 basis points to 6.6%, driven primarily by lower sales and production volumes and higher input costs, including tariffs. Those were partially offset by solid pricing, The benefit of certain IEPA tariff refunds recognized during the period and ongoing benefits from our business optimization initiatives. Our results demonstrate the resilience of our operating model in a dynamic environment as we managed moderating demand, higher input costs, and regional variability while continuing to deliver consistent results and maintain a strong financial position. Conditions in the broader industry remain complex. Weather continues to play a significant role as elevated temperatures and drought conditions persist across parts of Europe, along with ongoing weather variability in North and South America. These factors are influencing crop development, yield expectations, and ultimately farmers' decision making. At the same time, financing costs remain elevated, and trade policy developments are adding another layer of complexity. While commodity prices have improved recently, Farmers around the world have a heightened focus on maximizing net farm income. This environment is increasing demand for solutions that help manage costs, improve efficiency, and protect yields. That focus aligns well with AGCO's portfolio, particularly our precision agricultural solutions, which help farmers boost productivity and often deliver payback in one to two years for our retrofit customers. In this environment, our priorities are clear. To stay centered on being the most farmer-focused company in the industry, delivering high-quality innovations to solve farmers' toughest problems. Also to maintain discipline across the business to preserve operational flexibility and adjust production and cost levers as conditions evolve. Over the past several quarters, we have taken meaningful steps to simplify operations, improve efficiency, and strengthen execution. Those actions are helping us manage through the current environment and sustain a solid level of performance even as volumes fluctuate at the trough of the cycle. We are also continuing to invest in areas that matter most to our customers, particularly smart farming and digital solutions that help improve productivity and reduce input costs that I'll talk more about in a moment. Slide four provides an overview of industry unit retail sales by region on a year-to-date basis through June. Across many markets, demand remained measured. Reflecting affordability considerations, elevated input costs, and a focus on near-term returns. Farmers have experienced double-digit increases on inputs like fuel and fertilizer prices. These elevated input costs continue to pressure farmer economics and are contributing to a cautious approach toward fertilizer and equipment purchasing decisions. It is unlikely that farmers will see meaningful relief on these input costs in the near term, which will likely result in many farmers staying conservative On their spending and applying less fertilizer, and that increases my optimism for 2027. In North America, industry demand remains soft year over year, with continued weakness in higher horsepower equipment as farmers defer larger capital purchases. We're also seeing softer demand in lower horsepower segments, reflecting rural lifestyle customers' focus on affordability in the current environment. In Western Europe, industry conditions were mixed as input costs, demand, and capital allocation considerations influenced equipment purchases. Tractor demand showed relative stability year to date compared to prior year levels, but weakened during the second quarter. Combined demand remained more cautious as farmers considered financing conditions and capital allocation priorities. In Brazil, industry demand remained under pressure. Higher production costs and interest rates, tire credit availability, and currency dynamics continue to impact demand, with the greatest effects seen in larger equipment categories. Demand for smaller and mid-range equipment has been more resilient compared to larger equipment categories. Across all regions, we continue to see farmers taking a disciplined and selective approach to equipment investment, prioritizing solutions that deliver clear productivity and efficiency benefits. This environment reinforces the importance of aligning production with retail demand and maintaining flexibility in how we operate the business. While we face several near-term challenges, a number of factors could create a more supportive backdrop for commodity prices and farm economics over time. Elevated input costs, reduced fertilizer application, and drought conditions in parts of the world are pressuring crop production and this is before the potential effects of the super-aluminium. At the same time, there continue to be increased discussions on accelerating demand drivers such as expanded ethanol with year-round E15 in the U.S. and renewable diesel and sustainable aviation fuel usage in the U.S., Brazil, and Europe. All of these could support demand for key crops. Combined with aging equipment fleets, and the ongoing need for productivity gains, these dynamics reinforce our confidence in the fundamentals of agriculture. As the geopolitical environment stabilizes and input costs eventually moderate, we would expect farm economics to improve and farmers will be better positioned to invest in fleet replacement and productivity enhancing technologies. AGCO's factory production hours are shown on slide five. On a year-to-date basis through June, production hours were up approximately 6% compared to the prior year, reflecting a significant increase in the first quarter off a low production base in early 2025, effectively in Europe. In the second quarter, production hours were slightly lower year-over-year as we deliberately moderated output to align with our operating plan and current retail demand. Full year 2026 production hours are now expected to be slightly lower versus 2025. As the year has progressed, we have taken a more measured approach to production, including modest reductions in the second half to better line output with the end market demand, particularly in Latin America and Western Europe. This reflects our continued focus on matching production to demand and maintaining disciplined cost control in our cost structure. Turning to regional inventories, dealer inventory management remained a positive contributor to execution during the quarter as we saw lower dealer inventory levels in all three major regions. In Europe, dealer inventory months of supply were around three and a half months compared to just under four months in the first quarter, remaining well aligned with our four-month target range. Inventory levels across our brands continue to reflect disciplined channel management and healthy market positioning. providing flexibility to support customer demand while maintaining a focus on margin quality and mix optimization in our largest and most profitable region. In Latin America, dealer inventories moved to approximately three and a half months of supply, down from four months at the end of the first quarter. Units were down approximately 5% as dealers continued to work through aged inventory, especially non-tractor products. The reduction reflects continued progress toward our three-month target level Despite our current industry outlook in the region. In North America, dealer inventories improved modestly to just below seven months of supply, moving closer to our six-month target. Units were down around 7% in the quarter as we continue to right-size dealer inventory levels. Reductions were led by the large agriculture segment, reflecting continued execution of our production and shipment plans designed to support channel health and align field inventories with retail demand. Overall, we are pleased with the progress we are making with our dealers around the world, which increases our confidence of producing in line with retail demand next year. Slide six reinforces how we're executing against our strategy to drive higher quality growth and expand margins over time toward our 14% to 15% mid-cycle target. That strategy does not change with fluctuating market conditions. It continues to guide where we invest, How we innovate and how we create value for farmers and shareholders through the cycle. In the current environment, what is most important is how our three high margin growth levers are performing. High margin products continue to support mix. Our technology portfolio is driving differentiated values for customers, and our aftermarket business is providing a more stable and recurring revenue stream.