Good morning. My name is Sia, and I will be the conference operator today. At this time, I would like to welcome everyone to the AGCO 2021 Second Quarter Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. At this time, I would like to turn the conference over to Greg Peterson, AGCO's Head of Investor Relations. Please go ahead, sir.

Thanks, Sia, and good morning to those of you joining us for AGCO's second quarter earnings call. This morning, we will 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. This morning, we'll also make forward-looking statements, including 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 production levels, engineering expenses, exchange rate impacts, pricing, share repurchases, dividend rates, and future retail revenue, margins, earnings, cash flow, tax rates, and other financial metrics. We do 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, 2020. 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 like plant closings, workforce availability, supply chain disruption, and product demand; also, weather, commodity prices, and changes in product demand. We disclaim any obligation to update any forward-looking statements, except as required by law. A replay of this call will be available later today on our corporate website. On the call with us this morning, we have Eric Hansotia, our Chairman, President, and Chief Executive Officer; and Andy Beck, our Chief Financial Officer. And with that, Eric, please go ahead.

Thank you, Greg, and good morning. We appreciate everyone joining us on the call today. We've come a long way over the last year, responding to the global pandemic and addressing the needs of all of our key stakeholders during the COVID crisis. I think it's helpful to remember where we were in that journey during the last quarter – or the second quarter of last year to provide some context to our current results. Last year, we experienced extended second quarter shutdowns in our European and South American factories, which negatively impacted our sales and earnings. Over the last three quarters, global economies have started to reopen, and demand in our end markets has rebounded to very high levels. AGCO's results for the second quarter of 2021 reflect robust market recovery as well as strong execution by the AGCO team. We delivered sales and earnings growth despite significant ongoing supply chain challenges. Let's start on Slide 3, where you can see the net sales grew 43% compared to the second quarter of 2020. Adjusted operating income increased nearly 150%, driven by a 420 basis point increase in our adjusted operating margins, with improvement achieved in all regions. Favorable pricing helped to offset raw material and component cost inflation in the second quarter. And we expect to see a more significant impact of higher material costs during the remainder of the year. The supply chain challenges we discussed in our last call are still a major factor as capacity constraints and COVID disruptions continue to impact timely receipt of components for production. Underlining these farmer fundamentals remain very strong, and our order boards continue to be significantly above last year. Based on improved market forecasts across all regions and our strong second quarter results, we increased our financial targets for the full year of 2021. Our investments in smart farming, precision ag, and digital solutions are paying off, as we are seeing excellent demand for our technology-rich tractors, our precision planting solutions, and other aftermarket products. Our healthy balance sheet supports our technology-related investments, as well as funds the return of cash to our stockholders, as evidenced by the variable special dividend the company paid on June 1. Slide 4 details industry unit retail sales by region for the first half of 2021. The reopening of economies has increased the demand for grain, putting pressure on global grain inventories, which remain at low levels. Agricultural commodity prices have fluctuated over the past quarter, but continue to support favorable farm economics, resulting in increased demand for machinery. These improved conditions are expected to generate industry growth across all major equipment markets in 2021. In North America, the industry retail tractor sales increased about 22% in the first half of 2021 compared to the same period in 2020, with industry retail sales of large ag equipment growing by approximately 24%. Row crop farmers are taking advantage of improved commodity prices and projected healthy income levels to upgrade their equipment. Industry retail sales in Western Europe also increased in the first half of 2021 versus supply-constrained levels a year ago, with growth across all major markets. Higher wheat, dairy, and livestock prices combined with healthy levels of crop production are generating positive farmer economics and farmer sentiment. In South America, industry sales increased during the first six months of 2021, driven by improved demand in Brazil, as well as recovery in the smaller export markets. A healthy first crop, as well as favorable exchange rates, are supporting positive economic conditions for farmers who continue to replace an aged fleet. AGCO's 2021 factory production hours are shown on Slide 5. Our suppliers have been impacted by COVID-related disruptions, as well as capacity constraints due to surging industrial demand. Despite the great work by our purchasing team, we continue to experience supplier bottlenecks and delays in all of our regions. We expect significant challenges in the quarters ahead to meet the current strong levels of end market demand. Since last quarter, we increased our production plan to meet additional end market demand. Despite this increase, our new production plan does not represent the top of our capacity. If we see further increases in end market demand in the second half of the year – subject to our supply chain ability to respond – we would still have room to further increase our production. Total company production was up approximately 40% for the second quarter versus the same period in 2020, with the largest increases in our European and South American factories, which were shut down for portions of the second quarter of 2020. We are projecting a 15% to 20% increase in full year 2021 production compared to last year. You remember that our production ramped up significantly in the back half of 2020. So our growth in the second half of 2021 will not be as large as what we have experienced in the first half. Turning our attention to AGCO's order board. As of the end of June, our order board for tractors and combines was significantly higher in North America, Europe, and South America compared to a year ago. I'll now hand over the call to Andy Beck, who will provide you more information about our second quarter results.

Thanks, Eric, and good morning to everyone. I'll start on Slide 6, which looks at AGCO's regional net sales performance for the second quarter and first half of 2021. AGCO's net sales were up about 35% compared to the second quarter of 2020, excluding the positive impact of currency translation. Strong end market demand and favorable pricing drove the increases across all regions. The Europe/Middle East segment reported an increase in net sales of approximately 34%, excluding the positive impact of currency, compared to the production-constrained second quarter of 2020. The largest increases occurred in France, Turkey, and the United Kingdom. Net sales in North America increased approximately 29%, excluding the favorable impact of currency, compared to the levels experienced in the second quarter of 2020. Increased sales of tractors and precision planting products produced most of the increase. AGCO's second quarter net sales in South America grew approximately 53% compared to the second quarter of 2020, excluding positive currency translation impacts. The most significant growth was in Brazil, which was up over 65%, excluding currency impacts. Combines, midsized tractors, and grain and protein showed the strongest growth. Net sales in our Asia Pacific/Africa segment increased about 40% in the second quarter of 2021 on a constant currency basis compared to 2020. Recovery in Africa, along with strong growth in China and Australia were the drivers of the growth. Consolidated replacement part sales were approximately $480 million for the second quarter of 2021. Part sales were up about 12% compared to the same period of 2020, excluding currency impacts. In addition, our sales of precision ag products were up approximately 37% for the first half of 2021 compared to the first half of 2020, reflecting strong acceptance of our smart farming solutions. Slide 7 examines AGCO's sales and margin performance. AGCO's adjusted operating margins improved by approximately 420 basis points in the second quarter of 2021 compared to the same period in 2020. Margins were supported by higher levels of net sales and production as well as positive net pricing in the quarter. Our second quarter pricing of approximately 4.5% was adequate to cover inflationary cost increases. For the remainder of the year, we expect material cost inflation to intensify, with continued pricing required to maintain margins. The Europe/Middle East segment reported an increase of approximately $110 million in operating income compared to the second quarter of 2020, resulting primarily from higher net sales and production, partially offset by higher engineering expenses. North American operating income increased approximately $39 million, and operating margins reached 14.1% in the quarter. Higher sales and improved product mix contributed to the stronger results. Operating margins in our South America region reached 8.3% in the second quarter and operating income improved nearly $18 million from the same period in 2020. The significant increases in end market demand and a better sales mix supported the growth. In our Asia/Pacific/Africa segment, operating margins expanded to 11.5% in the second quarter, reflecting improved sales and production. Slide 8 details grain and protein sales by region and by product. Sales increased about 24%, excluding currency in the first quarter of 2021 compared to 2020. Globally, grain equipment sales increased approximately 23%, with our South America and European regions showing the largest increases. Protein production sales grew approximately 24% in 2021, with the strongest growth in Asia/Pacific/Africa and South American regions. Grain equipment demand has been stronger, supported by improved grain prices and profitability of farms. However, demand has been muted by significant price increases by manufacturers to cover surging steel costs. The protein production equipment market remains lower due to labor issues and higher input costs such as grain. Protein prices are improved, so profitability is recovering. The protein production segment was significantly impacted by the pandemic, particularly in North America, where protein processing capacity continues to be challenged. In China, protein producers are beginning to recover from the Asian swine fever outbreak and have started to rebuild their production facilities. We are expecting a recovery in grain and protein sales in 2021 following weak sales in 2020, which were heavily impacted by the pandemic. Slide 9 addresses AGCO's free cash flow for the first six months of 2021, which represents cash used in operating activities less capital expenditures. Our seasonal requirements for working capital are greater in the first half of the year and resulted in negative free cash flow in both the first six months of 2021 and 2020. AGCO's strong cash flow generation last year allowed us to repay the $276 million term loan facility that was taken out to provide liquidity in the prior year. AGCO's capital allocation priorities include investment in our precision ag offerings and digital capabilities, as well as opportunistically adding bolt-on investments. In terms of return on cash to shareholders, we will continue our regular quarterly dividend payments, share repurchases, and an annual variable special dividend to return cash to shareholders. In the first quarter, we increased our quarterly dividend by 25% and paid the first variable special dividend in the second quarter. We currently expect to repurchase shares opportunistically during the second half of 2021. Future returns of cash to shareholders will be based on cash flow generation, our investment needs, which includes capital expenditures and acquisition opportunities, as well as our market outlook. Other details for the quarter include losses on sales of receivables associated with our receivable financing facilities, which are included in other expense net, were approximately $5.1 million during the second quarter compared to $4.3 million in the same period of 2020. Turning to our full year forecast. Our 2021 outlook for the three major regional markets is captured on Slide 10. We increased our market forecast for all regions and expect higher retail industry demand globally compared to 2020. In North America, higher commodity prices and improved farmer sentiment are expected to result in increased 2021 sales. Replacement demand for an aged fleet of larger equipment is expected to drive most of the increase. Demand for smaller equipment is expected to be more stable after several years of increasing demand. We project North American industry unit tractor sales to be up approximately 20% in 2021, compared to 2020. European Union farm economics are expected to remain supportive in 2021. Higher commodity prices are expected to support healthy demand from the arable farming segment. Milk prices remain above the 10-year average, and economics are positive for dairy producers. Western Europe industry demand is expected to remain strong and grow approximately 10% in 2021. Elevated commodity prices and favorable exchange rates are expected to support additional growth in South America during 2021, as farmers continue to replace aged equipment. In total, industry demand in South America is expected to improve approximately 15% from 2020 levels. Turning to Slide 11, we highlight the assumptions underlying our 2021 outlook. Our priorities continue to be maintaining a safe working environment for our employees and providing proactive support to our customers and dealers. In addition to focusing on meeting the robust end market demand, we will also make significant investments in the development of new solutions to support our farmer-first strategy. Our 2021 forecast assumes improved global industry demand, with no additional impact from the pandemic. Our sales plan includes market share improvement and price increases of approximately 4.5%, aimed at offsetting higher material cost inflation during 2021. At current exchange rates, we expect currency translation to positively impact sales by about 3%. Engineering expenses are expected to increase by $50 million to $60 million on a constant exchange rate basis, compared to 2020. The increase is targeted at investments in smart farming and precision ag products as well as to continue the rollout of our platform designs. Operating margins are expected to be up approximately 200 basis points from 2020 levels, driven by higher sales and production, favorable pricing net of material costs, and productivity initiatives, partially offset by increased investments in smart products and our digital initiatives. We are targeting an effective tax rate ranging from 27% to 29% for 2021. Slide 12 lists our view of selected 2021 financial goals. We continue to operate in uncertain conditions, and this outlook does not consider any further business disruptions caused by the COVID outbreak. We are projecting sales to be in the $11.3 billion to $11.5 billion range, with 2021 earnings per share targeted at approximately $9.50. We expect capital expenditures to be approximately $300 million and free cash flow to be in the $450 million to $500 million range. For the third quarter, our current estimate is that earnings per share will be in the range of approximately $1.70 to $1.80 per share. This estimate is modestly below the third quarter of last year, which was unusually strong as our European and Brazilian production facilities worked to catch up lost production from the second quarter 2020 shutdowns. We also plan increased engineering expenses in the third quarter to facilitate new product introductions scheduled in 2021. While our order backlog supports our outlook, the timing between quarters of our sales is difficult to forecast due to supply chain challenges that we anticipate will continue during the rest of 2021. The Q3 estimate is highly dependent on component availability from suppliers and production levels throughout the quarter. We currently expect our fourth quarter 2021 results to be significantly improved over our 2020 performance.

Thank you, Andy. And we're ready now, operator, to take questions. Thanks. And we're ready to take questions.

The first question will come from Stephen Volkmann with Jefferies.

Thanks. Good morning guys. Thanks for taking my question. Maybe just to start off on some of the supplier issues that you mentioned. I guess I'm curious, do you feel like supplier issues limited or reduced what you accomplished in the second quarter? Did you have some sort of finished product waiting for parts at the end of the quarter? And then sort of longer term, it sounds like you expect a pretty big improvement in the fourth quarter. So maybe just a little color around that.

Yes, we've faced challenges throughout the year, which continued through the end of the second quarter. We anticipate these challenges will persist for the remainder of this year. We currently have an excess of raw materials and machines that are mostly assembled but waiting on certain parts. We ended the quarter with a very strong order backlog, likely the highest in the company's history. Our teams are working diligently to fulfill those orders, but there are still many machines that have been built but are not yet ready to be invoiced. We expect this situation to last for some time, which aligns with the comments made by Andy.

Okay. But obviously, the fourth quarter looks like a pretty big quarter based on your guidance, and I guess you're assuming things normalize then?

I wouldn't say normalized, but we think we'll get a little bit of relief. We believe that perhaps the worst of it is behind us, but we're not out of the overall topic yet. And we expect quarter three to still be quite challenging. We're aiming for quarter four to be a little bit less so, but not smooth sailing yet.

The next question will come from Jamie Cook with Credit Suisse. Please go ahead.

Hi, good morning. Nice quarter. I guess, Eric, you noted how great the order book is. I'm just wondering how much of your order book today is for 2022? And assuming you have orders for 2022, how do you approach pricing just given the challenging dynamics related to material cost rate, supply chain type stuff? Thank you.

Thanks, Jamie. Currently, not much of the order bank is for 2022; there are some orders, but the majority is still for 2021. The order bank mainly covers most of 2021, with just a few products extending into 2022. Specifically for South America, we have a strategy of opening order windows for a limited time, usually two to three months, during which we take orders at set prices before closing the window. This approach helps us manage the volatile inflation situation, as this is our most affected market. We can align our pricing strategy with cost inflation to ensure the timing is consistent. Early order programs are established this way, allowing us to set prices in advance. So far this year, this strategy has been effective, as we've managed to stay ahead of costs with our pricing actions.

Okay. And then just as a follow-up, Eric. There's a lot of debate around where you are in the cycle and concerns that the farm equipment market sort of bit peaked. So given your experience level, can you help us understand where you think the farm equipment cycle is by region sort of relative to peak or mid-cycle, however you want to define it? And then I'll get back in queue. Thank you.

Yes. The farming cycle overall, we would say, is very strong right now. No question about that. Is it at peak? We don't have it marked at peak yet. We have it above mid-cycle. And we went into the year forecasting early, late last year, we were forecasting this year was going to be a little bit below mid-cycle. We've guided above mid-cycle now. And – but we still think that there's room for this to play out for some time yet because of a number of factors. There's low grain inventories. There's high commodity prices. And there's still unmet replacement demand from many years of farmers holding off on purchases during the lean years. So, when you combine all that, good current conditions and a lot of pent-up demand. We think that there's a fairly strong market in front of us for a period.

Great. Thank you very much.

The next question will come from Ann Duignan with JPMorgan. Please go ahead.

Hi Beck. Following up on the previous question and your answer, I believe one important aspect not addressed is that input costs have increased for farmers more rapidly than ever. This suggests that their net incomes may have reached their peak this year. Could you take this into account when discussing the farm cycle? While you mentioned the equipment cycle, I would appreciate your insights on farmer incomes in North America and how the pressure from rising input costs might impact your outlook.

Yes. And this happens every time. This is a very typical behavior. So, it's not unusual this cycle. In each cycle, there's a period where there's been constrained purchasing. And so, commodity prices are low, costs are low. There's not room in the marketplace. Then there's – especially with this surge in demand when all the input suppliers are racing to try and catch up with that demand. We're seeing steel prices up 2.5x in North America, 1.7x in Europe. And so those kinds of pressures are because of the ramp-up. Our farmers are feeling that, too. And to some extent, especially like in grain bean purchases, that's slowing down their purchase behavior. And so we think that that's another reason why there's a good chance that this market strength may actually stabilize for some time because it's cooling off now. We think that that steel price is not going to stay at those elevated prices. And I think that allows for more room downstream for farmers to get back in and buy perhaps next year or the year after.

Yeah. I'm not talking about steel prices and prices for our commodities. I'm talking about seed prices, fertilizer costs, freight cost, fuel cost, whatever it is from a farmer's P&L perspective. Could you…?

I believe all the factors are similar. There is a significant increase happening right now, leading to high price inflation. Consequently, farmers are spending more on fertilizers, seeds, machinery, and many other inputs. Rental prices are likely to rise as well, which may reduce their purchasing activity. However, these prices are expected to stabilize over time. I mentioned steel as an example because it is more relevant, but I think the same situation will occur with fertilizers. This cooling demand in the short term should help distribute demand more evenly in the mid-term.

Okay. I’ll leave at there in the interest of time. Thank you.

You’re welcome.

The next question will come from Kristen Owen with Oppenheimer. Please go ahead.

Thanks for taking my question. I wanted to talk a little bit about mix in North America. Can you give us a sense of the traction of the expansion there? And any indication for how that's impacted your market share?

Do you want to take the?

We are experiencing significant growth in our high-horsepower equipment in North America, primarily due to an increase in our net sales in the region. We are on track with this progress. Sales of high-horsepower equipment have risen over 40% in the first half of this year, which has been a major factor in this growth. The acceptance of our fit product has been positive, and we continue to enhance our distribution, contributing to the stronger results we are seeing in North America.

Great. And my follow-up is somewhat related on the precision ag numbers that you provided, up 37% in the first half. Can you give us a sense of what that was in 2Q and maybe parse it out between precision planting and the rest of the precision ag portfolio? Thank you.

Sorry, I don't have it by quarter. We just had the first half numbers. The precision planting aspect of that precision planting is up about 40% in the first half. And so the other OEM aspects of precision ag that we were developing revenue on is a little below that 37%, so kind of in the low 30s.

Kristen, that 37% was pretty consistent across the first half. So it's been strong in the whole first half. And as Eric mentioned, our order boards are strong for the back half of the year as well.

And maybe I'll just build on that. The precision planting story is playing out exactly like we told you we are aiming for. So we've got multiple growth levers there. One is to continue to grow the planting business. Second one is to grow outside of planting into other technologies around the crop cycle. And the third one is to grow globally. If you take a look at the quarter two for Precision Planting, South America sales were up over 100%. European sales are up over 200%. So the strategy in each of those dimensions is happening as we targeted. The team is doing a really great job and the customers are very excited about the solutions coming out of that business.

Appreciate the color. Thank you so much.

You’re welcome.

The next question is from Larry De Maria with William Blair. Please go ahead.

Thanks. Good morning, everybody. First, I'll – to follow up on that question. Can you just maybe level set us on the rough dollar term size and margins in that business in the precision planning broadly or Precision Ag broadly because we try to see the impact of what that is on your overall margins?

Precision Ag margins? Yes. I would categorize those as aftermarket type margins. So they're typically double what – just like our parts business, typically double what we get from a normal OEM machinery sale.

Okay. Thanks. And if for the full year, a couple of hundred million dollars for Q3?

More than that.

Yes. So our revenues were about $400 million last year. And you can see what growth rate we're running right now. We'd probably expect that growth rate to come down a little in the second half because Precision Planting is really a first half business and not as important in the second half, but we'll still see pretty significant sales in the full year.

Thank you. If I could ask my main question. To sustain the favorable industry pricing, it’s essential for OEMs to avoid overproduction next year. What is your overall approach regarding production for the upcoming year? You provided some insights on South America, particularly about managing production discipline. How do you envision production for next year? Is there a chance of implementing early order programs and attaching names to orders to keep inventory lean and maintain positive pricing?

Yes, Larry, what we – our focus is not to just focus on the order board, which is, as Eric described, extremely high right now, but really look at what the retail demand and retail sell-through is going to be, and that's going to dictate our production levels and things like that. And I think if we continue to monitor the retail, sales, and produce to retail, then that will be the right approach and keep our dealer inventories and our company inventories obviously in line. Right now, our dealer inventories are well below where we were a year ago, the production constraints and issues there and the strong retail market is basically forcing our inventories lower. And we plan for some of that during 2020, but they're even lower now in 2021, really because of the strong retail demand. So as we go through the back half of the year, our plan is that our dealer inventories at the end of the year will be fairly level with last year, but given the strong retail demand, I would expect it's likely less than some other markets that are inventory levels that are still below the prior year.

Okay. Thank you.

The next question will come from Nicole DeBlase with Deutsche Bank. Please go ahead.

Yes, good morning, guys.

Good morning…

Maybe just starting with price cost. I appreciate that it was positive in the first half. Is your expectation that you can remain ahead of inflation in the second half? And I guess like should inflation remain an issue? Is there appetite for further price increases?

Our plan for the year is to continue to maintain and add pricing where necessary to counteract the rising material costs. This presents a significant challenge due to the severity of some of these cost increases. In certain areas, such as our grain and protein business, we are facing pressure and may not be able to adjust pricing accordingly. However, we are confident that we will implement pricing strategies that can offset these material costs. For the full year, we expect our net pricing, which accounts for pricing over material costs, to be approximately 50 basis points.

Okay, got it. Andy, that's really helpful. And then just a follow-up on South America margins. I mean the traction there was once again really impressive this quarter. So, I guess how are you thinking about the second half for South America margins since that's a pretty important variable to overall margin?

Our margins in South America have exceeded our expectations due to significant year-over-year increases in volume and production, which were complemented by a strong product mix in the first half of the year. Moving into the third and fourth quarters, we anticipate that margins will remain relatively flat in the third quarter and decline slightly in the fourth quarter. While our sales are expected to continue rising, we're experiencing higher expenses in engineering and other areas, and the product mix is not as favorable in the second half. We're seeing growth in some lower horsepower equipment, which is contributing to a weaker mix. However, overall profitability in the second half is expected to surpass levels seen in the same period last year.

Got it. Thanks Andy. I'll pass it on.

The next question will come from Ross Gilardi with Bank of America. Please go ahead.

Good morning guys.

Hi Ross.

I just had a question about Raven. I mean how big of a supplier are they to you? And does the business going into a competitor's hands worry at all and potentially cause you to go captive on whatever you're buying from them?

Yes, Ross. That's a good question. Raven is a relatively minor supplier for us. We purchase some technology from them for sprayer controls, but it's not substantial. There are a few aspects to consider. In the short term, we've already had discussions with CNH, and they are dedicated to upholding all previous commitments from Raven related to the AGCO components we acquire. We believe there's a solid arrangement in place where we supply CNH with precision planting components for their planters. We are confident that CNH and Raven will continue to provide us with the spray components we currently buy. Regarding the second part of your question about future developments, we plan to maintain several ongoing programs with Raven for future components. We have ensured that these will be protected in terms of intellectual property and data sharing. Our precision agriculture strategy consists of three key components: internal development, partnerships, and acquisitions when appropriate. We have a proactive team identifying potential precision agriculture companies for partnerships or acquisitions to enhance our technology offerings. We will share more on this in the coming quarters.

That's super helpful, Eric. Thank you. I mean just in terms of your priorities for cash flow, where do you think a larger precision ag-related acquisition that improves your competitive position ranks in the overall pecking order versus returning more of your free cash flow?

From an investor and internal perspective, this initiative is a high priority. However, for investors, it has a low impact because the companies involved are relatively small. Nonetheless, we believe it's an essential component. A small team can create significant change, similar to what we've seen with precision planting; although it was a small acquisition compared to AGCO as a whole, it has had a substantial effect. Thus, internally, it carries great significance. In terms of cash flow and its implications for returning capital to investors, I would say the impact is relatively minor.

Thanks, very much.

The next question will come from Jerry Revich with Goldman Sachs. Please go ahead.

Yes. Hi. Good morning, everyone. I'm wondering if you could just comment on how you see for your dealers their used equipment inventory balances heading into year-end. Just so we can have a sense for potential length of cycle, where do you view inventories for used equipment today versus long-cycle averages? And if you could comment by region to the extent you have visibility, that would be helpful.

Yes, I don't have the specific numbers on hand, but overall, the market strength we're observing is also evident in the used market, indicating solid demand. Our used inventories are lower than they were a year ago, which makes them quite lean. Additionally, used prices have increased, especially in North America and Europe. The used market doesn't have as much significance in South America, but generally, this sector is performing well. It's crucial to keep an eye on this area, and it is progressing in line with the trends we are witnessing in new equipment.

One of the ways we monitor this is by looking at returned equipment in our finance company. Our inventory of returned used equipment is extremely low, and there are usually costs involved in reselling it. Typically, this represents a cost of doing business for a finance company. However, this year we are actually making a profit from reselling that used equipment. This indicates that not only is our used equipment inventory in a strong position supporting prices, but it is also driving prices up. This positively impacts how we sell and price our new equipment.

Okay. And then as we look at the exit rate for earnings in the fourth quarter, obviously, a pretty robust number. Anything that we should think of as we model out what 2022 looks like relative to normal seasonality? Is there anything extraordinarily positive in this quarter's numbers, or is that the type of seasonally adjusted run rate we should be thinking about the business center in '22?

Overall, we're seeing margin expansion of probably close to 300 basis points in the fourth quarter. That's mainly driven, as I pointed out, South America, we're not going to see that, but mainly driven North America and Europe. If we think back to a year ago, we were working on reducing dealer inventories in both of those regions. And so, we're going to see some sizable growth, particularly in North America revenue in the fourth quarter. And our margins should be higher overall because of higher production levels and a strong mix of sales in the fourth quarter, more high horsepower equipment sales. So overall, it should be a good solid quarter in the fourth quarter.

The next question is from Adam Elman with Cleveland Research. Please go ahead.

Hey guys, good morning. I was wondering if we could chat about the GSI business a little bit more. Could you remind us what the sales outlook is for this year? I think you mentioned that customers are starting to get a little sticker shock and the bookings have slowed down. Could you maybe just update us on what the second half looks like? And any thoughts on next year? And then with steel prices up so much, can you remind us what the margin profile of that business is looking like now and here in the near – the medium term?

Sure. The grain and protein business really had a weak year last year. Really, the protein sector was shut down, a lot of issues. And so we do see a nice recovery in revenue. Our year-to-date revenue is up, as we've already mentioned, a little about 20%, and we expect that for the full year. And from a margin standpoint, we entered into the year expecting margin improvement. Now it looks like margins are going to be relatively flat, and that's really driven by my previous comments about the material costs and our ability to keep up with pricing to offset that longer project-oriented type deals. And there's a longer lead time between when we get the order and finish the project. So, a little bit of a squeeze there, so that will give us some opportunity moving into 2022 in terms of grain and protein margins.

Okay. Got you. And then earlier in the call, Eric, I think you mentioned that there could be some more upside to revenues this year, if component availability would improve. I guess, could you help us understand where we're standing today if supply availability was free? How much growth in the current footprint, we have without pretty significant CapEx?

Yes, the capacity in our factories is currently not an issue. The main challenge lies within the supply chain. We are making progress in a couple of factories, but the core issue is ensuring that components are flowing into the factories. This year, we don’t anticipate running out of factory capacity, unless production days are significantly affected by shutdowns or lost shifts. The focus remains on improving component flow. For the next couple of years, we do not foresee a significant need for capital investment in capacity. We have been consistently enhancing these factories through automation improvements. Recently, we implemented a new paint system and warehouse automation in several locations, which are helping us address the specific challenges we face. We are proactively managing these issues with our factories, and the main concern is still the supply chain.

Great. Thanks.

The next question is from Joel Tiss with BMO. Please go ahead.

Hey guys. How are you doing?

Hi, Joel.

Hi, Joel.

I wonder if we could zero in on the parts business for a minute. It sounds like it's doing really well. Some of it may be easy comps. But is it coming from you capturing more of the installed base of equipment that's out there, or is it the deal is performing better, or just a little sense of what's underneath that success?

Well, I think we're making improvements on a few different fronts. Dealer absorption is up. That's the measure of how much of their overall overhead is offset by parts and service sales. And so we want them to continue to move up towards 100% where they're covering their entire overhead with parts and service sales, and they're moving in that direction. So dealer performance has improved. Our parts fill rate has stayed very strong through the pandemic and is in market-leading conditions. In many of our markets, we're the best in the industry. And so I think we continue to build confidence in the marketplace with our farmers, and to some extent, with our dealers. And so there's a bit of a shift there. But we still have a lot of untapped potential. We haven't leveraged our full potential from our connected machines. Our connected machine fleet will be up. By the end of this year, we'll have four times more connected machines than we did just in 2019. And being able to use that to move more proactively into driving the service parts revenue is still an untapped potential. So I think there's several areas, both at the customer level and at the dealer level, that are improving, but we still got a lot of runway in front of us.

And then as we go through all these kind of challenging times, are there other business units or pieces of businesses or product lines that seem like maybe they're a little more commoditized or it's harder to get the pricing through or whatever you're looking at that might not really be the best use of capital, or that's too small to worry about?

We're pretty much across all of our businesses getting the price increases to stick right now. Granted, some of this inflation is very high, but we've been able to stay ahead of it with pricing. So we don't see any segments that are no-fly zones for being able to manage it the way Andy talked about.

Okay. Thank you.

You’re welcome.

The next question is from Chad Dillard with Bernstein. Please go ahead.

Hi, good morning guys.

Hey, good morning Chad.

Hi Chad.

So a question for you on your price realization guidance. You're guiding to 4.5% versus probably more like your baseline, which is around 2%. So 250 basis points delta. Can you just talk about how much of that comes from lower sales incentives versus mix versus core price increases? I'm just trying to understand just like how sustainable this is. And then similar to some of the things you're seeing on the GSI side, how much further can you push before there's demand destruction?

The pricing we are seeing comes from various sources. Some of it is the invoice price at which we sell equipment to the dealer, but there are also adjustments to our discount program. Most of our products offer discounts that are below the invoice price, resulting in a net price that is lower than the invoice price. We provide discounts through multi-unit programs and volume bonuses, among other incentives for dealers. We have managed to limit or reduce these promotional programs throughout the year to help establish better pricing without changing the list price of the units. Later this year, as we approach model year repricing, we will have the opportunity to adjust those model prices, giving us more flexibility with our pricing strategy. Overall, we have various methods and strategies to implement the price increase we aim for. Our main concern is timing, particularly because we have a strong order backlog and there is a lag with material costs. We need to be cautious about any potential mismatch between the timing of new pricing and the incoming costs. Currently, as mentioned by Greg and Eric, we are ahead of schedule regarding pricing compared to costs, but we anticipate further cost increases in the latter half of the year. This is something we will be monitoring very closely.

That's helpful. I have a second question regarding the relationship between price and cost, specifically the net price. When do you expect that to reach its peak? Assuming commodity prices remain stable, how long until the worst is behind you? Additionally, on the dealer inventory front, you mentioned that you might be exiting at levels comparable to 2020. If supply chain issues improve, would you consider increasing inventory in your channel right now?

In terms of pricing and cost, I believe the most significant challenge will arise in the third quarter. I expect things to start to balance out in the fourth quarter, assuming we don't experience another rise in commodity prices. Regarding dealer inventory levels, our goal is to maintain these levels. I have already mentioned that there is a higher risk of them remaining low due to strong retail demand. We do not intend to increase our dealer inventory levels; instead, we aim to keep them at the appropriate level, similar to where they were at the end of last year. However, with the increased demand, our month supply of dealer inventories is decreasing, while we expect the total amount to remain relatively consistent year-over-year.

Great. Thank you.

The final question is from Steven Fisher with UBS. Please go ahead.

Great. Thanks. Good morning guys. I know you said you have some additional capacity. I guess I'm curious how you're thinking about the potential outcome of this growing season to meaningfully change the demand side. Are you hearing things that kind of give you some sense of where that's leading, or are dealers or farmers telling you that if the drought isn't too bad, there will be some additional orders. So, what are you hearing from the field there?

Demand remains strong across nearly all our segments. We are experiencing significant weather challenges, particularly severe drought and heat in the Western regions of the US and Canada, which is affecting farmers. In South America, there are also severe droughts, along with unusual freezes and snow. While weather is an important topic, it directly impacts farmers’ operations. In North America, many farmers rely on crop insurance, and global weather events tend to limit grain yields and maintain low inventories, resulting in sustained high prices. The farmers who are hit hardest, especially in North America, are at least able to stay afloat due to insurance. Overall, we anticipate a robust market into the next cropping cycle based on yield forecasts, which boosts our confidence in continuing strong demand. Our order bank is currently solid, and the rate of new orders is also strong.

Got it. And then just a technology question. I'm curious which areas of technology you feel the most need or desire to kind of expand into beyond Precision Planting? As you mentioned earlier, it sounds like you're satisfied for now with the Raven status quo on spring. Where else? And what other kinds of technologies do you feel motivated to expand?

Yes, we are focusing on a couple of categories. The first is the development of smart machines that automate functions to allow on-the-go adjustments for operators. For example, our smart firmer sensor on the planter can sense soil conditions in real-time and make adjustments as needed. It takes 2.3 million measurements per acre and can make around 8,000 adjustments per acre, which is something a farmer wouldn't do as frequently. We're looking for this application in planters, harvesting, whether it's for hay or grain, and sprayers, aiming to enable machines to sense their environment and optimize performance through real-time adjustments. This is our main focus and aligns with our vision. The second area involves sustainability, including alternative fuels like electrification and hydrogen, along with supporting farmers in soil carbon sequestration and capturing carbon from the air into the soil. We see significant potential in both technology and the evolution of farming practices. We've recently adjusted our field trials from solely Precision Ag to incorporate sustainability as well, leading to two broad categories with multiple components in each.

That’s very helpful. Thanks so much.

Thank you. We appreciate everyone's participation this morning and your interest in AGCO and encourage you to follow up with us if you have additional questions. Thanks. And have a great day, everyone.

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