Agco Corp /De Q1 FY2023 Earnings Call

Good day. And welcome to the AGCO First Quarter 2023 Earnings Call. All participants will be in listen-mode. After today’s presentation, there will be an opportunity to ask questions. In consideration please limit yourself to one question and one follow-up. 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, Jason, and good morning. Welcome to those of you joining us for AGCO’s first quarter 2023 earnings call. We will refer to a slide presentation this morning that we posted on our website at www.agcocorp.com. The non-GAAP measures used in the slide presentation are reconciled to GAAP metrics in the appendix of that presentation. We will make forward-looking statements on the call this morning with respect to strategic plans, demand, product development and capital expenditure plans, production levels, engineering expense, exchange rate impacts, pricing, share repurchases, dividends, interest rates, future commodity prices, crop production, supply chain disruption, inflation, component delivery, sales, margins, earnings, cash flow, tax rates and other financial metrics. We wish to caution you that these statements are predictions and that actual events may differ materially. We refer you to the periodic reports that we file from time to time with the Securities and Exchange Commission, including the company’s Form 10-K for the year ended December 31, 2022. These documents discuss important factors that could cause the actual results to differ materially from those contained in our forward-looking statements. These factors include, but are not limited to, adverse developments in the agricultural industry, including those resulting from supply chain disruption, exchange rate volatility, 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 corporation website. On the call with me this morning are 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.

Thanks, Greg. Good morning. It’s great to be with you. We started 2023 incredibly well from both an operational and a financial perspective. Slide three highlights the results of quarter one 2023. We posted a record first quarter in terms of sales, operating margin and earnings. The combined efforts of AGCO team have helped deliver first quarter sales growth of 24%, with adjusted operating margins expanding by 260 basis points to 11.7%. This marks three consecutive quarters with operating margins above 10.5%, indicating sustainable progress towards our mid-cycle target of 12%. These results are a testament to the tremendous value we are adding to farmers as we revolutionize the crop cycle. This success is taking place against a backdrop of a continuing strong industry. AGCO’s precision ag sales were up 30%, and IDEAL combine sales increased 70% in the first quarter compared to a year ago. Development is underway on targeted spring autonomy and dozens of smart precision ag features. We are making solid progress towards our ambitious technology deployment goals we set in December. This focus and progress stem from our commitment to being the most farmer-focused company in our industry. Our customers' growing interest in AGCO’s precision ag solutions is supporting extended order boards. We expect healthy market conditions to continue, and our improved financial outlook for 2023 reflects this optimism. We have increased our sales and earnings forecast and expect to generate significant cash flow this year. This strong performance supports our technology-related investments aimed at advancing our digital capabilities and growing our precision ag sales. We will also continue to return cash to our shareholders. Last week, we announced a special variable dividend of $5 per share, as well as a 21% increase in our regular dividend, given the strength of our business and our confidence going forward. Slide four details industry unit retail sales by region for quarter one 2023. Supportive farm economics resulted in robust demand for large agricultural equipment, as farmers continue to replace aging machines. While dealer inventory of smaller equipment has increased versus 2022 levels, larger machinery is still below historical averages. North American industry retail sales were down approximately 3% for quarter one versus 2022. Smaller tractor sales declined from a high level in 2022, while increased sales of units greater than 100 horsepower helped to offset the decline. Tractor retail sales in Western Europe decreased approximately 3% in quarter one 2023 compared to 2022. Farmer sentiment has been negatively impacted by the war in Ukraine, as well as input cost inflation; however, forecasts for healthy farm income in Western Europe are expected to continue to support solid retail demand for equipment throughout 2023. In South America, industry retail sales decreased 3% during quarter one 2023. Positive farm economics, supportive exchange rates, and continued expansion in planted acreage in Brazil are driving increased investments in high-tech farm equipment, leading to an outlook of modest growth for the South American tractor industry in 2023 versus strong levels last year. Across all regions, the combine industry saw significant growth compared to quarter one of 2022 due to the relatively low levels in the first quarter last year, which were impacted by major supply chain constraints. We are very positive about the underlying agricultural fundamentals supporting strong industry demand in 2023. Tractor usage remains low, which is supporting elevated commodity prices. While there’s been some pullback in commodity prices over the last six months, they are still well ahead of historical averages. Equipment in the field is aging, signaling an increased need for replacement. New dealer inventory of large ag equipment remains below targeted levels, while small ag dealer inventory is up from last year. Input costs like fertilizer and fuel have decreased significantly from their peaks last year. While farm income may be down modestly in 2023 from record levels in 2022, we believe it will remain at favorable levels in 2023, supporting industry demand, assuming normal crop production, and we do not see that changing significantly for 2024. Our team has done a remarkable job maintaining focus on our strategy while navigating supply chain challenges. While the supply chain has improved over the last couple of quarters, we continue to experience some component shortages affecting our production volumes. The encouraging news is that despite global supply bottlenecks and inflationary pressures, farmer economics remain healthy and global end market demand remains strong, especially in the large farm segment. AGCO’s quarter one 2023 factory production hours are shown on slide five. While some supply chain shortages linger, we grew our production in quarter one by approximately 8% versus 2022. We are planning on higher production levels in quarter two compared to 2022, while maintaining relatively flat production levels in the second half of this year versus 2022. Based on our industry and market share forecast for 2023, we are projecting a 3% to 5% increase in production hours for the year. As of the end of March 2023, demand for our farmer-focused products remains very strong, and our order boards remain elevated across all regions. In Europe, tractors have order coverage through the end of the year with large ag orders increasing in double digits, while small ag orders have decreased in double digits compared to last year. In South America, we have order coverage through September 2023, where we continue to limit our orders to around one quarter in advance to give ourselves more pricing flexibility. To illustrate the strength in this market, when we opened the system to receive third-quarter orders, the order board was filled effectively in one day. In North America, our orders for tractors, combines, and sprayers extend into 2024, as demand in the large farm market continues to be extremely strong. As we outlined last quarter, orders remained below last year’s levels as we have opted to limit order intake to improve our on-time delivery rates. Normalizing for the new order intake rules, large ag orders are up, and small ag orders are down. This next slide highlights our three growth vectors to outpace the industry by 4% to 5% per year: our Fendt global full-line business, our global parts and services, and our precision ag product offerings. All three provide significant growth potential at higher margins with less variability during cyclical downturns. This morning, I want to focus on our efforts on the Fendt initiative. We continue to grow the business on two fronts. First, we are expanding the Fendt product line beyond tractors to now include key products like sprayers, planters, and combines. Second, we are taking this full line of Fendt products global. As you can see in our results, interest continues to grow for our premium Fendt product line in both North and South America. In the first quarter, our Fendt-branded sales in those markets increased by 139% and 94%, respectively. Our Fendt and Challenger sales in North and South America are expected to double over the next four to six years. As part of our Fendt globalization efforts, we are launching the Fendt 200 Vario in the North American market. This segment-leading tractor has been successful in the European market for many years, and now we are bringing it to North America, where it was launched in February at the 2023 World Ag Expo. The tractor will serve customers with vineyards, orchards, and other high-value specialty crops. The lightweight and maneuverability combined with the high performance of the machine enable premium pricing and high margins. The feedback from dealers and potential customers at the World Ag Expo regarding the Cat space, front 3-point features, and variety of width offered was very positive. We expect the Fendt 200 Vario to continue to provide our farmers with exceptional results, as they have come to expect as part of the Fendt experience. With the introduction of the 200 to the North American market this year, the globalization of our Fendt tractor product line is nearly complete. We have brought through market models ranging all the way from the largest 1000 series down to the 200 series. Our technology-rich products are enabling more sustainable farming practices and outcomes for our customers. We are also in a much stronger position from a sustainability perspective. Slide seven shows a couple of highlights from our 2022 sustainability report, which was issued in March. We are delivering on our sustainability commitments from industry-leading innovation to improved sustainable outcomes for our farmers, decarbonizing our products and operations, and offering our talented diverse employees a safer, more engaging workplace. I am proud of our progress, which includes achieving our Scope 1 and 2 targets three years ahead of schedule by reducing the emissions intensity of our manufacturing operations. Other impressive achievements include our renewable electricity usage now accounts for 63% of our total; our renewable energy usage is already at 36% of our total; improvement in health and safety metrics, such as reducing our incident rate by 14%, aided in part by increasing the number of sites that are ISO certified; and incorporating employee feedback from our Voices survey to help make AGCO a great place to work. With that, I will now hand over the call to Damon, who will provide more information about our first quarter results.

Thank you, Eric, and good morning, everyone. I will start on slide eight with an overview of AGCO’s regional net sales performance for the first quarter. Net sales were up approximately 30% in the quarter compared to the first quarter of 2022 when excluding the negative effect of currency translation. Pricing in the quarter, which was over 11%, contributed to higher sales along with strong growth in high horsepower tractors, combines, application equipment, and precision ag products. By region, the Europe/Middle East segment reported an increase in net sales of approximately 30%, excluding the negative effects of currency translation compared to the prior year. The improvement was driven by increased sales of high horsepower tractors, utility tractors, and Fuse precision ag products, along with favorable pricing actions. Strong growth in Turkey, Germany, and the United Kingdom accounted for most of the increase. In South America, net sales in the first quarter grew approximately 42% year-over-year, excluding the negative effects of currency translation, driven by continued strong sales growth in Brazil, partially offset by lower sales in Argentina. Higher sales of tractors, combines, and application equipment, as well as favorable pricing effects, drove most of the increase. Net sales in North America increased approximately 32%, excluding the unfavorable impact of currency translation compared to the first quarter of 2022. The growth resulted primarily from increased sales of high horsepower tractors, application equipment, and combines, supplemented by the positive effects of pricing to more than offset inflationary cost pressures. On a constant currency basis, net sales in our Asia/Pacific/Africa segment decreased about 4%. Delayed shipments from our European factories in the last quarter resulted in lower sales in most markets, partially offset by sales growth in Australia and China. Finally, consolidated replacement part sales were approximately $456 million for the first quarter, up about 2% year-over-year. Unfavorable currency effects were approximately 5% during the first quarter. Turning to slide nine. The first quarter adjusted operating margins improved by approximately 260 basis points versus 2022. Margins in the quarter benefited from higher sales and production, a richer mix, and positive net pricing compared to the first quarter of 2022. Price increases of over 11% more than offset significant material and freight cost inflation on a dollar basis and were also positive on a margin basis. For the full year, we are still projecting approximately 8% pricing. By region, the Europe/Middle East segment reported an increase of approximately $77 million in operating income compared to the first quarter of 2022, and margins improved approximately 250 basis points. Higher sales, product mix, and strong pricing contributed to the improvement. North American operating margin for the first quarter increased approximately $47 million year-over-year. Operating income benefited from higher sales and production, positive net pricing, and a favorable mix. Operating margins in South America reached nearly 20% in the first quarter, with operating income improving over $53 million versus the same period in 2022. The South American results reflect the benefit of higher sales and production and a favorable sales mix. The continued strength in Brazil has resulted in strong price resiliency in the quarter, helping deliver robust results once again. Finally, in our Asia/Pacific/Africa segment, operating income declined approximately $16 million in the first quarter, primarily due to lower sales and production. With the margin expansion in the last two years in our North American, South American, and Asia/Pacific/Africa regions from our strategy execution and disciplined pricing, we expect AGCO’s margin profile to become more balanced across the globe in the years ahead. Slide 10 summarizes our precision ag business. As you can see, we are focused on expanding our addressable market from just traditional agricultural machinery spend, which today is in the low- to mid-teens, to around 70% of all non-land areas. We believe that investments in precision ag position us well as it will play a major role in achieving the global sustainability targets being established, while simultaneously helping farmers improve their profitability. We recorded $199 million in precision ag revenue in Q1 of 2023, approximately a 30% increase from 2022. Our current run rate puts us solidly on track to hit the $1 billion sales target by 2025, which we announced during our December 2022 Investor Day. Slide 11 details our free cash flow for 2023 and 2022. As a reminder, free cash flow represents cash used in or provided by operating activities less capital expenditures, and free cash flow conversion is defined as free cash flow divided by adjusted net income. In the first quarter, AGCO used $682 million of cash in 2023, 6% more than 2022. Remember, it’s typical that we seasonally build inventory in the first quarter for the spring selling season. The year-over-year change is related to approximately $60 million increase in capital expenditures coupled with a modest increase in working capital that more than offset increased earnings. For 2023, we expect our raw material and work-in-process inventory to remain somewhat elevated given supply chain challenges; however, we expect this to be a modest source of cash versus a use in 2022. We expect our free cash flow conversion to range from 75% to 100% of adjusted net income, a significant increase from 2022. We remain focused on direct returns to investors during 2023, with a regular quarterly dividend that we recently increased 21% to $0.29 per share last week, and the declaration of a special variable dividend of $5 per share. Future returns of cash to shareholders will be based on cash flow generation, our investment needs which include capital expenditures and acquisition opportunities, as well as our market outlook. Slide 12 highlights our 2023 retail market forecast for our three major regions. Globally, driven by elevated commodity prices, we expect healthy farm economics to support another year of strong end market demand. In North America, we expect similar demand compared to the healthy levels in 2022. We anticipate continued growth in the high-horsepower row crop equipment segment to be offset by softer demand for smaller equipment after several years of robust growth. Increasing interest rates are expected to continue to slow the smaller equipment segment of the market. In South America, we expect industry sales to be flat to up 5%, moderated by supply chain constraints. This region remains one of the stronger end markets, especially in Brazil, where the farm footprint is increasing, and we expect another year of healthy farmer profitability, which we believe will drive demand for large agricultural equipment beyond 2023. Turning to Western Europe, the industry is forecast to be relatively flat compared to 2022. Farm fundamentals in the region are generally healthy, with grain prices continuing to outpace input inflation. Meanwhile, supply chain constraints over the last two years are extending equipment replacements. Slide 13 highlights a few key assumptions underlying our 2023 outlook. In addition to focusing on meeting strong end market demand, we will also make significant investments in the development of new solutions to support our farmer-first strategy. Although we see strong market demand, AGCO’s results will still depend on our supply chain performance in 2023. Our sales plan includes market share gains, along with price increases of approximately 8%, aimed at offsetting material cost inflation. We currently expect currency translation to positively impact sales by about 1%. Engineering expenses are expected to increase by approximately 20% compared to 2022. The increase is targeted at investments in smart farming and precision ag products. Operating margins are expected to improve to around 10.9%, driven by higher sales and production, favorable pricing net of materials, and improved factory productivity, partially offset by increased investments in our engineering and digital initiatives, as well as inflationary cost pressures. With increasing interest rates and higher sales forecasted, we expect other expenses primarily related to the sales of accounts receivables to increase approximately $50 million year-over-year, with the majority occurring in the first half of 2023. We are targeting an effective tax rate in the range of 27% to 28% for 2023. We have raised our sales and earnings per share targets from what we highlighted in our fourth quarter call; currently, we expect net sales to be in the range of $14.5 billion, and earnings per share should be approximately $14.40 in 2023. We continue to target capital expenditures of $375 million, and, as I mentioned earlier, free cash flow conversion should be in the range of 75% to 100% of adjusted net income, consistent with our long-term target.

With that, I will turn the call back to Greg for Q&A.

Our first question comes from Stanley Elliott from Stifel. Please go ahead.

Hey. Good morning, guys. Thank you for taking the question. Could you talk a little bit, I guess, start off with the grain and protein business? How has that been tracking relative to expectations, and just curious about that?

Yeah. Sure, Stanley. So I’d tell you, grain and protein, after a couple of challenging years, the team worked really hard to do a fair amount of restructuring to consolidate the factories and improve the overall cost position of the business. Last year, Stanley, they were challenged with steel prices, obviously escalating in the first half of the year, and they were probably the most adversely affected by the cyber event that we experienced. The challenges they saw in China, particularly in the protein side of the business, masked the underlying improvement we were witnessing in their operations. That being said, as we started the first quarter here, I would tell you grain and protein had a good first quarter. You saw in the appendix sales of $256 million. Operating income was mid-single digits, so improving year-over-year. As you know, Q2 is a strong quarter season, especially here in the U.S., and we are hopeful to see improved performance continuing to raise that margin, with expectations for substantial improvement in grain and protein in 2023 compared to 2022.

Great. And I apologize, I had to hop on a little bit late. But can you talk about kind of where you think we are in the cycle, more so for South America and then in North America? How are you managing the business and expectations there?

Farmer fundamentals are extremely strong. Our order boards are higher now for all large ag across the world than they were a year ago. Dealer inventory is low, and used prices are high. So we see a very strong market throughout the year, and we don’t anticipate any significant changes for 2024. We are not forecasting for 2024 yet, but we strongly believe we have a strong market ahead. There are several macro tailwinds that will play out as well. A few years back in North America, we had this big ethanol demand contributor that started consuming a significant portion of the corn crop. We see a similar trend happening with vegetable oil, where soy and canola will be needed to convert vegetable oil into renewable fuels and other products. The renewable diesel capacity has doubled in just the past year, and by the end of the decade, we expect it to quadruple globally and increase by nine times in the U.S. Another trend is the increasing focus by countries worldwide on food security, leading to increased hoarding or storing of grain locally. This has driven global ending stocks down for the last six years in a row. So with insufficient grain, tight machinery supply, and rising demand, we believe this market has considerable strength.

Our next question comes from John Joyner from BMO Capital Markets. Please go ahead.

Good morning. Thank you for taking my question. When looking at your outlook for operating margins for the year, why would margins ease for the remainder of the year? Is it greater planned investments or something else, or is it just a bit of conservatism?

Yeah. I think, John, it’s a couple of things. First, we have material costs increasing. Additionally, pricing in the first half, particularly in the first quarter, was our strongest part of the year. South America is outperforming our expectations; however, we do expect some moderation. Lastly, engineering expenses are expected to increase by approximately $100 million year-over-year. These are the three primary drivers leading to the outlook of 10.9% for the full year.

Okay. I’ll take it as being conservative. My next question, when looking at the age of the machinery fleet in South America, farmers there typically utilize equipment longer than in North America or Europe, often exceeding the assumed life span of the equipment. What do you believe is driving the increased age of large ag machinery there, especially when grower economics are currently so strong?

Yeah. So, John, you are correct that equipment is used more intensively in South America, leading to a shorter useful life formally. We observe that equipment tends to be replaced more quickly, especially on larger farms in Mato Grosso and among sugarcane mills that are significant consumers. The dynamics haven’t really changed, and used market values, when present, are still very high. Even our new equipment inventory levels at dealers, while up a bit, still lag behind desired levels. Last year, dealer inventory was almost non-existent, so Brazil continues to represent a robust market.

The next question comes from Dillon Cumming from Morgan Stanley. Please go ahead.

Great. Good morning, guys. Thanks for the question. Regarding production dynamics for the remainder of the year, is there still a layer of growth being constrained by supply chain, labor, etc., so that as we look beyond this year, you could potentially increase more?

Yeah. I think, Dillon, as we look at the second quarter, you'll see a big increase. If we assess the back half of the year, we expect continued supply chain challenges and will evaluate dealer inventory levels. The market demand remains robust. However, we may have opportunities to achieve more incremental production as we see fit, but our forecast currently aligns with our revenue outlook and market demand into early 2024.

Okay. Great. Thanks, Damon. Regarding tighter financing conditions, have you heard feedback from the dealer channel? Do you have any concerns about that?

No. Between AGCO Finance, DLL, and our joint venture partners, we haven't seen any issues affecting financing. While we observe that small ag is declining due to rising interest rates, we are not encountering challenges in collectibility or loan approvals. We believe that many loans are managed by regional, ag-centric banks that tend to be more conservative in their lending policies.

Our next question comes from Mig Dobre from R.W. Baird. Please go ahead.

Thank you. Just to follow up on that last question, would you say there’s an increase in the outright cost to finance equipment, and are the dealers looking for more manufacturer support? How do you think this situation can be managed?

We do our best through AGCO Finance. For those large farms, most are bringing a trade-in as they upgrade their equipment. The trade-in values for used equipment remain high. Regarding interest rates, AGCO Finance remains competitive and we have opportunities to incentivize farmers to utilize our services over alternative financing options. For small ag, we have implemented zero percent financing for certain periods to encourage purchases. Our team constantly monitors the market conditions to maintain appealing financing options.

Understood. For South America, can you level set our expectations here going forward, particularly concerning second-half margins? What should we expect on both revenue and margin?

The South American market is our strongest relative to mid-cycle expectations, and we foresee this market remaining strong for the balance of the year, estimating a growth of 0% to 5%. Margin performance has recently exceeded expectations due to price resilience. However, we anticipate a decline in margins for two primary reasons: ongoing material cost inflation, particularly for large horsepower tractors, and traditional dealer incentives, which we've only selectively utilized in the face of market strength. For the balance of the year, expect margins to fall in the 16% to 17% range due to these factors.

Our next question comes from Seth Weber from Wells Fargo Securities. Please go ahead.

Hey, guys. Good morning. On your margin performance in Europe, is this just pricing strength or has there been a structural change that warrants thinking about margins in the low-teen range going forward?

Indeed, Seth. Europe had another exceptional quarter. Strong pricing helped offset inflation, and we experienced a rich mix with considerable volume growth driven by our key brands. We expect these strong margins to continue for the balance of the year due to favorable production year-over-year and better absorption.

Thanks. Regarding the free cash flow guidance maintained for the year, what are the big drivers that will help you achieve that? Are there concerns related to inventory levels?

Seth, the free cash flow outlook year-over-year is indeed stronger, although we are still managing supply chain inefficiencies that impact our factories. We expect to enhance our inventory through the second half of the year, as our first quarter is primarily a seasonal build. We aim to deliver on our full-year targets of cash flow generation ranging from 75% to 100% of adjusted net income.

Our next question comes from Jamie Cook from Credit Suisse. Please go ahead.

Good morning and congratulations on a nice quarter. With a strong order book and visibility into 2023, what are your expectations for decrementals if demand deteriorates in 2024? How will margins remain structurally higher?

For margins, the growth of components like our parts business and precision ag, combined with our share expansion through Fendt, should help us maintain healthier margins in downturns. The risk is harder to quantify since market conditions could change rapidly. If demand were to decline abruptly, the adjustment period around our production and cost could take time. Nevertheless, we are closely monitoring the situation and managing costs carefully.

For order trends in the second half, agriculture does not necessarily follow GDP. It hinges on whether global grain supply is adequate. With the downward trajectory of global ending stocks combined with rising demand for grains, especially given geopolitical situations, we don’t foresee significant demand reduction. Current order books are heavily customer-focused, but we anticipate a balancing towards dealers as market normalization returns over time.

Our next question comes from Kristen Owen from Oppenheimer. Please go ahead.

Thank you for taking my question. Please elaborate on the $199 million of precision ag revenue in Q1. Did you see improved availability and what’s the outlook for full year revenue?

No. We remain optimistic about precision ag revenue, targeting between $800 million and $850 million for this year, reflecting a 30% annual increase that aligns with improved chip availability compared to last year. The current trajectory certainly supports this optimistic outlook.

This summer, we will complete our new distribution center, which will further enhance capacity and efficiency to manage global orders effectively, supporting the demand for precision planting and other acquisitions we’ve made.

Thank you. Regarding margin performance, what’s your production rate relative to pre-COVID levels, and how do you foresee margins performing this year due to better throughput?

Production today is not as efficient as in 2019 due to ongoing supply issues. However, we are significantly better year-over-year, and as we perform seasonal maintenance, we are aiming to match production levels with our revenue outlook. There’s good potential for upside in margins if supply conditions improve.

Our next question comes from Jerry Revich from Goldman Sachs. Please go ahead.

Good morning, and congratulations on the results. What do you anticipate for margins in Q2, given normal seasonality?

We expect traditional margin strength in Q2, though some standpoints in South America indicate potential margin contractions due to material cost increases and retail pricing discounts declining. Overall, we will see stronger revenue but probably a slight margin compression.

Can you also discuss where your new equipment inventory stands in North America and South America?

Most inventory increases are in small ag. Large ag inventory levels continue to be below our healthy targets, while small ag is slightly above targets, particularly entering the selling season. Dealers continue to require more inventory for large ag markets.

The next question comes from Tami Zakaria from JPMorgan. Please go ahead.

I wanted to touch on the incomplete red tag units. Are they all cleared by now or do you still expect some deliveries in 2Q?

We significantly reduced the number of semi-finished units by the end of last year, which is typical at this time of year. Although the current number of units is up relative to the fourth quarter, it remains half of what it was last year due to better supply chain performance. So, we are on track with adequate inventory levels as we move into the second quarter.

Thank you. Regarding the sales guidance raise of $500 million, can you clarify how much of that is volume-driven?

Your numbers are accurate. The $250 million increase in guidance is primarily attributed to a richer mix of products and slightly improved volume, but mainly driven by mix.

Our last question comes from Chad Dillard from Bernstein. Please go ahead.

What levels do you expect for large dealer inventories by the end of 2023? Is there any potential for restocking included in your guidance?

Large ag inventories are still below normal levels, and we don't foresee significant changes through 2023. Therefore, we haven't factored in any dealer restocking for large ag this year. This opportunity is still projected for 2024, depending on market cycles and commodity prices. Regarding AGCO's pricing strategy and sales incentives, the overall 8% increase is composed predominantly of list prices. Most of that pricing was implemented late last year and will start to lap in the second half. We strategically held back on traditional dealer incentives, which reflects positively in our results this quarter.

I’d like to close by thanking everyone for your participation and support of AGCO. We are really proud of how we started 2023, marking a record quarter in many ways that sets us on a trajectory for another record year at AGCO. The key to our success lies in the continued execution of our farmer-first strategy. We focus on growing our margin-rich businesses like Fendt, parts and service, and precision ag solutions that solve critical farmer problems, promising short paybacks. Our precision ag tools are pivotal in enhancing sustainability measures while helping farmers transition to productivity in a more sustainable manner. Finally, global large ag markets are strong. We believe in healthy farm fundamentals and see conditions supporting farmers' investments. With trends indicating a rising focus on food security and increased demand for oilseeds, we are confident in our prospects for 2023 and beyond. We look forward to seeing many of you at our technology event on June 28th and 29th in Nashville. Thank you and have a great day.

Thank you for joining the AGCO first quarter 2023 earnings call. The call has concluded. Have a nice day.