Agco Corp /De Q3 FY2023 Earnings Call

Good day, and welcome to the AGCO Third Quarter 2023 Earnings Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Greg Peterson, AGCO Head of Investor Relations. Please go ahead.

Good morning. Welcome to those of you joining us for AGCO's third quarter 2023 earnings call. This morning, we'll refer to a slide presentation that's posted to our website at www.agcocorp.com. The non-GAAP measures used in the slide presentation are reconciled to GAAP metrics in the appendix of that presentation. We'll make forward-looking statements this morning, including statements about our strategic plans and initiatives as well as our financial impacts. We'll discuss demand, product development and capital expenditure plans and timing of those plans, and our expectations with respect to the costs and benefits of those plans and timing of those benefits. We'll also discuss future revenue, crop production and farm income, production levels, price levels, margins, earnings, cash flow and other financial metrics. All of these are subject to risks that could cause actual results to differ materially from those suggested by the statements. These risks include, but are not limited to, adverse developments in the agricultural industry, including those resulting from COVID-19, supply chain disruption, inflation, weather, commodity prices, changes in product demand, interruptions in supply of parts and products, the possible failure to develop new and improved products on time, including premium technology and smart farming solutions within budget and with expected performance and price benefits, difficulties in integrating the Trimble Ag business in a manner that produces the expected financial results, reactions by customers and competitors to the transaction, including the rate at which Trimble Ag's largest OEM customer reduces purchases of Trimble Ag equipment and the rate of replacement by the joint venture of those sales, introduction of new or improved products by our competitors and reductions in pricing by them; the war in Ukraine; difficulties in integrating acquired businesses and in completing expansion and modernization plans on time in a manner that produces the expected financial results; and adverse changes in financial and foreign exchange markets. Actual results could differ materially from those suggested in these statements. Further information concerning these and other risks is included in AGCO's filings with the Securities and Exchange Commission, including its Form 10-K for the year ended December 31, 2022 and subsequent Form 10-K, 10-Q filings. AGCO disclaims any obligations to update any forward-looking statements except as required by law. We'll make a replay of this call available on our corporate website. On the call with me this morning is Eric Hansotia, our Chairman, President and Chief Executive Officer; and Damon Audia, our Senior Vice President and Chief Financial Officer. With that, Eric, please go ahead.

Thanks, Greg, and good morning. AGCO has consistently delivered record results over the last two years, and I'm pleased to tell you that the third quarter of 2023 is no different. AGCO delivered $3.5 billion in third quarter sales, nearly 11% higher than the third quarter of 2022. Operating margins in the quarter were 12.3% and 12.6% on an adjusted basis. That's 190 basis points better than 2022. This marks the fifth consecutive quarter with operating margins above 10.5%, which is evidence of how we have structurally transformed our business and further demonstrates the progress we are making towards our mid-cycle 12% operating margin target. This strong financial performance reflects the continued success of our Farmer-First Strategy, focused on growing our Precision Ag business, globalizing a full line of our Fendt branded products and expanding our parts and service business. Our North and South American Fendt sales are ahead of our growth targets as we expand our distribution networks in the regions to give more farmers access to the industry's best equipment, and we continue to have the best parts fill rates in the industry. Our strategy is generating strong growth in each of these margin-rich businesses, providing the foundation for 2023 to be another record year in sales, operating margin, earnings per share and free cash flow. Our expanding tech stack is taking our products to new levels of performance and efficiency, putting us in a winning position as farmers' most trusted partner for industry-leading smart farming solutions. The recently announced joint venture with Trimble is truly transformational for AGCO and for farmers. It also aligns perfectly with our strategy of focusing on a greater percentage of our business and the high-margin, high-growth Precision Ag segment of our industry. We'll talk more about the planned JV in a few minutes. Slide 4 details industry unit retail sales by region for the first nine months of 2023. As harvest draws towards completion in the Northern Hemisphere, higher production is driving up grain inventories, weighing on prices. Farm income is still relatively strong. And with positive cash flow for most growers, demand for our equipment is at a relatively high level, although it is retreating from the highs seen in 2022 and earlier this year. While still supportive, lower commodity prices and the fleet age trending younger are causing farmers to become more selective about their equipment and technology investments. North American industry retail tractor sales were down approximately 2% through September year-to-date versus 2022. Smaller tractor sales continued to decline from higher levels in 2022, as higher interest rates and overall economic conditions have slowed demand. Strong demand for tractors greater than 200-horsepower helped partially offset the decline. Industry retail tractor sales in Western Europe decreased approximately 2% through September compared to 2022. Farmer sentiment continues to be negatively influenced by the ongoing war in Ukraine, as well as input cost inflation. However, forecasts for healthy farm income in Western Europe are expected to support good retail demand for equipment throughout the remainder of 2023. In South America, industry retail tractor sales decreased 8% for the first nine months of 2023 compared to 2022. Retail demand in Brazil was negatively affected by the depletion of government-subsidized loan program prior to the June 30 fiscal year end. But with loans now being processed, we are hopeful this will help drive improved retail sales for the balance of the year. Although, there are increasing signs of caution, retail demand in Brazil and Argentina remained at above average levels in 2023, with particular strength in the high horsepower segments. The combine industry was up 23% in North America and 30% in Western Europe, through September versus 2022, due primarily to improving supply chains. Combines in South America declined 20% in the first nine months of 2023 compared to the prior year. Although, market conditions continue to soften off the extremely strong conditions over the last couple of years, we remain positive about the underlying ag fundamentals supporting long-term industry demand for several reasons. First, stock-to-use levels are higher than recent lows, but they remain supportive of profitable commodity prices versus historical levels. Second, as the demand for clean energy grows, the need for solutions like renewable aviation fuel and vegetable oil-based diesel will grow strongly, driving demand for our farmers that will further support commodity prices. And third, input costs such as fuel and fertilizer are down from their peaks last year. We expect farm income to be down modestly in 2023 from the record levels of 2022. In aggregate, we believe that it will remain at attractive levels in 2024 and be supportive for industry demand. AGCO's supply chain has improved significantly over the last year. Our suppliers' on-time delivery performance to AGCO's factories has gotten better, and our on-time product delivery to our farmer customers has improved every month since March 2023. Another benefit of this more normalized production environment is lower inventory. We have been able to reduce our raw material and work-in-process inventory by 14% since September of 2022. AGCO's 2023 factory production hours are shown on slide 5. Our production decreased in quarter three by approximately 2% versus 2022. Recall that last year's third quarter production was exceptionally high as we were recovering from the cyberattack in the second quarter. Given this phasing and our focus on managing 2023 inventories, we are planning for relatively flat production levels in the fourth quarter versus last year, resulting in a 5% increase in production hours for the full year. As of the end of September 2023, demand for our farmer-focused products remains strong, and our order boards remained higher than historical average across all regions. In Europe, tractors have six months of order coverage, taking us into the second quarter of 2024. Dealer inventories are up approximately three-quarters of a month versus September of 2022. We're now at our targeted level of around four months on average with certain products like Fendt high horsepower tractors still below the optimal levels in certain areas. In South America, we have order coverage through December 2023, where we continue to limit our orders to around one quarter in advance, giving ourselves more pricing flexibility. We opened our fourth quarter order boards for all brands in South America and they filled up within a matter of days. In North America, our orders for tractors, planters and application equipment are fully booked for model year 2024 as the demand in the big farm market continues to be strong. We continue to limit order intake on some products to improve our on-time delivery rates, though other products are returning to a more normal order bank management. We currently have approximately seven months of order coverage for both large and small ag. Moving to slide 6. At our Investor Day in December 2022, we discussed our three high-margin growth levers that would help AGCO achieve its margin aspirations and outgrow the industry by 4% to 5%. To reiterate, those three levers are; globalization and full-line product rollout of our Fendt brand, focusing on global parts business and increasing the market share of genuine AGCO parts, and the third is growing our precision ag business, which supports not only factory fit technology but also significantly focuses on the mixed fleet retrofit solutions. These three growth engines will help AGCO achieve 12% operating margins at mid-cycle by year 2026 and will drive AGCO's growth above the overall industry performance. Slide 7 recaps the planned transformational joint venture between AGCO and Trimble that we announced a few weeks ago, in which AGCO will acquire an 85% interest in Trimble's portfolio of agricultural assets and technologies. By layering Trimble Ag on top of our already strong portfolio, we will fast track AGCO's technology transformation. The joint venture will allow AGCO to be a key player in guidance by offering advanced hardware and correction services. It enables us to automate even more activities for the farmer through Trimble's automated steering system and enable farmers to connect with all of their data via Trimble's farm management software, all of which will be controlled by AGCO. This combination provides a full suite of advanced technologies for farmers everywhere regardless of the brand. With our combined solutions, we further expand our mixed fleet offerings throughout the entire crop cycle and are able to put technology on more than 10,000 different models from almost any OEM. This JV announcement, combined with our existing Precision Planting business, reinforces our commitment to brand-agnostic retrofit solutions and will help position AGCO as the hub of the mixed fleet solutions. Lastly, AGCO's multi-channel distribution approach will drive increased adoption of Trimble's portfolio of technology across the machinery population, allowing farmers more locations to access next-generation technology. This multi-channel access is a key lever to doubling the EBITDA in five years. Looking at slide 8, the business combination will create meaningful commercial growth opportunities for AGCO through access to expanded geographies and channels. Through September, AGCO's precision ag sales have increased 16% on a year-to-date basis, putting us solidly on track to hit our long-term 15% growth target and taking AGCO's precision ag sales to $1 billion by 2025. When we overlay Trimble Ag's 2023 expected revenues, the effective pro forma sales would be approximately $1.3 billion already in 2023. With the combination of revenues from AGCO's Precision Ag and Trimble Ag JV, we expect to deliver over $2 billion in combined Precision Ag revenues by 2028. To conclude, we would likely expect this deal to close in the first half of 2024, subject to regulatory approval and customary closing conditions.

Thank you, Eric, and good morning everyone. I will start on Slide 9 with an overview of regional net sales performance for the third quarter. Net sales were up approximately 7% in the quarter compared to the third quarter of 2022 when excluding the positive effects of currency translation. Pricing in the quarter, which was in the high single-digit range, was the primary contributor to higher sales. As you may recall, the third quarter of 2022 was a very strong quarter, partially due to a catch-up in sales related to the cyber event in the second quarter, which had a bigger impact on our European and North American operations. By region, the Europe/Middle East segment reported an increase in third quarter net sales of approximately 9%, excluding the positive effects of currency translation compared to the prior year. The improvement was driven by increased sales of mid- and high horsepower tractors, strong part sales, along with favorable pricing. In South America, net sales in the third quarter grew approximately 19% year-over-year, excluding the positive effect of currency translation, driven by the continued strong sales growth in Brazil and Argentina. Higher sales of tractors and momentum planters as well as favorable pricing drove most of the increase. Net sales in North America increased approximately 3% in the quarter, excluding the favorable impact of currency translation compared to the third quarter of 2022. The growth resulted primarily from increased sales of high-horsepower tractors, sprayers and tools, along with the positive effects of pricing that more than offset inflationary cost pressures. On a constant currency basis, net sales in our Asia-Pacific/Africa segment decreased approximately 15%. The most significant declines occurred in Australia, Japan, and China, driven by lower farmer confidence and dry weather. Finally, consolidated replacement part sales were approximately $468 million for the third quarter, up 10% year-over-year or 5%, excluding the effects of positive currency translation. Turning to Slide 10. The third quarter adjusted operating margin improved by 190 basis points versus 2022. Margins in the quarter benefited from higher sales due to a richer mix and positive net pricing compared to the third quarter of 2022, significantly offsetting high input costs and approximately $35 million of increased engineering expense year-over-year. Price increases in the quarter more than offset material and freight cost inflation on a dollar basis and contributed to the improvement in margins. For the full year, we are still projecting approximately 8% pricing. By region, the Europe/Middle East segment reported an increase of approximately $57 million in operating income compared to the third quarter of 2022 and margins improved 230 basis points. Higher sales due to strong net pricing and a healthy product mix contributed to the improvement. North American operating income for the quarter increased approximately $27 million year-over-year, while margin improved by approximately 250 basis points. Operating income benefited from higher sales due to positive net pricing and a favorable mix based on significant growth in Fendt products year-over-year. Operating margins in South America exceeded our expectations again this quarter and were over 20%, a 200 basis point increase over the same period in 2022. Operating income improved almost $42 million versus the third quarter last year. The improved South American results reflect the benefit of a favorable sales mix. Finally, in our Asia/Pacific/Africa segment, operating income declined approximately $14 million in the quarter due to lower sales, reflecting much weaker market conditions year-over-year as well as lower product mix. With the margin expansion in the last two years in our North American and South American regions from our strategy execution and disciplined pricing, we expect AGCO's margin profile to be more balanced across the globe in the years ahead. Slide 11 details our year-to-date free cash flow for 2022 and 2023. As a reminder, free cash flow represents cash used in or provided by operating activities less purchases of property, plant and equipment, and free cash flow conversion is defined as free cash flow divided by adjusted net income. Through September year-to-date, we have used $155 million of cash, approximately $411 million or 73% less than 2022, despite increasing capital expenditures by almost $90 million year-over-year. This was a result of higher earnings and improved supply chain that enabled us to improve our manufacturing flow and get products into the hands of our farmers more quickly. We typically sell down our inventory over the back half of the year and anticipate a strong fourth quarter to hit our targeted free cash flow range of $900 million to $1.2 billion for 2023. For 2023, although things continue to improve, we still expect our raw material and work-in-process inventory to remain somewhat elevated, given supply chain challenges earlier in the year, but we still expect it to be a modest source of cash versus a use in 2022. We expect our free cash flow conversion to continue to range from 75% to 100% of adjusted net income, a significant increase from 2022, consistent with our improved financial outlook. We remain focused on direct returns to investors during 2023 with a regular quarterly dividend that we increased last quarter by 21% to $0.29 per share and the payment of a special variable dividend of $5 per share in the second quarter. Slide 12 highlights our 2023 retail market forecast for our three major regions. While still at supportive levels, the recent reductions in commodity prices are resulting in slightly softer demand across all regions in 2023 relative to 2022. For North America, we now expect demand to be 2% to 3% lower compared to the healthy levels in 2022. The high-horsepower row crop equipment segment continues to be strong, but it's offset by softer demand for smaller equipment after several years of robust growth. Current interest rates are expected to continue to slow the smaller equipment segment of the market. In South America, we expect industry sales to now be down 2% to 3% in 2023. This is a result of softening demand and higher dealer inventories we have seen emerge last quarter. However, this region remains one of the stronger end markets, especially in Brazil, where the farm footprint is increasing. Although down from 2022 highs, we expect healthy farmer profitability in the region, which should continue to drive demand for large ag equipment. For Western Europe, we now expect the industry to also be down 2% to 3% compared to 2022. Farm fundamentals in the region are still generally healthy, but sentiment has weakened a bit in the region and order flow has slowed. Slide 13 highlights a few assumptions underlying our 2023 outlook. In addition to focus 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 sales plan includes market share gains, along with price increases of approximately 8% aimed at more than offsetting material cost inflation. With the weakening of the euro last quarter, we do not expect currency translation to have effect on sales year-over-year. Engineering expenses are expected to increase by approximately 20% or approximately $100 million compared to 2022. This increase is targeted at investment in smart farming and Precision Ag products. Given our strong performance through September, we are raising our full year operating margin to around 12% versus our prior outlook of 11.7%, driven by the sales mix, table of pricing net of material cost and improved factory productivity, partially offset by increased investments in our engineering and digital initiatives as well as inflationary cost pressures. Other expenses are expected to increase approximately $105 million year-over-year, most of which has been incurred year-to-date. Half of this increase is tied to the sales and receivables to AGCO Finance where we're being affected by higher sales volume and higher interest rates compared to 2022. The other half is related to increased volatility in the Turkish lira and Argentine peso where we saw additional FX losses in Q3. With more clarity on our full year, we are now updating our effective tax rate to 27% for 2023, which is the low end of our prior estimate of 27% to 28%. Turning to slide 14. Despite the slightly weaker currency outlook versus last quarter, we have maintained our full year net sales outlook of approximately $14.7 billion. We are increasing our earnings per share estimate, which should now be approximately $15.08 or on an adjusted basis, $15.75 in 2023 versus our prior target of $15.25, given the strong year-to-date performance and our confidence in the fourth quarter. We've also increased our CapEx targets to around $450 million to include additional investments in our CBT capacity and to further enable Precision Ag growth. As I mentioned earlier, even with the increased capital expenditure target, free cash flow conversion should be in the range of 75% to 100% of adjusted net income, consistent with our long-term target, which based on our improved outlook, should deliver an additional $60 million to $80 million in free cash flow from our prior outlook. With that, I'll turn the call back to Greg for our Q&A.

We will now begin the question-and-answer session. Our first question is from Seth Weber with Wells Fargo Securities. Please go ahead.

Hey. Thanks. Good morning, guys. Eric, in your prepared remarks, you talked about a potential risk or trying to navigate around the loss of a potential OEM customer from the Trimble JV. I'm wondering if you could just give us a little bit more detail on how you expect to offset that loss that's slightly coming on that side of the JV. Thanks.

Yes. We've got a really solid plan here that is largely in our control in that today, AGCO offers two suppliers or two choices on our navigation systems. One is Trimble and one is another supplier. A majority of the customer sales actually go to the other supplier. And so as we migrate into once the JV is official and we migrate into that chapter of existence we are working together, we can influence sales to move significantly towards a predominantly Trimble offering out of the factory on our new products. And then also, we can continue in the marketplace to help those that have bought Trimble systems in the past, regardless of brand, to continue to have confidence. There's over 100 OEMs that are already partnered with Trimble. We've talked to many of them already, and the feedback has been consistently strong that they said that under the new arrangement, they still feel very comfortable and want to continue to grow the business. And then there's the retrofit business, a retrofit portion of the market that we intend to focus on as well. So, retrofit OEM from the factory, working on all three of those paths, to make sure that plenty of customers can get access to this great technology.

That's helpful. Thanks. And then maybe just appreciate the color on the order boards for next year. Can you just give us any details on how you're handling pricing for 2024 at this point?

Yes. I think, Seth, we haven't given any sort of official outlook for our 2024 pricing yet. But I think if you think about our outlook here for the 2023 performance where we said we're around 8% and you look at our year-to-date, we're starting to lap some of those big price increases that we put in place last year. And so we see pricing becoming what I'll call more normalized here in the fourth quarter. And again, we're probably seeing that to be a more reasonable assumption as we move into 2024.

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

Yes. Thanks. Good morning, guys.

Good morning.

Can you maybe talk a little bit about what you're seeing in South America with respect to recovery in retail sales, your inventory levels? And also, any thoughts on margins for 4Q, given the very extreme strength that persisted again in 3Q?

Yes, Nicole. If we look at the fourth quarter, we've definitely noticed that at the beginning of the third quarter, the government-subsidized funding plans experienced some delays for small and medium-sized farmers. However, we observed an improvement in the latter half of the quarter. That said, we're continuing to see a slowdown in that market, particularly on the lower end. Dealer inventories have transitioned to what I would consider more normalized levels by the end of the third quarter, and we expect this to continue into the fourth quarter. As we've mentioned in previous quarters, as dealer inventories stabilize and farmers gain confidence in their ability to access products, we anticipate seeing more traditional retail incentives emerging for our dealers and farmers in the fourth quarter. In the third quarter, we began to see this trend toward the end of the quarter. Looking ahead to the fourth quarter, we expect to see South American margins decline, projecting them more into the high teens compared to the third quarter. This outlook is reflected in our Q4 guidance, which includes a 12% full-year estimate compared to our year-to-date performance.

Okay. Got it. That's really helpful. And then just a higher-level question on the implied outlook for 4Q. I think you guys are embedding like EPS kind of flattish sequentially, but you usually see a pretty material Q-on-Q step-up. So what are the big drivers of that divergence from normal seasonality? Thank you.

Yes, there are a few factors affecting the fourth quarter. First, when comparing the currency outlook from this quarter to the previous quarter, we previously anticipated a 2% increase, but now we expect it to be relatively stable, which impacts sales by about $200 million. Despite this, we have maintained our forecast at $14.7 billion due to our solid performance in Q3 and our outlook for Q4, which translates to approximately $0.20 of earnings per share. Our expected outlook of $15.75 has been affected by about $0.20 in lost foreign exchange compared to our third-quarter forecast. Looking at year-over-year performance for Q4, last year was exceptionally strong as we were rebounding from a cyberattack in the second quarter and dealing with supply chain issues. In Europe, we had a robust fourth quarter attributed to the supply chain. It's worth noting that semi-finished inventories at the end of the third quarter last year were much higher; this year, they are down nearly 70% due to improvements in the supply chain, allowing us to deliver tractors and combines more efficiently throughout the year. Consequently, we do not expect to see the same strong fourth quarter this year, particularly in Europe, which will present challenges in year-over-year comparisons, leading to lower numbers than last year.

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

Thank you and good morning. Hopefully, I understood this correctly, but I mean, what I heard from your comments is that inventories, dealer inventories have largely normalized at this point, and it sounds that demand maybe is starting to soften a little bit. So, I'm kind of curious as to how you're thinking about managing the channel as you look into 2024. Are you thinking a downward adjustment in production? And if that's the case, is there some context that we should have about the first half versus second half as we think about next year?

Yes. So I think, Mig, you're right. The inventory levels at the dealers, generally speaking, have normalized over the last quarter, I would say, with a couple of caveats to that. North America, for example, we do know that the dealer inventory is just around six months or so. The third quarter is usually the highest level. If I strip out the low – the small ag portion of that, the dealer inventory is actually around about five months. So it's still a little bit low so there's still some opportunity there. If I look at Europe and Eric, in his opening remarks, talked about the inventory levels being at about four months, again, that's an overall statement, but there are still a lot of areas where the Fendt high-horsepower tractor inventory at the dealers are below the optimal level for us. So we still see some opportunities for some dealer fill there. But generally speaking, I would say inventory levels are normal. As we think about 2024, as we go through our budget planning process, the question is going to be about our market share initiatives and what we think we can gain relative to where we were in 2023, given some of the supply chain constraints. And that's going to influence our production, especially as we see these markets potentially continue to soften. So we don't know how the production is going to shape out just yet. We'll give you that update. But I would tell you, you should be thinking more about production aligned with overall demand as we think about 2024.

All right. That's helpful. And I guess my follow-up, your North America margins, as you talked about already have been quite good. I'm, sort of, wondering about the sustainability of that going forward, especially as you talk about Fendt continuing to build momentum? Thank you.

Yes. Again, I think, Mig, for us, North America has been a really good margin performance for us, and a lot of that is predicated on that Fendt's market share expansion. We've talked about introducing Fendt to North America and South America. Adding these Fendt dealers and really focusing on that Fendt experience, we've talked about being very selective on how fast we roll Fendt out into the dealer networks who is able to offer it because they need to deliver on that overall Fendt experience, which includes the Gold Star warranty, the replacement tractors. So we've seen great growth, great share growth in North America. And again, if I think about that performance year-over-year, a lot of that or the majority of that is coming from the Fendt market share growth that we're seeing or the Fendt performance in North America. And as we've said in the past, we still see opportunities. Remember at our December Investor Day, we said that we are going to outpace the industry regardless of where we were in the cycle by 4% to 5%. One of those three growth factors were going to be the Fendt market share, mainly in North America and South America. We remain convinced that that is still an opportunity as we move forward into 2024 Precision Ag growth, which we've said is going to grow at around 15% per annum on average and then our parts growth. So those three are going to help us outpace the industry by 4% to 5%. And I think North America is showing that this quarter, and we remain confident in its potential going into next year.

Yes. Just one more comment on that. We've grown the Fendt market participation in North America from about 40% market coverage to 70%, 75% market coverage with a step-by-step dealer expansion that Damon talked about. We expect to grow that from 75% up to 90%, 95% over the next couple of years, steadily only when the dealer earns it but much like we've been doing over the last few years. So there's more market potential there to be able to experience the full Fendt overall brand promise. Same thing in South America.

Good morning, everybody. Eric, I think you talked about farmers becoming more selective in their capital spending. What does that mean exactly? Are you seeing sort of a mix shift in the types of equipment that they're buying?

I wouldn't say it's a mix shift. Instead, I would mention that some new applications for financing are showing signs of cooling down, indicating a return to a more normal market after the heated conditions of the past few years. However, the focus remains on large agriculture. Growth is particularly strong in the Precision Agriculture retrofit sector, which enhances the capabilities and intelligence of existing machines. Smaller agriculture, on the other hand, is comparatively weaker than larger agriculture. Therefore, I don't see it as a significant mix shift, just a general increase in caution among farmers.

Okay. Thanks. And then it sounds like everywhere we turn, people are talking about normalization. But does it make sense to think about 2024 just really big picture terms as kind of mid-cycle year for the industry, and you guys may do what you do if you have outgrowth targets, but is mid-cycle the right way to think about 2024 for now?

Yes, we're not giving exact numbers, but I think that we don't see any dramatic moves in 2024, let's say it that way. And so it's a general slight movement into 2024, but we haven't committed to any industry numbers. But wouldn't be shocked with your kind of prediction.

Hi. Thank you for taking the question. I'm also going to ask a normalization type of question. And in particular, on the pricing front, as we think about pricing normalizing, can we just double-click on what pricing normalization for AGCO means today? So arguably, you've got a much richer technology mix, a much higher contribution from Fendt. Just how do we think about what norm pricing means on a go-forward basis?

Yes. I think, Kristen, directionally, when we think about pricing, I would sort of tell you, it's 2% to 3% has been the historical. Again, when you think about the pricing and you referenced Fendt, Fendt is driving more of the margin enhancement. Again, if we're raising prices on a Fendt tractor, it may not be different than what we do with a Massey or Ultra tractor when we think about that 2% to 3%. And to your point, when we think about the Precision Ag, the retrofit, that does operate at a slightly different price point. And so the pricing there may be slightly different. But in aggregate, you're probably looking at us being in that more 2% to 3% based on our historical rates.

Both your and Steve's questions addressed the normalization aspect. We believe it is effective on both sides. While pricing may not increase as much as in previous years, we anticipate significant opportunities for reductions in farmer and AGCO costs. Specifically, farmer costs related to fertilizer and other inputs, along with interest rates, seem to be near their peak, suggesting they could decrease further. Similarly, for AGCO, we have faced inefficiencies in both our factories and those of our suppliers over the past couple of years, which we have not fully addressed yet. Although we have seen improved performance this year, with plant shortages down 54% year-to-date, there are still costs we plan to eliminate in 2024. This represents the other aspect of the normalization discussion.

Appreciate those puts and takes for next year and beyond. But so then my follow-up question is related to the Trimble JV. You talked about the fill that needs to occur in order to replace the existing OEM relationship. But the $2 billion in Precision revenue implied by 2028, it's about a 15% CAGR off of a much higher base. Just help us dimensionalize the sources of growth in terms of technology solutions and how to think about the cadence to that $2 billion revenue. Thank you.

Yes, Kristen. I think for us, again, that 15% CAGR, I think what you're going to see here over the first couple of years is actually a decline in some of the OEM revenues coming out of the system, which we knew about as we were looking at the partnership with Trimble. As Eric alluded to in his comments, our plan is to replace that with our OEM fitment opportunities here and we expect to sort of recover that. But again, from an absolute level over the first couple of years, you won't see much growth there but see more of a transformation of the mix of that revenue. And then as we introduce new products, we start to leverage more of the combined channels, so again, bringing the Trimble type products into Precision Planting, some of our OEM channels, looking at accessing advantage channel with Precision Planting, we see significant revenue growth coming there, plus some of the new product introductions that they have in the pipeline that we're excited to bring to all of those different channels. And those are the two sort of the primary drivers that will help drive that growth over the next several years.

Hi, thanks. Good morning, everyone. I would like to follow up on the Trimble discussion regarding the $170 million in pro forma EBITDA. There is a significant portion related to CNH and CNH dealer EBITDA. Can you provide specific numbers on what that $170 million looks like for 2024, considering the various dynamics? Assuming the market remains flat, we might experience some loss in sales and EBITDA, but also some gains. How would that $170 million be affected on a full-year basis, taking these factors into account?

Yes. I think, Larry, it'd probably be a little premature for us, given that we're still in the midst of closing the transaction right now. I think we're going to defer any comments on 2024 on the JV portion of 2024 until we actually get to closing. Again, what I would tell you, as Eric has alluded to, once we're able to, we're going to start to work with the team there in shifting the receivers and our base offering to Trimble. But we have to work through the process here to ultimately close the transaction. But once we're able to, we'll give you guys more clarity on how we envision and what we see for the joint venture for 2024.

Thank you. I wanted to switch topics. You mentioned that the tractors, planters, and application equipment in North America are sold out for the 2024 model year. Can you provide some context on that? What percentage of North America does that cover? Are these sold-out levels higher than those in 2023? What does this indicate for North America?

Yes. I think that's directionally speaking, it's about 20% of the North American revenue. And it's, I'd say, relatively flat volumes year-over-year in those particular products.

Since supply chain has improved, Larry, it probably means we'll produce a small amount more than we did the year before but relatively similar.

Hi, good morning. Thank you so much. So most of my questions have been asked, so just two quick ones. The first one is on fleet age, I think you mentioned it's trending younger. Is it for both tractors and combines that you feel like it's trending younger? And any quantification like what is the age now versus, let's say, two, three years ago?

Yes. So Tami, I would say, yes, both categories, tractors and combines. And we've moved down probably from the beginning of the year to where we are at the end of the third quarter to somewhere between half a year and one year closer to normal. So I think we were probably a full year ahead of a 10 or 15-year average, 7.5 years versus this more normal 6.5. We're probably about halfway back to that 6.5, so probably closer to seven in terms of age of the fleet.

Got it. That's helpful. And then I think getting – going into the third quarter, you were expecting flattish production hours but it seems like it was down 2%. What drove that disconnect? And also related to that, in the fourth quarter now, it seems like you expect production hours up a little bit year-over-year. Again, which regions are driving this up expectations?

Right. Tami, most of that change in fluctuation related to what happened with the financing program in Brazil, so that program ran out of money, as we've talked about. As the loans began to be processed again, that led to us cutting production in the third quarter in Brazil, and then as those loans now are being processed, some of that production got shifted into the fourth quarter. So net-net, most of that change related to South America.

And just one other thing to think about when you're thinking about the age of the fleet, the other indicator to watch is used inventories. And so for example, in North America, the tractor is 175 horsepower to 300 horsepower, which is right in the middle of the bell curve, we've got like 300 units in the industry now versus 6,500 units pre-COVID. So inventory is still low, maintaining good, strong price of used inventory, that's a good health barometer for the industry.

Yes, hi. Good morning, everyone.

Hi, Jerry.

I'm wondering, if we could just expand the discussion on the Trimble JV integration. So one of the compelling points about the acquisition is just how quickly you can transition the receivers and drive that additional upside for the joint venture. So as we think about the mix of receivers that are going to be Trimble JV over the course of fourth quarter, first quarter, can you give us a sense? Is it possible for us to be at a healthier run rate from a mix standpoint exiting the first half of the year than what the run rate of the joint venture is now? Or are we really waiting until we close to pull that lever, Eric, that you spoke about earlier in the conversation today?

There are two factors to consider. The first is whether there is any technical design work needed, and the second is the size of the order bank. On the positive side, there is no technical redesign required for the switch since we already offer the Trimble receiver in our products. We provide two versions, and the other brand serves as the base offering. We will switch to Trimble and direct the customers towards it. Thus, there is no technical work involved, but we do have an order bank to address. Whatever has been ordered in recent months will remain, and we need to process that. We anticipate the deal will close in the first half of 2024, assuming regulatory approval proceeds as expected. This timeline aligns with the size of our order bank, so we are organizing our approach to ensure a strong start for the new joint venture with significantly improved Trimble rates.

That's great. And can I ask on an unrelated question in Brazil. The industry year-to-date retail for 180-plus horsepower tractors down 8%. Your shipments are up over 20%. Is that how much share you're gaining? Or can you just flesh that out a little bit in terms of your market position now? And can you touch on where do you expect the margin rate to be in that region relative to your other regions on your normalized framework, considering the 20% that you're running at now?

Yes, Jerry. Some of the increase in our sales was due to shipments to our dealers, and we've mentioned that our dealer inventories are normalizing. So, part of it is related to restocking. However, you're correct, especially regarding the higher horsepower categories for tractors, sprayers, and planters. Additionally, the Fendt brand has performed very well in Brazil since its launch, and we have ambitious growth targets. In fact, we are currently ahead of those targets. So, while a portion of the market share gain is attributed to this, there is also some restocking occurring in our channel there.

And Jerry, in regard to your margin question, again, South America has done exceptionally well, and again, you followed us long enough. We were in a money-losing position there years ago. We've taken that business as part of the strategy, mixing up to generate these 20%-plus margins. Again, a little bit of that is ahead of themselves because they've been very good in pricing and ahead of material cost and we have been giving those dealer incentives. As I said, in the fourth quarter, we expect that to come down more into, I would guesstimate, 17%, 18% margin range. I think over the long-term, I'll say, in a more normalized environment, we would expect the margins in South America to be more in that mid-teens sort of range over the longer-term when we get into what I'll call more of a normal run rate. But the balance of this year, we still expect it to be above that year as we enter the fourth quarter.

Hi. Good morning guys.

Good morning, Chad.

So a couple of questions for you. First on pricing. So if I look at your year-to-date price and your 8% guide, it looks like 4Q implied is flat so I just want to confirm that. Second, just would like to get some early color on 2024 farmer profits for the US and Europe? And then finally, I just wanted to get a better sense of where you are versus mid-cycle exiting 2023 on a volumetric basis.

Yes, sure. So for Q4 pricing, Chad, I think directionally, you're in the ballpark. Flat to mid to low single digits is sort of the range that we would expect to see in the fourth quarter. I'll let Greg handle the '24 probability. But as I think about where we are mid-cycle, I'd say we've seen, as the markets have weakened here in the back half of the year, directionally, I would expect that as a total company, we would be exiting the year at around 105% of mid-cycle would sort of be our current estimate. And we started the year a little bit stronger than that. But given the weakness we saw in Asia-Pacific, some of the weakness we're seeing, especially in the low horsepower South America, probably about 105% as we finish the year. And I'll let Greg touch on the 2024 farmer profit outlook.

Right. So we've talked a good bit in our prepared remarks about commodity prices coming down, but still remaining at attractive levels kind of well above, if you look at 10-year averages and stuff. That being said, we've also seen input costs come back, diesel, fertilizer, some of the other input costs. So the outlook kind of at a high level would be to see a modest decrease in 2024 in terms of farm income, but certainly still in a very supportive range as we think about farmers' ability to continue to refresh their fleet and invest in new technology.

Very good. Thank you very much. I'll close today by saying thank you very much for your participation and your support of AGCO. We're really proud of our performance throughout 2023. It is a great third quarter in many ways and is setting us up for a trajectory to deliver even another record year big time. Just to give you some examples, our smart planters, we're expecting those to be up 20% from 2023 versus 2022. IDEAL combines forecast those sales will be up 65% versus 2022 and 118% versus 2021. And sprayers, our smart nozzles be up 75% versus 2022. Those are all just the indicators of the value we're generating for farmers through smarter and smarter machines that add not only more productivity but more sustainability to their operations. Our key success overall is the continued execution of our Farmer First strategy. Our focus is on growing our margin-rich businesses like Fendt, parts and service, and our Precision Ag business that we mentioned several times. We've invested heavily in all of these, and we continue to do that. The announcement of the AGCO-Trimble joint venture in this past quarter represents the biggest ag tech deal in history and will enable AGCO to further develop farmer-focused solutions that are solving critical problems, many of them with very short paybacks. The large ag markets continue to be higher than historical averages globally, and farm fundamentals are supporting farmers' investments. Over the last few quarters, we've touched on many factors supporting our markets, including growing populations, changing diets, low stock-to-use levels, increased demand for biofuels and relatively healthy commodity prices. All of these trends give us confidence in the long-term health of our industry. In fact, when you take a look at just renewable diesel, we're seeing that in the US by 2028 renewable diesel demand will grow to about 40% of the current US soybean makers. That's very similar to what's happened with ethanol consumption of the corn acres. So, there's a big demand growth driver right on the horizon here. We look forward to seeing many of you at our AGCO Technical Meeting on November 14th in Hanover. Thank you very much for your participation today and have a great day.

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