Agco Corp /De Q1 FY2024 Earnings Call

Good day, and welcome to AGCO First Quarter 2024 Earnings Call. Please note that 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. Mr. Peterson, your line is unmuted. Please go ahead.

Thanks, Jigar, and good morning. Welcome to those of you joining us for AGCO's First Quarter 2024 Earnings Call. We will refer to a slide presentation this morning that's posted on our website at www.agcocorp.com. The non-GAAP measures used in the slide presentation are reconciled to GAAP 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 their financial impacts. We'll discuss demand, product development and capital expenditure plans and timing of those plans and our expectations concerning the costs and benefits of those plans and timing of those benefits. It will also cover 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, 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, putting premium technology and smart farming solutions within budget and with the expected performance and price benefits. Also includes difficulties in integrating the PTx Trimble business in a manner that produces the expected financial results, the reactions by customers and competitors to the transaction, including the rate at which PTx Trimble's largest OEM customer reduces purchases of PTx Trimble equipment and the rate of replacement by the joint venture of those sales. And it also includes the introduction of new or improved products by our competitors and reductions in pricing buyback, 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 included in AGCO's filings with the Securities and Exchange Commission, including our Form 10-K for the year ended December 31, 2023, and subsequent Form 10-Q filings. AGCO disclaims any obligation to update any forward-looking statements, except as required by law. We'll make a replay of this call available later today on our corporate website. On the call with me this morning are Eric Hansotia, our Chairman, President and Chief Executive Officer; as well as Damon Audia, our Senior Vice President and Chief Financial Officer. With that, Eric, please go ahead.

Thanks, Greg, and good morning. Before I get into the details of the quarter, I want to take a moment to express my confidence in the team and our strategy. Despite weaker industry conditions, our focus on three growth drivers as well as integrating PTx Trimble and staying agile by adjusting production and our cost structure all continue to position 2024 to have the second highest level of full year adjusted operating margin in the history of the company. With that, let's look at AGCO's first quarter results. First quarter 2024 net sales came in at $2.9 billion, which was down approximately 12% from last year due to softening global end market demand for agricultural equipment. Consolidated operating margin was 9.3% of net sales on a reported basis and 9.6% on an adjusted basis. We focused on reducing production more than the industry decline and further tightened our cost controls in the quarter to align with slowing end markets. Lower sales and operating leverage were a factor in our reduced margins. Stability in the European region helped partially offset sales and operating margin declines in all other regions. Despite the industry being down in Europe, sales were flat compared to the first quarter of 2023, yet operating margins had an all-time first quarter high of 16.4%, an impressive 230 basis points better than the first quarter of last year. Margins in South America remained pressured as the industry weakened even further than expected. We saw operating margins of approximately 5.3% in the first quarter of 2024 compared to nearly 20% in the first quarter of 2023. Market demand remained weak in Brazil, and we also underproduced retail demand there, which helped lower our dealer inventories in the region. More challenging global market conditions are expected to continue in 2024 due to reduced commodity prices and lower farm income expectations. As a result, AGCO is forecasting lower sales in 2024. To mitigate these challenges, we will remain focused on manufacturing cost reduction opportunities, driving increased SG&A expense efficiencies and lowering company and dealer inventory. In addition, AGCO's growing precision ag business, full-line Fendt-branded products and our parts business are expected to help us dampen the agriculture cycle. To better serve farmers, we will continue our investments in premium technology, smart farming solutions and enhanced digital capabilities to support our farmer-first strategy while helping to sustainably feed the world. Slide 4 details industry unit retail sales by region for the first quarter of 2024. Global industry retail sales of farm equipment in the first quarter were lower in all of AGCO's key markets. North America full industry retail sales decreased 9% during the first three months of 2024 compared to the first three months of 2023. Sales declines in smaller equipment were more significant than most of the larger equipment categories. Lower projected farm income and a refreshed fleet are expected to pressure industry demand in 2024, resulting in weaker North America industry sales compared to 2023. In Western Europe, industry retail tractor sales decreased 8% during the first three months of 2024 compared to the same period of 2023. Farmer sentiment in the region has continued to be negatively impacted by the conflict in Ukraine and input cost inflation. Industry demand is expected to soften in 2024 as lower income levels pressure demand from arable farmers, while healthy demand from dairy and livestock producers is expected to mitigate some of this decline. South American industry tractor retail sales decreased 18% during the first three months of 2024 compared to a very strong demand in the first three months of 2023. Brazil and the smaller South American markets showed the most weakness, while declines in Argentina were moderate after weak industry sales in 2023. Following three strong years, retail demand in South America is expected to further soften in 2024 as a result of lower commodity prices and farm income. Similar to tractors, the combine industry was down significantly in all regions in the first quarter of 2024. Although market conditions continue to soften from the extremely strong conditions over the last few years, we remain positive about the underlying agricultural fundamentals supporting the long-term industry demand. Stocks at these levels are higher than recent lows, but they remain supportive of profitable commodity prices versus historical levels. As the demand for clean energy grows, the need for solutions like sustainable aviation fuel and vegetable oil-based diesel will grow strongly, driving the demand for our farmers that will further support commodity prices. Also, input costs such as fuel and fertilizer are down from their peaks in 2022. We expect farm income to be down in 2024 relative to 2023, closer to the long-term averages but still supportive of industry demand. AGCO's 2024 factory production hours are shown on Slide 5. Our production decreased in the first quarter by approximately 16%, slightly more than expected versus the same period in 2023. Reductions were taken in all regions with the biggest reductions in South America and North America. We are aggressively managing our company and dealer inventory to match the softening retail demand. As I mentioned earlier, we made progress in destocking the dealer channel in the first quarter in all regions but still have work to do. We expect further production cuts during 2024 with all regions aligning to retail demand by quarter four. Currently, we're expecting 12% to 15% lower production in 2024 versus 2023 on a full year basis. This reduction reflects our 2024 market forecasts, market share growth assumptions and targeted reductions to dealer inventory. Relative to historical demand patterns, orders for our products remain solid. In Europe, tractors had five months of order coverage. That's a healthy level compared to the two to three months we are accustomed to pre-COVID. Dealer inventories of approximately four months of supply are in line with our targeted levels with certain products like Fendt high horsepower tractors still below the optimal levels in certain areas as we continue to grow share in the region. In South America, we have order coverage through June of 2024 where we continue to limit our orders to one quarter in advance due to inflationary pressures. We now have four months of dealer inventory across all products, while our target level is around three months. We cut production by more than 30% in the region in both quarter four 2023 and quarter one 2024. Our goal is to be between three and four months by year-end. In North America, we currently have between four and five months of order coverage, while our dealer inventory is just over six months of supply. Our North America target for dealer inventory ranges from four to six months depending on the product. We continue to focus on underproducing retail demand coupled with retail market share execution to bring dealer inventories down to our targeted range by year-end. Moving to Slide 6, where you'll see our three high-margin growth levers aimed at improving our mid-cycle operating margins to 12% and outgrowing the industry by 4% to 5% annually. To reiterate, these three growth levers are the globalization and full-line product rollout of our Fendt brand, focusing on accelerating our global parts business and increasing the market share of genuine AGCO parts and growing our precision ag business, which supports not only factory-fit technology but also significantly focuses on mixed fleet retrofit solutions for farmers and OEMs. You will notice new logos on this slide, which represent the precision ag portfolio of our newest leading brand, PTx as well as PTx Trimble. I wanted to take a moment to elaborate on the combination of our multiple brands and how we have unified them under PTx. Slide 7 shows the new PTx branding and how the name PTx is rooted in our heritage. This PTx portfolio will provide seamlessly compatible, powerful, simple precision ag solutions. Part of that portfolio is PTx Trimble, which we formed with the closure of our transformative joint venture with Trimble on April 1. We are tremendously excited to have Trimble ag technology offerings as part of our AGCO family. This deal significantly enhances AGCO's technology stack with disruptive technologies that cover every aspect of the crop cycle, which ultimately helps us better serve farmers no matter what brand they use. PTx will serve farmers around the world through three go-to-market approaches. Specialized precision ag dealers will help farmers retrofit almost any make or vintage of equipment they already own with the latest technologies. PTx will also expand its relationships with more than 100 OEM partners that can integrate products from the PTx portfolio directly at the factory. Similarly, new machines from AGCO's leading brands, Fendt, Massey Ferguson and Valtra, will also offer factory-fit technology from the PTx portfolio. The JV will be positioned to drive outsized growth and better provide next-generation technologies to even more farmers around the world. In addition to presenting a unified offering to the market, we are also evolving the visual identity of Precision Planting as part of the new PTx brand portfolio. Taken all together, the P represents precision agriculture. The T represents advanced technologies. And the X represents the fact that we're multiplying and increasing the impact we create by bringing our technologies and solutions together in seamless, intelligent and farmer-centric ways. On Slide 8, you can see how we plan to build equity in PTx, simplify our offerings to farmers and present a streamlined portfolio. We will consolidate AGCO's precision ag brands to create the critical mass needed for a market-leading precision ag brand. Together, these teams represent the best precision ag tech talent in the industry. We will form one cohesive team who will collaborate on product development, go-to-market channels and how to best serve both farmers and OEMs. We will innovate, solve problems, complement each other's strengths and grow together, bringing mixed fleet precision ag solutions to the market faster than anyone else. PTx Trimble includes JCA Technologies, Trimble Agriculture, Bilberry and Muller Elektronik. Precision Planting will bring Headsight and IntelligentAg under its brand. Slide 9 summarizes our Precision Ag business. As we highlighted before, we are focused on expanding our addressable market from just traditional agriculture machinery spend, which stays in the low to mid-teens as a percentage of total farmer spend. With our precision ag portfolio, our sights are set to impact around 70% or effectively all nonland areas. We believe that the investment in precision ag positions both AGCO and our customers well as it will play a major role in achieving our global sustainability targets currently being established, while simultaneously helping our farmers improve their profitability. Now that we have closed on the joint venture to form PTx Trimble, we remain committed to our goal of achieving $2 billion in annual precision ag sales by 2028. With that, I'll hand it over to Damon.

Thank you, Eric. Slide 10 provides an overview of the regional net sales performance for the first quarter. Net sales were down approximately 13% in the quarter compared to the first quarter of 2023 when excluding the positive effect of currency translation. Pricing in the quarter, which was around 1%, contributed to higher sales. By region, the Europe/Middle East segment reported flat sales in the first quarter of 2024 compared to the same period of 2023, excluding the impact of favorable currency translation. Growth in Germany and France was offset by lower sales across nearly all other European markets. Positive pricing and increased sales of high horsepower tractors, especially Fendt products, was offset by declines in other products. South American net sales decreased approximately 42% in the first three months of 2024 compared to the same period of 2023, excluding the impact of favorable currency translation. Significantly softer industry sales drove lower sales of tractors and combines, which accounted for most of the decline. The substantial sales decrease in Brazil was slightly offset by modestly higher sales in Argentina. Net sales in the North American region decreased approximately 21% in the first quarter of 2024 compared to the same period of 2023, excluding the impact of favorable currency translation. Softer industry sales were partially offset by positive pricing. The most significant sales declines occurred in the hay equipment, midrange tractors as well as combines. Net sales in Asia Pacific/Africa decreased 16%, excluding negative currency translation impacts in the first three months of 2024 compared to the same period of 2023 due to weaker end market demand. Lower sales in China and Australia drove most of the decline. Finally, consolidated replacement part sales were approximately $434 million for the first quarter, down approximately 5% year-over-year or 6% excluding the effect of positive currency translation. Turning to Slide 11. The first quarter adjusted operating margin declined by 210 basis points versus a strong first quarter of 2023. Margins in the quarter were mainly affected by the significant decline in production, reflective of the weak industry conditions, higher discounts and higher SG&A and increased engineering expenses. These items were partially offset by positive net pricing. By region, the Europe/Middle East segment income from operations increased $43.5 million, and operating margins improved by 230 basis points in the first three months of 2024. The improvement was driven by positive net pricing and mix, partially offset by higher SG&A expenses and engineering expenses. North American income from operations for the first three months of 2024 decreased $59.7 million compared to the same period in 2023, and operating margins were 5.8%. The decrease resulted from lower sales and production as well as increased SG&A and engineering expenses. Operating margins in South America in the first three months of 2024 decreased by approximately $83 million compared to the same period in 2023. This decrease was primarily a result of lower sales and significantly lower production volumes as well as negative pricing. The quarter was positively affected by the reversal of a dealer termination accrual, which improved margins by approximately 4% this quarter. Finally, in our Asia Pacific/Africa segment, income from operations decreased by $10 million in the first three months of 2024 compared to the same period in 2023 due to lower sales volume. Slide 12 details our year-to-date free cash flow for 2023 and 2024. As a reminder, free cash flow represents cash used in or provided by operating activities less purchases of property, plant and equipment. Free cash flow conversion is defined as free cash flow divided by adjusted net income. We used $465 million of cash in the first quarter of 2024, approximately $217 million or 32% less than the first quarter of 2023 primarily related to improved working capital and lower capital expenditures. For the full year, we anticipate our free cash flow to be in the upper half of our long-term target range of 75% to 100% of adjusted net income. We remain focused on direct returns to investors in 2024. In addition to the regular quarterly dividend of $0.29 per share, we also declared a special variable dividend of $2.50 per share in the second quarter. This is now the fourth consecutive year of us paying the special variable dividend. Even with the closing of the PTx Trimble joint venture, the special variable dividend is another sign of our confidence in how we have transformed our long-term profitability and remain focused on deploying capital in the most effective ways possible for our shareholders. Slide 13 highlights our 2024 retail market forecast for our three major regions. For North America, we continue to expect demand to be 10% lower compared to the levels in 2023. The high horsepower row crop equipment segment is expected to decrease after several years of strong growth that was fueled by high levels of farm income. The small tractor segment is also expected to decrease in 2024, although the rate of decline is slowing compared to the prior years. For Western Europe, we continue to expect the industry to be down 5% to 10% compared to 2023. Farm income is nearing the long-term average for the region due to reduced commodity prices and higher input costs. In South America, we are updating our guidance to reflect industry sales down approximately 20% in 2024 compared to our previous estimate of a 10% reduction. The industry for tractors greater than 340 horsepower, combines and planters have deteriorated even more than we had anticipated. Farmers are holding on to grain longer in the region, awaiting higher prices. Shortfalls in the subsidized financing programs are causing farmers to postpone purchases. Although this may affect demand in the short term, this region remains one of the most long-term attractive end markets, especially in Brazil, where the farm footprint is increasing. While farm income is expected to decline from elevated levels in 2023, we generally expect farmers to remain profitable in 2024. AGCO's brand-agnostic retrofit approach to precision ag and our strong parts business should help dampen the cycle, making our margins less volatile. On Slide 14, a highlight of a reconciliation of sales, adjusted operating margin and adjusted earnings per share from what we've communicated on our fourth quarter earnings call on February 6 to today. Starting from the left, our initial outlook reflected sales of $13.6 billion, adjusted operating margins of approximately 11% and adjusted earnings per share of around $13.15. The negative effect of currency translation and the weaker South American industry outlook assumption change, coupled with the modest reduction in our pricing outlook, reduced our sales outlook by approximately $400 million, which is partially offset by the inclusion of the PTx Trimble joint venture sales of approximately $300 million for the balance of the year. Our new sales outlook is down slightly to $13.5 billion. Our continued and heightened focus on taking cost out of the business is mitigating margin erosion from the lower operating leverage. We anticipate remaining at 11% adjusted operating margins before adjusting for the impact of the PTx Trimble joint venture. The strong margins in the high 20% range of the PTx Trimble business help us raise our full year adjusted operating margins now to 11.3%. Our new adjusted EPS guidance is approximately $12 on a consolidated basis. The reduction in EPS is a combination of multiple factors, including the effect of currency translation, industry assumption changes, a slightly lower pricing assumption, continued FX losses that affect other income and expense and an increased effective tax rate related to inflation and foreign currency in Argentina as well as the incremental interest expense on debt related to the acquisition of the PTx Trimble joint venture. This is partially offset by the consolidation of the earnings of PTx Trimble. The figures for PTx Trimble you see on this reconciliation reflect nine months of activity, and they exclude any sales related to other parts of AGCO. As we said at the announcement of the deal back in September and reiterated on April 1 of this year, we anticipate PTx Trimble to be accretive to AGCO's revenues, adjusted operating margin and adjusted earnings per share in the first full year post close. This will be achieved by paydown of debt combined with higher earnings from PTx Trimble as we transition to a new distribution model and realize synergies across the AGCO portfolio. Slide 15 highlights a few key assumptions underlying our 2024 outlook, which now includes the consolidated results of the PTx Trimble joint venture. At this time, we see markets continuing to weaken in 2024. Our sales plan includes market share gains, along with price increases reverting back to approximately 1%. As our raw material cost has stabilized and we pursue further cost savings actions, we expect this level of pricing will more than offset inflationary cost increases. We expect currency translation to now have a 1% adverse effect on sales year-over-year, primarily due to a weakening of the euro, which is modestly lower than our previous assumption. Engineering expenses are expected to be up approximately 3% in 2024 compared to 2023, including PTx Trimble. Excluding PTx Trimble, engineering expenses would have been down around 4% as we look to moderate some investment, given the softening industry outlook. With the expectations of our industry declining around 10% to 15% from our approximately 105% of mid-cycle in 2023 to around 90% to 95% in 2024, we expect our adjusted operating margins to come down from the record 12% in 2023 to around 11.3% in 2024, slightly above the value creation line due to the strong performance of our three growth drivers, increased cost control measures, and the inclusion of the high-margin PTx Trimble joint venture. We will provide updated long-term margin targets at our December 2024 Analyst Meeting to account for the performance of PTx Trimble. Our effective tax rate is now anticipated to be between 28% and 29% for 2024, which is 1.5 percentage points higher than our previous guidance. The reason for the increase is due to the impact of foreign exchange rates and inflation in the calculation of income tax in Argentina. Turning to Slide 16 for our 2024 outlook. Our full year net sales outlook for 2024 is $13.5 billion, down from the record levels seen in 2023. Our adjusted earnings per share forecast is approximately $12. We've also set a CapEx target of around $475 million, slightly lower than what we spent in 2023. Our free cash flow conversion should be at the upper end of our range of 75% to 100% of adjusted net income, consistent with our long-term target. With the continued underproduction relative to retail demand in the second quarter of 2024, we project sales in the $3.6 billion range, adjusted operating margins of about 11% and adjusted earnings per share of around $3. With that, I'll turn it back over to the operator for Q&A.

The first question is from Jamie Cook from Truist.

I have two questions. First, could you provide some insight on South America regarding the anticipated production cuts, the pricing, and how you view margins for the latter half of the year? Earlier, you mentioned expecting margins in the low double-digit range. Is that still a possibility? My second question is for Damon. I want to clarify that you expect Trimble to be accretive in the first full year after the close, which I assume means by the first quarter of 2025. Can you confirm that? Additionally, could you explain the pathway to that expectation, considering it's projected to be $0.13 dilutive for the year? Is it primarily due to debt paydown? Any further details on how accretive it will be by the end of the year, especially in light of the unfavorable farming trends, would be appreciated.

Yes. So Jamie, I'll start with the Trimble question, and I'll revert back to the South American question. So fully accretive in all of 2025. So not the four quarters. But if we look at all of 2025, that is what we're planning on it being accretive. It’s really a combination of us being able to repay some of the debt that we took on here, given our strong free cash flow generation. But more importantly, as we really start to ramp up some of the synergies here in leveraging the precision ag channel that we have, our Precision Planting channel and also complementary products from Precision Planting moving into the Trimble, Vantage channels. So we see those two things really helping drive some growth next year and then paying down some debt. So again, accretive for the full year of 2025 versus the first four quarters. On South America, as you heard in Eric's opening comments, we did reduce our production again over 30% here in the first quarter. That's after a 30% reduction in the fourth quarter. I would expect to see continued production cuts more heavily weighted here in the second quarter. We did make some marginal improvement in the dealer inventory down there, but still not where we need to be. So I would expect to see further production cuts here again in the second quarter. And then hopefully, as we move into the back half of the year, those production cuts starting to become less and hopefully, as we get to the fourth quarter lapping. As we think about the margins in South America, and again, I'm going to give you margins that are inclusive of the PTx Trimble being rolled into these numbers just to stay consistent. But we do expect the margins really in the back half of the year to start to get back up into those mid-teens. Again, under the presumption that the markets continue to improve, the new FINAME financing comes out here in the back half of the year, which spurs growth in some of the farmer activity. So right now, we see the first half continue to be challenged, both for farmer demand as well as our production and the absorption but then hopefully improving in the back half.

Our next question is from the line of Kristen Owen from Oppenheimer.

Sort of an extension of Jamie's here, but maybe broadening that out to the other regions. Just given the production cuts that were both higher than expected and broad-based and now the updated outlook, I'm hoping you can walk us through your updated assumptions for just organic volume growth across the regions for the remainder of the year. So maybe if we strip out the Trimble results, what those organic expectations are.

Certainly. So, Kristen, if we focus on the organic performance, excluding Trimble, we anticipate the North American market will likely decline about 10% for the entire year, which is a slight improvement considering it was down 21% in the first quarter. We expect mid-single to upper-single-digit declines for the remainder of the year. In Europe, following a strong first quarter, we expect stability year-over-year, except for the fourth quarter. We had a record fourth quarter in Europe last year, and we don't anticipate that level repeating, so we project a mid-single-digit decline for the entire year, primarily influenced by fourth quarter comparisons. For Asia Pacific, we expect performance to remain relatively flat throughout the year after the significant drop in the first quarter, with stabilization expected in the following months. Meanwhile, in South America, following a substantial first-quarter decline, we foresee another significant year-over-year drop in the second quarter, a further decrease in the third quarter, and then hopefully, a more manageable comparison that allows for growth in the fourth quarter. Overall, we estimate sales in South America will decline around 20% for the full year, contributing to our anticipated organic decline of approximately 9% for the company.

Okay. And then you didn't mention this in the prepared remarks, but I was wondering if you could address the 8-K yesterday regarding your commercial relationship with TAFE. Can you provide us some of the background, any terms related to the termination and just the strategic rationale there.

Thank you for your question, Kristen. There’s nothing particularly significant to share, other than to say that TAFE has been a key supplier for us last year. We acquired approximately $172 million worth of low horsepower tractors from them, which we distributed globally. As with any supplier relationship, we have assessed their performance and maintained ongoing communication regarding our expectations. Ultimately, we reached a point where we decided to notify them that we would seek an alternative supplier for these low horsepower tractors in the future. We handled this situation in the usual manner, treating it as we would with any important strategic supplier, and we have communicated our expectations clearly over the years. However, considering the demand from farmers for our products, along with our dealers’ needs worldwide, we believe this change is in the best interest of AGCO, our farmers, and our dealers.

We have our next question from the line of Stanley Elliott from Stifel.

Can you talk a little bit more about what you're seeing in Europe? Curious, I guess, kind of how much margin is maybe mix versus some of the manufacturing improvements you all have had going on over there?

Yes. I think Europe presents a varied situation. Our Fendt product line has performed exceptionally well, with strong pricing and an impressive mix coming from the region. We have the new 600 model launched and the next generation 700 model, which are contributing to our good performance and share capture by the team. The Fendt EMEA team has excelled in gaining market share in Europe. Overall, this segment of the business has been quite successful. However, as the industry has declined, we've noticed more pressure on the volume-oriented brands in Europe. Massey Ferguson and Valtra are managing reasonably, but they are more influenced by the market downturn. Overall, while the markets are weakening, Fendt continues to excel as farmers recognize the value in what we offer.

And just, I guess, a point of clarification. So the $300 million that's going to come from Trimble this year, those are only the sales to AGCO, and that kind of strips out your sales to other parties that Trimble used to sell to? And then if that's the case, at what point or can you help us with kind of a timeframe when you think you recoup some of those sales?

Yes. So Stanley, I think it's a bit more of the inverse. The sales of over $300 million that I mentioned are to all parties except AGCO. There are some sales involved, and if you looked at the filing we made about a month ago, you would have seen that last year, the Trimble joint venture sold around $35 million to AGCO. Since we now consolidate that business, those figures are excluded as part of the corporate eliminations. Thus, the $300 million plus total consists entirely of third-party sales. As we've previously discussed regarding our precision agriculture business, we typically break it down into two segments. One is the Precision Planting, the retrofit third-party sales, which usually accounts for about half of the total. The other segment is our Fuse business, representing original equipment sales to companies like Fendt, Massey, and Valtra. We will need to provide a similar overview regarding PTx Trimble since we will keep making third-party sales, resulting in that $300 million plus figure. However, there will be growth in AGCO sales that won’t be reflected in that total. We will need to clarify the combined number versus what is reported. I hope that clears things up.

We have our next question from the line of Tami Zakaria from JPMorgan.

So just wanted to understand the guide a little better. I think you're excluding PTx Trimble that you expect about $300 million plus. The core business, the new guide suggests like it's down by almost $400 million versus the previous guide. So can you just help me understand the buckets of this guide down? How much is North America versus South America versus if there's any FX in there. So really trying to understand what's the delta between the current and previous outlook for the core business ex Trimble.

Sure. No problem, Tami. So we went from 13 6 to 13 2 on the core business. I would tell you, just call it was around about $150 million of that is related to the currency weakness, give or take. You got about $200 million related to the change in the South American market. And then the delta would be the pricing coming down from about 1.5% down to around 1%. Those are the three big buckets.

Got it. Okay. And then I saw in the presentation, I think you're expecting a high 20% EBIT margin from the Trimble, PTx Trimble, which I would think is a little lighter than what Trimble as a standalone company used to do. So again, I know probably sales are down this year, but can you just help me understand what drives that high 20% EBIT margin? And where do you eventually see it going as, hopefully, that market recovers at some point?

Yes, what we're showing you is the revenues excluding AGCO sales. Last year, that was $35 million. If I consider PTx Trimble margins in the high 20s and the EBITDA margin we presented in September in the low 30s, if you add about $5 million of depreciation, these numbers include some transitional service agreement costs with Trimble. There are a few million dollars embedded in these numbers that will dissipate over the next couple of years as we integrate them more into our system, which will improve margins. With revenues declining, we are losing some leverage, further depressing margins. Additionally, the presence of $35 million in solid margin business, combined with no significant change in SG&A costs, is also impacting margins. Overall, when we assess our products and their gross margin in the market, we feel positive about the situation. As we discuss synergies and revenue growth from further integration into the AGCO portfolio going forward, we are optimistic.

The next question is from the line of Mig Dobre from RW Baird.

Yes. I also want to follow up on the Trimble JV. Look, maybe I'm a little bit confused here. But using the information that you put out in the 8-K about a month ago, it strikes me that the margins that we saw there, the operating margins for the Trimble JV were a little bit lower than the high 20s that you're talking about here. So when I'm kind of looking at what's going on in terms of volume compression and obviously, the fact that the CNH business is going away from Trimble, I'm kind of curious how to square to that $300 million revenue guide that you provided but also to the high 20s margin here. So what assumptions are you making on the core Trimble revenue and on the CNH-related business?

Yes. When I think about the 8-K where we published the standalone financial statements, it's important to remember that this was a segment of the Trimble business being reported. In the process of creating the standalone cost with Trimble, certain allocated costs were included to establish the pro forma for that business. However, this doesn't capture all the costs we will incur or those we've taken over, as we can leverage many of our operating resources. The goal of that 8-K was to provide a standalone financial statement for the business, including some allocated costs that Trimble might not have shown previously, which do not accurately reflect the ongoing cost structure. So, when we discuss the numbers now, we're referring to the business we control and the cost structure we observe. For the remainder of the year, we anticipate revenues to be around $300 million. We expect the CNH business to decline, aligning with the revenue noted in the 8-K, which was just over $500 million. Expect to see a decrease of about $100 million year-over-year, which isn't surprising considering our markets have decreased by about 10% since our initial announcement, equating to around $50 million in lower revenue. We do anticipate the CNH OE business to decline as we mentioned in September, likely by about $40 million year-over-year. Additionally, there will be some churn within the CNH dealer channel as they transition to either partnering with Trimble as Vantage dealers or exploring other options. Overall, when looking at the year-over-year decline and margins, we still view this as a strong business, confident in maintaining high 20s operating margins that should grow as volume increases over the next couple of years.

The next question is from the line of Jerry Revich from Goldman Sachs.

This is Clay speaking for Jerry. Could you provide an update on the progress of sign-ups for the CNH dealers to become Vantage dealers? Are you still experiencing some destocking as we look ahead?

Yes, Clay. So I think, again, the relationship with CNH and Trimble, they made that change long before the announced joint venture between us and them. And again, they had, had some very good success in signing up many of these dealers to begin to sell the Trimble products directly. We've continued to see good momentum as the sales teams have been out with the dealers, as some of our team members now over the last month have begun to work with the Trimble team as well in working to update and connect with these dealers about the value and the benefits of the PTx Trimble products. And again, really no change in how we're approaching this. With our Precision Planting business, we're very much focused on the farmers and servicing all makes in all models. So our Precision Planting Group is very much similar to what the Trimble Group had been. And the key for us and with the dealers is that, again, we want them to be able to service the farmers the way the farmers want to be serviced. And whether that's with a competitive product or an AGCO product, we're agnostic to that. We're there to service them, make them more productive and drive their yields, reduce their input costs and make them more profitable. So I'd say we're seeing good momentum. Obviously, the market environment is a little bit more challenged. Farmer incomes in many parts of the world are lower this year than they were last year. So you're seeing a little bit of hesitation more just on farmer spending. But I would tell you the momentum that we're seeing with our team now engaging with the PTx Trimble team has been very good, and the engagement from the dealers has been very good as well. Again, we still have to work through some of the history of how many of these dealers receive their Trimble product because that would have come directly from the OE. As this now transitions from the JV, we would continue to expect a little bit of churn here in the first half of this year and then hopefully normalizing as we move into the back half of the year.

And separately, you have an update for us on just the GSI portfolio review timing and what the last 12 months EBITDA has been?

Yes. So we continue to be under the strategic review of the grain and protein business units. Significant amount of external interest in this. Also, the team continues to execute exceptionally well as we started the first quarter. What we've historically said is the EBIT margins for this business are sort of in that mid-single digits. Again, credit to the grain and protein team. They've done exceptionally well and had a great first quarter here. So I think we'll be in a position to sort of come to a final conclusion on that sort of in the summer here of this mid-summer timeframe.

We have the next question from the line of Chad Dillard from Bernstein.

So my question is on the change in pricing guidance for '24. I just wanted to get a sense for what you're seeing from the regional standpoint. Was all the change driven by South America? Or are there other regions where you saw a pull back? And then specifically for South America, how should we think about the cadence of pricing from 1Q through the balance of the year?

Yes, I believe the pricing will be consistent overall. It may be slightly more pronounced in the first half as we begin to compare against some of the previous figures, particularly in South America during the second half. Additionally, the emphasis is more on the volume-focused brands when comparing Fendt, Massey, and Valtra. However, in general, this applies to all regions.

Got you. That's helpful. And then just second question on your legacy AGCO Precision Planting business. What was the year-on-year change in revenues in the first quarter? And what are you embedding in your guidance for the full year for that business?

Yes. When examining precision ag revenue, it remained unchanged compared to last year. In the first quarter of the previous year, we were benefiting from strong momentum despite supply chain challenges, resulting in revenues of approximately $200 million, which includes the Fuse business. Similar to what I mentioned earlier, both retrofit sales and internal Fuse sales contributed to this figure. We anticipate mid-single-digit growth in this area. As we've previously discussed, our precision ag business is performing well and is able to mitigate earnings fluctuations throughout cycles. The aftermarket and retrofit segments continue to show growth despite the original equipment side of the business. Overall, we are seeing good momentum and strong margins, and we expect mid-single-digit growth to continue in 2024 for this segment.

This concludes our question-and-answer session. I would like to turn the conference back over to Eric Hansotia for any closing remarks.

Yes, I'll close today by saying that there's never been a more exciting time to be in the agriculture business. Technology is transforming how farmers operate and providing them with the potential to produce more food in more resource-efficient ways, a critical need given the world's expanding population. AGCO's farmer-first focus centers on helping them realize this potential, enables them to operate more profitably and sustainably. The key to our success is the continued execution on our farmer-first strategy. Our focus is on growing our margin-rich businesses like Fendt. In fact, I was just up at the launch of the Fendt Lodge, our brand home in North America. And we had unbelievable excitement from farmers and dealers about that brand and how it can continue to grow into the future. Secondly, our Parts and Services business; and third, our Precision Ag business, which we've been investing in heavily in the last few years. In April, we reached a major milestone in our company's history by closing the PTx Trimble joint venture, which creates an industry-leading global mixed fleet precision ag platform to better serve farmers and original equipment manufacturers. For the last few quarters, we've touched on many factors supporting our markets, including growing populations, changing diets, low stocks to use levels, increased demand for biofuels and relatively healthy commodity prices. All these trends give us confidence in the long-term health of our industry. I'll finish where I started. Our financial outlook reflects my confidence in the team and our strategy. Despite weaker industry conditions, we continue to execute on investing in the future, delivering market share gains and staying nimble on our costs. All these will help position us to deliver the second highest level of adjusted operating margin in the history of our company despite meaningfully weaker market conditions year-over-year. We look forward to seeing you at the upcoming technology event in June. Thank you, and have a great day.

Thank you. Thank you for joining the AGCO First Quarter 2024 Earnings Call. This call has concluded. Have a nice day.