Good day. And welcome to the AGCO Second Quarter 2024 Earnings Call. All participants will be in a listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Greg Peterson, AGCO Head of Investor Relations. Please go ahead.

Thanks, and good morning. Welcome to those of you joining us for AGCO's second quarter 2024 earnings call. This morning, we'll refer to a slide presentation that's posted on our website at www.agcocorp.com. The non-GAAP measures used in that slide presentation are reconciled to GAAP measures in the appendix of the presentation. We'll also make forward-looking statements this morning 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. Future revenue, crop production and farm income will also be discussed as well as production levels, price levels, margins, earnings, operating income, cash flow, engineering expense, tax rates and other financial metrics. Our expectation with respect to the sale of our Grain & Protein business will be discussed. All of these are subject to risks that could cause the actual results to differ materially from those suggested by those statements. These 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 the 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 the expected performance and price benefits, difficulties in integrating the PTx Trimble business in a manner that produces the expected financial results, reactions by customers and competitors to the transactions, 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, 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 and in a manner that produces the expected financial results, the need to fulfill closing conditions, including obtaining required governmental approvals in connection with the sale of our Grain & Protein business, and adverse changes in the 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 SEC, including its 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 as required by law. We will 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, Senior Vice President and Chief Financial Officer. With that, Eric, please go ahead.

Thanks, Greg, and good morning. Before I go into the quarterly details and the exciting things happening at AGCO, I wanted to take a moment to reflect on how I'm feeling about the industry and the things that we are doing to position AGCO for success. As in prior cycle downturns, there's always a big correction year where the industry slows rapidly as farmers reduce their spending on new equipment. We've known 2024 was going to be that big transitional year. After the transitional year, industry demand tends to float around trough levels for a period of time before ramping back up. The duration and the severity of the decline are influenced by many things like commodity prices, weather, and stock-to-use ratios, which will make every downturn a little different. For AGCO, we understand the industry dynamics and are working aggressively to address the challenges and position ourselves for success. We are rapidly cutting production this year faster than in the past to right-size dealer inventory levels this year in hopes that production and retail demand are more balanced in 2025. We have been actively addressing costs for several quarters. In the second quarter, we made the decision to further restructure our workforce due to the weakening market demand. We also challenged our teams to think differently with technologies and other sustainable lower-cost operating alternatives. Much of these savings are still to come in 2025 and beyond, helping to further improve our ability to deliver higher operating margins throughout the cycle. In addition, we are doubling down on being the most farmer-focused company in the industry. With our continued role at our FarmerCore, we are helping better serve farmers how they want to be served. In addition to our unique mixed fleet retrofit mindset, we are helping farmers improve their productivity and profitability despite the industry backdrop. With this mindset and focus, we are a different company that is more farmer-focused, more resilient, and more profitable. Now Damon will cover the financials and the outlook later, but even in a big correction year where we are dropping well below mid-cycle, we are still planning on delivering one of the best operating margins in our history and well above historical levels at these industry levels. With that as a backdrop, let's jump into the second quarter, Slide 3, where you can see that AGCO's sales were down approximately 15%. Our results reflect the impacts from both softer industry-wide demand and our resulting production cuts. Our team is analyzing all aspects of the business to identify cost savings and better align our operations with the current market environment. We are balancing the need for cost reduction with our commitment to farmer-focused customer support and innovation, as well as our desire to continue our market share growth ambitions. Last week, we announced a definitive agreement to divest the Grain & Protein business. The divestiture of this business supports our strategic transformation, recently accelerated by the PTx Trimble joint venture, and is an inflection point for AGCO. Divesting this business allows us to streamline and sharpen our focus on AGCO's portfolio of award-winning agricultural machinery and precision ag technology products. We believe this sale will better position us for long-term growth in our higher margin and higher free cash flow generating businesses. Simultaneously, it will raise our profitability throughout the cycle as Grain & Protein has historically been a below-average margin business. I do want to take a moment to thank the Grain & Protein teams around the world who have done an excellent job staying focused on serving the customers and delivering on their commitments while we work through the strategic review of the business. Now getting back to our second quarter results. Consolidated operating margin was 10.3% on an adjusted basis. Lower sales, production cuts, and operating leverage were the major factors in our reduced margins. South America remains our most challenged region as the industry continues to contract. In that region, we saw operating margins of approximately 3.6% in the second quarter of 2024 compared to more than 20% in the second quarter of 2023. Due to falling demand, we cut production by around 57% in the second quarter compared to the second quarter of 2023 with additional cuts planned for the balance of 2024. We remain confident that long-term agricultural fundamentals remain positive despite the downturn in commodity markets. Our optimism for the long-term demand for our products is driving continued investment 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 half of 2024. Global industry retail sales of farm equipment in the second quarter were lower in all of AGCO's key markets. North American industry retail sales decreased 8% for the first six months of 2024 compared to the first six months of 2023. Sales declines in smaller equipment were more significant than most of the larger equipment categories. In Western Europe, industry retail sales dropped 5% during the first six months of 2024. South American industry tractor retail sales decreased 14% during the first six months of 2024 compared to the same period of 2023. Strong declines were consistent across Brazil, Argentina, and the smaller South American markets. The weakening demand in Brazil was negatively magnified by the floods in Rio Grande do Sul while also continuing to be affected by funding shortfalls of the government-subsidized loan program and a challenging first-half harvest in the Cerrado region. Similar to tractors, the combined industry was down significantly in all regions through the first six months of 2024. Although market conditions continue to soften from the extremely strong conditions over the last few years, we remain positive about the underlying ag fundamentals supporting long-term industry demand. Population growth and the increase in the middle class will drive the need for additional grain. Stocks-to-use levels are higher than the recent lows but are still below prior downturn 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 demand for our farmers that will further support commodity prices. Also, input costs such as fertilizer and fuel are down from their peaks in 2022, which has helped dampen the effect of lower commodity prices are having on farmers' profitability. AGCO's 2024 factory production hours are shown on Slide 5. Our production decreased in the second quarter by approximately 23%. Significant reductions were made in all regions with the biggest reductions being in South America and Asia Pacific. The unit company inventory management remains a key priority for us as the market continues to soften, and we pushed to right-size inventory levels this year. As a result, we expect further production cuts through 2024 with all regions targeting to align to retail demand for 2025. Currently, we are expecting 20% to 25% lower production in 2024 versus 2023 on a full-year basis, which is a more significant reduction than our prior outlook, given our current 2024 market forecasts, market share growth assumptions, and targeted reductions to dealer inventory. In general, our order board is in good position and relatively consistent with last quarter. However, there are pockets of dealer inventory that we will need to focus on rightsizing in the balance of the year. In Europe, tractors have between four to five months of orders. Dealer inventories of approximately four months of supply are in line with our targeted levels. Massey Ferguson and Valtra dealer inventories are a bit higher, and Fendt a bit lower than the average in part due to strong share gains on Fendt. In South America, we have order coverage through September 2024 where we continue to limit our orders to one quarter in advance due to inflationary pressures. Despite our aggressive production cuts, we still have approximately four months of dealer inventory across all products as industry conditions continue to weaken. Our goal is to further reduce it by year-end. In North America, we currently have approximately four months of order coverage depending on the product. Smaller rural lifestyle equipment has the lowest order coverage while bigger equipment is higher. Our dealer inventory increased by just over one month compared to last quarter as industry conditions weakened further and is now approximately eight months of supply. Our North America targets for dealer inventory range from four to six months depending on the product. We will continue to focus on underproducing retail demand coupled with retail market share execution to bring dealer inventories in line with our targeted range. 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. Now 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. Our Precision Ag business is where we'll focus today. We recently held our 2024 Technology Days in Westminster, Colorado and near Salina, Kansas. Our growing technology stack and Precision Ag products were on full display to those in attendance. Slide 7 recaps some of the key messages from that event and how AGCO is committed to differentiated farmer-focused solutions for the mixed fleet. In Westminster, the home of our PTx Trimble joint venture, we discussed our go-to-market strategy for our aftermarket and retrofit side of the business and our PTx OEM solutions side of the business. Our aftermarket and retrofit dealers focus on adding new capabilities to existing machines of almost any make and vintage. Our PTx OEM solutions provide technology and services to over 100 OEMs from the factory, in addition to AGCO's Fendt, Massey Ferguson, and Valtra brands. AGCO is unique as the only major OEM in the world with a separate independent retrofit dealer channel. We can take an on-farm approach to sales and act as consultants for farmers, recommending the best PTx products for their specific use cases. These retrofit dealers are primarily focused on selling incremental solutions to address farmer pain points, to improve productivity and profitability, leveraging the farmer's existing machines. This is in contrast with the traditional dealer whose focus would tend to be in selling a completely new, more expensive piece of equipment. Now both types of dealers are critical to ensuring farmer satisfaction. Because AGCO has both, it allows us to be the most farmer-focused company in the industry and the farmers' most trusted partner for industry-leading smart farming solutions. As I touched on in my opening comments, we also discussed how we're bringing the dealer to the farmer through our FarmerCore initiative. This revolutionary approach in our industry blends brick-and-mortar presence with mobile trucks capable of performing most services right on the farm. This mobile model will help us further grow our parts penetration by utilizing the telemetry data coming off the machines and proactively performing maintenance before it becomes a problem. Just like the shift to e-commerce in people's daily lives, we strongly believe that FarmerCore will help improve the AGCO customer experience by taking business to the farm, where many of them want to be served. Lastly, we saw product demonstrations from across the PTx portfolio that illustrated how our technology stack has taken a big leap forward with our new PTx Trimble joint venture. We showed how AGCO is able to optimize farms better than ever with advanced products like guidance, water management, the connected carbon exchange platform, and Precision Planting's radical agronomic soil testing solution. All these solutions help make the farmer more productive and profitable. Slide 8 covers some of the key milestones AGCO has committed to in terms of smart solutions targeted spring will launch later in 2024 on a retrofit basis with an OEM solution in 2026. Also in 2024, we will be launching our autonomous retrofit solutions for grain cut applications with more autonomy across the crop cycle to come. We anticipate having autonomous solutions for all parts of the crop cycle by 2030. We also showed our advancements in connectivity and cloud data management, allowing farmers more actionable insights and control over their operations. Our farm office highlighted the agronomic and machine data management benefits at the farm level across numerous makes and models of machinery. Utilizing ag tech requires data. AGCO's solutions allow farmers to manage, collect and make data available to maximize their investments in Precision Ag technology. We aim to deliver the most agnostic data platform across the crop cycle and for mixed fleets. Furthermore, our technology stack will allow customers to participate in almost any sustainability program like the PTx Connected Carbon Exchange. We highlighted the next evolution of our autonomous grain cart, which now enables two grain carts to partner with one combine to ensure maximum output and the utilization of the combine. An autonomous grain cart helps farmers get their crop harvested earlier, preserving substantial yields. Additionally, it can enable the flexible deployment of labor by freeing up a driver from the grain cart. The easily installed retrofit autonomy kit was shown in two different brands of equipment, highlighting our farmer-focused mindset and the ease of adaptability across the mixed fleet of brands. Autonomous tillage is the next phase of the crop cycle we are tackling. Autonomous tillage enhances productivity across diverse farm sizes and locations by ensuring timely crop planting within ideal windows, extending operational hours for increased throughput and boosting operational efficiency through flexible labor management. A major benefit of AGCO's retrofit kit is that the same hardware and sensors can be used as we enable more phases of autonomy across the crop cycle, making it more convenient and less costly for farmers. Our automated planter and fertilizer options were also shown on a Momentum planter. Controlling fertilizer usage is a big opportunity for Precision Ag and fertilizer placement and timing has an impact on farmers' profitability. Momentum's dry fertilizer system offers farmers flexibility and accuracy. Momentum's agronomic features also solve compaction problems and offer accurate seed placements, leading to more dollars in the pockets of farmers. Lastly, we showed our targeted spray solutions. PTx Trimble offers WeedSeeker 2. This is a proven retrofit solution already in the market today, which detects weeds with infrared sensors and applies herbicide only where needed. We also showed our Precision Planting Symphony Vision system, which utilizes cameras to detect and spray only weeds and allows scouting of farmers' fields to identify where weed pressure is the highest. There's never been a more exciting time to be in the ag space. With these and several other technologies, we remain committed to our goal of achieving $2 billion in annual Precision Ag sales by 2028. For those of you that were with us, we want to thank you for your attendance at the event and your interest in AGCO. We hope that you saw how we are driving innovative solutions that are focused on helping improve farmers' profitability. For those of you who did not attend, we hope we piqued your interest and that you'll attend in our future events. With that, I'll hand it over to Damon.

Thank you, Eric. And good morning, everyone. Slide 9 provides an overview of regional net sales performance for the second quarter. Net sales were down approximately 16% in the second quarter compared to the second quarter of 2023 when excluding the negative effect of currency translation and the positive impact of acquisitions. By region, the Europe/Middle East segment reported sales down roughly 5% in the quarter compared to the same period of 2023, excluding the impact of unfavorable currency translation and favorable impact of acquisitions. Growth in Germany, France, and Spain was offset by lower sales across nearly all other European markets. Increased sales of high horsepower tractors, especially Fendt products, was offset by declines in other products. South American net sales decreased approximately 40% in the quarter, excluding the impact of unfavorable currency translation and favorable impact of acquisitions. Significantly softer industry sales and underproduction of retail demand drove most of the decrease. Lower sales of tractors and combines accounted for most of the decline. The substantial sales decrease in Brazil was slightly offset by modestly higher sales in Argentina and other South American markets. Net sales in the North American region decreased approximately 18% in the quarter, excluding the impact of unfavorable currency translation and favorable impact of acquisitions. Softer industry sales and lower end market demand all contributed to lower sales. The most significant sales declines occurred in the high horsepower and mid-range tractor categories. Net sales in the second quarter in Asia/Pacific/Africa decreased by 35%, excluding the negative currency translation impacts and favorable impacts of acquisitions due to weaker end market demand and lower production volumes. Lower sales in China and Australia drove most of the decline. Finally, consolidated replacement part sales were approximately $488 million for the second quarter, down approximately 1% year-over-year or flat excluding the effects of negative currency translation. Turning to Slide 10. The second quarter adjusted operating margin declined by 280 basis points versus a very strong second quarter of 2023. Margins in the quarter were mainly affected by the significant decline in production, reflective of the increasingly weak industry conditions along with higher discounts. By region, the Europe/Middle East segment's income from operations decreased just under $7 million while operating margins improved 40 basis points in the quarter compared to the same period of 2023. The improvement in margin was driven by favorable product mix related primarily to the sales of Fendt high horsepower tractors. North American income from operations for Q2 of 2024 decreased approximately $60 million year-over-year, and operating margins were 9.2%. The decrease resulted from lower sales and production as well as increased warranty expenses. Operating margins in South America decreased by approximately $109 million in Q2 versus the prior year. The decrease was primarily a result of lower sales and significantly lower production volumes, as well as increased discounts year-over-year. Finally, in our Asia/Pacific/Africa segment, income from operations decreased by $8.5 million in Q2 of 2024 due to lower sales and production volumes. Slide 11 details our June 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, and free cash flow conversion is defined as free cash flow divided by adjusted net income. We used $328 million of cash through June of 2024, approximately 45% less than the same period of 2023, primarily related to improved working capital and lower capital expenditures. For the full year, we continue to expect our free cash flow to be in the upper half of our long-term targeted range of 75% to 100% of adjusted net income. We also remain focused on rewarding investors with direct returns. In addition to the regular quarterly dividend of $0.29 per share, we also paid 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 increased debt associated 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 for our shareholders. Slide 12 highlights our 2024 market forecast for our three major regions. For North America, the market has continued to weaken and we now expect demand to be 10% to 15% 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 smaller tractor segment is also expected to decrease in 2024, although the rate of decline is slowing compared to prior years. For Western Europe, we continue to expect the industry to be down 5% to 10% compared to 2023. Farmer settlement and other indices have been hovering near trough levels for a few months now due to reduced commodity prices and higher input costs. We are updating our guidance for South America to reflect the increasing weakness and now expect industry sales down approximately 25% to 30% in 2024 compared to our previous estimate of a 20% reduction. The industry for tractors greater than 340 horsepower combines and planters continues to deteriorate even more than we had anticipated. Farmers are holding onto their grain longer in the region, awaiting higher prices, and shortfalls in the subsidized financing program caused farmers to postpone purchases. Flooding in Rio Grande do Sul has also weighed on sentiment. Although this may affect demand in the short term, South America remains one of the more 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, AGCO's brand-agnostic retrofit approach to Precision Ag and our strong parts business should help dampen the cycle, making our margins less volatile. Slide 13 highlights a few key assumptions underlying our 2024 outlook, which is still inclusive of the Grain & Protein business and also includes the consolidated results of the PTx Trimble joint venture. Despite the weakening market conditions, our sales plan include market share gains. In addition, full-year pricing is now expected to be effectively 0% year-on-year. As our raw material costs have stabilized and we pursue further cost savings actions, we still expect this level of pricing will allow us to be approximately breakeven on a net pricing basis. We expect currency translation to have a 1% adverse effect year-over-year primarily due to a weakening of the euro. Engineering expenses are expected to be flat in 2024 compared to 2023, including PTx Trimble. Excluding PTx Trimble, engineering expenses would have been down around 7% as we look to moderate some investments given the softening industry outlook. With expectations of our industry declining around 15% from approximately 105% of mid-cycle in 2023 to near 90% in 2024, we would expect our adjusted operating margins to come down from the record 12% in 2023 to around 9% in 2024. Given the significant levels of under-absorption reflected in our financials as we cut production, coupled with the operating margin enhancements associated with the pending sale of the Grain & Protein business and the additional run rate savings associated with our restructuring announcements, we believe the current forecast 9% adjusted operating margin should be near our trough margin, assuming traditional downturn patterns, which demonstrate the significant improvements we have made to our business over the last several years. We'll provide an updated long-term mid-cycle operating margin target at our December 2024 Analyst Meeting to account for the performance of PTx Trimble and announced divestiture of our Grain & Protein business. Our effective tax rate is now anticipated to be approximately 30% for 2024, which is roughly 1.5 percentage points higher than our previous guidance. The reason for the increase is due to a higher proportion of income in higher tax jurisdictions. On Slide 14, we highlight a few details in terms of the restructuring plan we announced in late June along with the details of the recently signed agreement to divest our Grain & Protein business. Our restructuring plan was announced in response to continued weakening demand in the agriculture industry and long-term efforts to structurally change AGCO's operations. The objective of the program is to reduce structural costs, streamline our workforce and enhance global efficiencies by better leveraging technology and global centers of excellence. As part of the plan, we announced a planned reduction of approximately 6% of our salaried workforce. As a result of the restructuring actions, we will incur between $150 million and $200 million in expenses, mainly related to one-time termination benefits. This expense is anticipated to be incurred in 2024 and the first half of 2025 with $28 million recorded in the second quarter. More importantly, the program will result in between $100 million to $125 million in annual run rate savings, the majority of which will start in 2025, which will help year-over-year profitability. As mentioned earlier, we have entered into a definitive agreement to sell our Grain & Protein business. As of June 30, 2024, the business met the criteria to be classified as held for sale. The company determined the intended sale of the Grain & Protein business does not represent a strategic shift that will have a major effect on the consolidated results of operations, and therefore, results of this business were not classified as discontinued operations. The results of the Grain & Protein business are included within our regional reported segments. We expect to receive proceeds of approximately $700 million from the sale, subject to customary working capital and other adjustments. Upon the classification of held for sale, the company recognized a projected loss of approximately $495 million in the company's consolidated statement of operations based on the current estimate that will be adjusted at the time of closing. The closing of the transaction is subject to regulatory approvals and customary closing conditions and is expected to be completed before the end of the year. Turning to Slide 15 for our 2024 outlook. Our full-year net sales outlook is $12.5 billion, down from the record levels seen in '23 and down from our previous outlook. Adjusted earnings per share forecast is now approximately $8. We continue to expect capital expenditures to be approximately $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 continued underproduction relative to retail demand in the third quarter, we project sales in the $2.9 billion range, adjusted operating margins of approximately 7%, and adjusted earnings per share of about $1.05. With that, I'll turn it back over to the operator for Q&A.

The first question comes from Jerry Revich of Goldman Sachs.

I’m wondering if you could just talk about the decremental margin outlook that's implied for the back half of the year. What's the impact to that of the inventory reduction that you folks are delivering? In prior cycles decremental margins for you folks have been closer to 20%. So I'm wondering, as we think about '25, after company inventories have come down, should we be thinking that decremental margins in the first half of '25 are being closer to the low 20s that you folks have posted historically?

I think, Jerry, as you saw with the production cuts here in the back half of 2024, we are doing a significant level of reduction, again, the 20% to 25% reductions this year is the highest level we've cut in over a decade, trying to right-size dealer inventories as we go through this year. So as we think about 2025 and you listen to Eric's comments about the industry likely floating at this trough level, we would expect, assuming not a significant reduction, that our decrementals next year should be closer to that mid to high 20s that you would have seen. And again, I think if you factor in the effect that pricing is having here in the back half of the year, you would see that the decrementals from an operational standpoint are in that high 20%, 30% range, as well as just being magnified due to the decrease in pricing.

And then can I ask on your Precision Ag business, can you talk about developments that you're seeing in the market? How is the aftermarket Precision Ag business performing in the back half of the year versus what you're seeing on the whole goods side? Can you just double-click on the near-term performance, if you don't mind?

Our current business is PTx, which stands for Precision Technologies multiplied, representing the combination of PTx Trimble, the joint venture we created, and Precision Planting. We have a mix of OEM sales and retrofit sales. OEM sales have decreased, similar to the broader industry, possibly even more so due to some channel destocking among key OEMs. However, we have not lost any OEM customers; they are simply adjusting to industry trends. Retrofit sales have increased but are beginning to cool off, and we are now noticing some declines in that area as well. Nevertheless, our AGCO ramp-up is progressing well, potentially even ahead of schedule, and CNH dealer sign-ups are also on track, potentially ahead of plan. Importantly, we haven’t lost any OEM customers or talent from our engineering team. Overall, the business is performing as expected, though it is experiencing impacts from industry fluctuations.

Next question comes from Tami Zakaria with JPMorgan.

So I was hoping you could help me with some numbers. So the implied back half production outlook, how much is that versus your expectation of retail sales? I'm trying to understand production versus retail sales growth expectations as we exit this year.

The production in the second half of the year is expected to decrease to the mid to upper 20s, with a more notable decline anticipated in the third quarter. On a quarterly basis, this will be slightly above the annual guidance. For the fourth quarter, I estimate the production will fall within the range of 20% to 25%, primarily due to easier comparisons from last year in South America. Therefore, you can expect production levels to be in the low to mid-20s during the third and fourth quarters as we move into 2025.

So then as you exit this year, how much is your production going to be versus your expectation of the mid-cycle volume?

So I guess the way I would look at the mid-cycle volume, Tami, is last year, we were at about 105% of mid-cycle. If you remember last year, there was also a fairly strong channel replacement or filling of that channel as we started 2023 with a very low dealer inventory level. So you would sort of view that at 105% plus some incremental production; it's a little bit of incremental production for that dealer fill, now coming down to an industry of around 90%. So you can see that our production levels are down 15%-plus to get back to sort of, I would say, this mid-cycle when you factor in the overproduction; so call it 10% to 15% is probably the range to think about the delta between where we are and getting back to mid-cycle.

Next question comes from Steven Fisher with UBS.

The pricing down to 0%, what drove that? Was that higher incentives to make trades happen, was it reductions in actual pricing? And how do we think about sort of the regional spread of where that change happened from the prior pricing expectations for the year?

Steve, I think the - generally speaking, the incremental price - the reduction in our outlook is reflective of the incremental discounts really trying to spur more retail sales. As we've seen the industries weaken here, South America, North America and even to a certain degree, in the non-Fendt branded products in Europe, we've definitely seen the incentives picking up. I think relative to our prior outlook, I would say that the declines or the change has really been focused in South America, Europe, and to a lesser degree North America. But I would say Europe and South America were probably the two biggest changes that we saw relative to the last quarter.

And then you're undertaking this restructuring. I'm curious kind of where you think that will leave you relative to the ideal manufacturing structure that you see for the future of the business. Do you think this will get you there or are there still other steps that you think you might be taking over the next couple of years to kind of put the business and the manufacturing structure in place for the next 10 years?

So maybe I'll start and then Eric may want to add a few more comments longer term. But the restructuring activities that we alluded to, I would say, we're more SG&A back office-oriented. So that 6% reduction in the workforce we've talked about is really reflective of the industry cooling and us trying to shrink our overall cost here. But at the same time, as I may have mentioned during the Technology Day, this is really challenging our teams to look deeper at leveraging technologies, generative AI, and trying to do things in a much more efficient manner. And at the same time, trying to commonize things where we can centralize them potentially in lower-cost areas or have centers of excellence versus how AGCO had been built up in the history of a group of acquisitions really not creating that common skeleton. So as we looked at the industry it sort of gave us that opportunity to shrink the workforce to stay where we needed to be, but at the same time, take down or further reduce it through simplicity. So again, I think there's probably opportunities when we look as we learn more about our operations and we learn more about technology. But if you look at what we're talking about, that $100 million to $125 million, as Eric alluded to and I alluded to, that's run rate savings, that's not reflective in these numbers that we'll start to see that build in '25 and hopefully more to come as we better leverage technology. But I think on the footprint, Eric, anything else you want to add?

No, that's exactly right. We're taking fast action on getting ourselves rightsized for the industry that we're seeing. The 6% is a net number so we're actually cutting deeper in some of our high-cost countries, hiring back in some low-cost countries, but that's really about rightsizing and reflecting the demand we're facing. Then there's a chapter two about thinking differently about how we run the business. And Damon already covered that, so I don't need to repeat, but it's largely using artificial intelligence and automating much of the routine tasks that we have and higher leverage of lower-cost locations.

The next question comes from Mig Dobre with RW Baird.

I want to go back to the discussion on production and dealer inventories. I just want to make sure that I properly understand it. So you talked about your industry forecast being down 15% for this year and production for the full year down 20% to 25%. Is it fair to understand the gap between the two is the amount of underproduction or destocking that is happening in the channel? And if so, can you give us a sense from a unit perspective where you think your channel, your dealer inventories are going to be relative to where they exited in 2022? So before we had that kind of stocking dynamic of last year.

So maybe we'll have to go back and look at the 2022 so I don't think we have that handy right now, but maybe on a follow-up, Greg can get you that. But I think your comment about the industry decline versus the production decline, that's spot on. That's the destocking that we're talking about here to try to better right-size the inventory. And again, I think as we said on some of my comments, there is still more work to do here in North America. We do want to take that inventory levels down. Right now, we're sitting at around eight months of inventory so we want to get that down a couple more months, and that's part of the large production cuts we have planned in the back half of the year. Europe has been staying flat the last couple of quarters at around four months of inventory. And again, we probably have a little bit of access in our more volume-oriented brands of Massey and Valtra. Fendt's doing quite well from a share capture standpoint, which is keeping the dealer inventory levels at probably the optimal level. And then South America, as that industry continues to decline despite the production cuts we're taking in last quarter, in the second quarter, we cut production in South America 57%. And so a significant cut there. As we see that industry cool, the dealer inventory, though, stayed relatively flat. So again, we now have more production cuts in the back half of the year, trying to get that four months down to probably more around three months by the end of the year as we hope we see some improvement going into 2025 in that market.

And as we said in our comments, this is the big correction year. In most cycles, they go through one big year where there's a significant correction, and this one is going from $105 million down to $90 million. We're being very aggressive, much more aggressive than we would have in other historical cycles to cut production, get it out of the system so that we can be much closer to retail demand in '25.

My follow-up is on the mid-cycle comment that you had. Maybe a reminder here in terms of how you guys frame mid-cycle. And I guess I am wondering, given the fact that machines have become so much more productive, could that actually have an impact on where mid-cycle demand from a volume standpoint truly is these days?

Well, it's a ten-year average, and we watch for trends in certain markets. So for example, Brazil is an increasing marketplace. It still has a cyclicality to it, but the long-term trend is increasing because they're putting more acres into production. So we watch overall trends and we've got that factored into our model. The intention is that 100% is the average industry that we should expect through the business cycle on a global basis. And so the numbers we're talking about are on a global perspective. And so we're believing we're about 90%. We believe this is the big correction year. Like I said earlier, oftentimes, there's one big correction year, then the industry hovers around that for a little while. But it doesn't move so dramatically like it did this year, and then it starts working its way back up again; that's what we expect to happen.

The next question comes from Kyle Menges with Citigroup.

I'd love to follow up on that last question and just dive deeper into mid-cycle. So if you're at 90% of mid-cycle, could you kind of parse out where you think you are as a percent of mid-cycle by region, like North America, is that actually closer to 100% than maybe South America and Europe are more in the 80% range?

I think Europe tends to be the least volatile of our major regions, usually fluctuating between 105% and 95% due to the level of subsidies the EU provides for farmers. I would estimate it to be slightly below 100%, perhaps in the high 90s. North America is edging closer to the mid-range, around 90%. Currently, South America is experiencing a steep correction, and I would place it a bit below that. However, it's important to remember that South America's corrections come after exceptionally strong years; in 2022, it was about 130% of mid-cycle. The percentage change over the last couple of years has been quite significant, but I would say Europe is just under 100%, North America around 90%, and South America possibly a little lower right now.

It's interesting, we're starting to see some early signs of recovery already in our Australia and New Zealand market. They are the first ones to go down. We're starting to see them find bottom and maybe even recovering a little bit. So each region is in its own different place based on where they've come from and the farmer dynamics there. But they're all behaving like we would normally see in prior cycles.

And then I was curious, could you talk a little bit about the Trimble margin performance in the quarter? And is there any change to that full year outlook for Trimble margins in the high 20s?

The Trimble sales in the quarter were a little bit more challenged. Again, I think what you're seeing with Trimble is a reflection of the overall industry, Kyle. As our industry levels are dropping, as we've talked in the past, there was a significant amount of purchases pre-acquisition from us, putting a lot of inventory in the channel. As the industry has slowed, obviously, that inventory in the channel is now moving out slower than maybe what we had thought a quarter ago, and you're seeing that reflected in our industry outlook. And so the sales were a little bit below our expectations. Obviously, that translates to the margin issue given the high margin of that business. Our outlook when we gave you last quarter was the PTx Trimble business was going to be $300 million-plus. As I think about the lower OE sales, a little bit lower industry outlook right now, I would tell you that's probably a little bit below $300 million, so down a little bit, not materially different. So instead of $300 million-plus, maybe $300 million negative would be the way to look at that. But again, it's more a reflection of the industry levels dropping and what was in the channel moving out slower as the industry has slowed. But I think what we would tell you is all of the operational aspects of PTx Trimble, signing up the CNH dealers, connecting with the customers themselves about the value proposition, all of that is in line with our plan, feeling very good about the growth prospects. It's just working through this industry decline and letting this churn, which we knew 2024 was going to be a churn coming off of what CNH was selling to their dealers, moving from Trimble into the AGCO family; all of that was going to create churn in 2024. So again, nothing is changing in the long-term prospects; it's just sort of working itself out quarter-to-quarter here.

The next question comes from Kristen Owen with Oppenheimer.

I wanted to ask about the assumption for market share gains. I mean, that's something that you've consistently held through the last three guidance cycles. You talked a little bit about Fendt in Europe but just wanted to see if you could unpack the market share assumptions maybe by product line or by geography, to help us understand where that share gain is coming from.

I think, Kristen, without going into too many details, Fendt has been performing exceptionally well in Europe. This is due to the new 600 we launched and the Gen7 700, both of which are contributing to strong market share performance. Overall, Fendt's product portfolio is up year-to-date, and when considering Fendt globally, sales are actually up by about 1% despite the current market conditions. The strong performance is primarily driven by Europe. In South America, we are experiencing some share growth, although not to the extent we originally anticipated due to the competitive environment. We are also seeing selective share growth in other markets, particularly in lower horsepower segments in North America. The team is performing well across these various regions, creating a mixed performance beyond just Fendt in Europe and South America.

And my follow-up is a little bit longer term. I recall during the up cycle, your goal of getting to a more balanced margin portfolio across the regions; some of those efforts were kind of prolonged in South America just given how strong the up cycle was there. Now that we are in this environment of resetting production, particularly in Brazil, are there things that you can do during this downtime to sustainably support the margin improvement in that region?

I think there's a couple of things that you're seeing here, Kristen. I mean, again, I wouldn't lose too much sleep on South America. Production was down 57% in the quarter, that has a tremendous burden on the P&L here. But if you think about South America and you think about those professional growers in the Cerrado region, that caters to the Fendt portfolio. And so Fendt's still a relatively low share there. We've opened up several stores, growing share there. Hopefully, those professional growers are more consistent with their buying behaviors versus some of the smaller growers who are going to be more influenced by the subsidized funding. So that should hopefully help as we grow the Fendt market share. The second one is the Precision, the PTx businesses in total. And again, that's both the Precision Planting business, which as you know, is growing in South America, still a relatively small footprint there, but we see that growing. Then you layer on PTx Trimble, which again had a good business there with significant growth potential in that market. So we see those being more stable, high margin, higher growth businesses. And then as Fendt grows in penetration, coupled with Massey and Valtra down there, the parts business. Again, we've increased the penetration in the fill rate down there. And again, as that specialty spend grows, the amount of parts business growing there hopefully will again stabilize and bolster the underlying margins and improving the bottom end margins in South America over the next several years.

And just a couple of comments, everything Damon said is spot-on. We've moved from a company that was focused on small, low-tech tractors in the south of Brazil to one that's got a full crop cycle set of solutions of industry-leading products that's focused on the whole region. We probably have more channel change in South America than any other region in terms of improving our dealer capability. So it's a big shift in product, a big shift in channel. Both of those we think are good for the long-term prospects and health of that business.

Our next question comes from Stephen Volkmann with Jefferies.

Most of my questions have been answered, but I wanted to ask about the cadence of the cost-cutting program that you've done, the $125 million, I think it was. Do we get sort of the full $125 million in '25, is that the right way to think about it or does it sort of end the year at that run rate and we maybe don't get the full amount?

Steve, we likely won't achieve the full amount. Given our significant presence in Europe, we will need to consult with workers' councils there, which will take some time. I'm not certain when we'll complete this process, but I hope we can finalize it in the first half of the year, possibly the first quarter or early part of the second half as we navigate those consultations. If everything proceeds smoothly, we might see the benefits a bit earlier. However, I would estimate that the exit will be in the $100 million to $125 million range, and we should expect to receive some of that throughout the year.

But some of those actions have already been taken. In the non-works council areas, some of those actions have already been taken. So it's a mixture.

And what about on the direct labor side? What are you doing there? How should we think about what sort of benefits might come on that side?

Steve, we have been reducing our direct labor due to the overall challenges in the industry. Year-to-date, we have likely eliminated around 3,000 direct labor associates, including cuts to hours and flexible time. I want to use that as a foundation when we discuss 2024 and adjusting our inventory levels and production in preparation for 2025. As both Eric and I mentioned, we believe that this 9% is around the lowest point. Looking ahead to 2025, we identify several positive catalysts. You mentioned the restructuring that could generate $100 million to $125 million in run rate savings, which is not included in my current figures. Our production is expected to decrease by approximately 20% to 25%. Historically, a 25% cut would be unprecedented for us over the last decade. Whenever we have made such significant production cuts in a downturn, the following years have typically seen much less reduction. Hence, considering the relationship between retail and production absorption this year, we anticipate a positive trend next year if the industry continues on a similar path, as Eric noted. We expect improved restructuring savings and better retail compared to production absorption. Regarding PTx Trimble, this year has been one of transition, and while the margins are not where we want them to be, we anticipate improvements in 2025 as dealer inventories stabilize. Additionally, the Grain & Protein sector has negatively impacted margins this year, but as we phase out or divest that business, we expect it will contribute positively to margins next year. If the industry follows historical trends, we feel optimistic that margins next year could surpass this year's levels, even without a significant change in the industry.

In the past, our lowest margins were around 4% to 5%. Currently, we are reporting 9% for this period. We have implemented many structural changes within the company, not even counting the upcoming ones that Damon just mentioned.

Our last question today comes from Chad Dillard with Bernstein.

So my question is on price cost. Just trying to understand what that data point looked like in the first half of the year and then what are you embedding for the second half of '24?

So for the full year, net zero, Chad, price versus cost was slightly positive. Price was slightly positive here in the first half of the year. When you include all the discounts, it will be maybe a little bit on the zero to slightly negative, net. The material costs are coming down as well in the back half of the year, sort of what closes the gap to keep us sort of at a net neutral here.

And then just a second question is about South America. So given you guys are down plus 50% in terms of production in the second quarter, where does that compare versus prior production troughs? And then I guess the second part is just like thinking about if we do get to that, I guess, absolute trough in terms of production, how should we think about like the operating margins of the business? Do you think you can actually maintain positive operating margins there?

I believe we need to review the historical production levels. In South America, we reduced production by 57% in the quarter and still achieved a positive operating margin. As Eric mentioned, we are making structural changes to the business by transitioning from low to medium horsepower tractors and focusing on expanding around the crop cycle with the IDEAL combine, the Momentum planter, and Fendt tractors. Additionally, we have integrated our PTx Trimble group with the Precision Planting business, resulting in significant changes for the long-term. Ideally, we anticipate this to become a double-digit margin business. However, this year faces two challenges. First, the pace at which we are reducing production. Second, we have been communicating for a year that the pricing in South America last year was not sustainable, so we did not provide discounts despite the market strength, knowing it would decline. This discounting, combined with absorption issues, is affecting margins and putting the team in a tough position. Nevertheless, they are still achieving good, positive margins, which reflects the long-term structural changes made in the business.

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

Thank you. I'll close today by just saying in the short term, we're focused on executing our plan to reduce inventory and aggressively control costs, to better align our operations with the current weak market environment. The key to our long-term success is the continued execution of our farmer-first strategy. Our focus is on growing our margin-rich businesses like Fendt and parts and service and our Precision Ag business, which we've been investing in heavily over the last few years to become an innovation leader. The strategic actions we've taken over the last few months, like launching FarmerCore, forming the PTx Trimble joint venture, and divesting the Grain & Protein business should enhance and accelerate the benefits of our farmer-first strategy. Over 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 of these trends give us confidence in the long-term health of our industry. And while cycles are typical in the ag industry, how we react and weather them will illustrate how we are structurally changing AGCO to be a better, high-performing business regardless of market conditions. And we recognize that we're surely closer to the bottom of the cycle than we are at the top of the cycle. We look forward to seeing you at our upcoming meeting at Farm Progress Show late in August, and thanks for your participation today.

Thank you for joining the AGCO second quarter 2024 earnings call. The call has now concluded. Have a nice day.