Agco Corp /De Q2 FY2025 Earnings Call

Good day, and welcome to the AGCO Second Quarter 2025 Earnings Call. Please note this event is being recorded. I would now like to turn the conference over to Greg Peterson, AGCO Head of Investor Relations. Thanks, good morning. Welcome to those of you joining us for AGCO's Second Quarter 2025 Earnings Call. We will refer to a slide presentation this morning that's posted on our website. The non-GAAP measures used in the slide presentation are reconciled to GAAP measures in the appendix of that presentation. We will make forward-looking statements this morning, including statements about our strategic plans and initiatives as well as our financial impacts. We'll discuss demand, product development and capital expenditure plans and the timing of those plans and our expectations concerning the costs and benefits of those plans and the timing of those benefits. We'll also cover future revenue, crop production, farm income, production levels, price levels, margins, earnings, operating income, cash flow, engineering expense, tax rates and other financial metrics. All of these are subject to the 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, tariffs, weather, commodity prices, changes in product demand, interruptions in the supply of parts and products, the possible failure by us 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; introduction of new or improved products by our competitors and reduction 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 and adverse changes in financial and foreign exchange markets. Actual results could differ materially from those suggested in these statements. Further information concerning these and other risks is included in AGCO's filings with the Securities and Exchange Commission, including its Form 10-K for the year ended December 31, 2024, 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 on our website later today. 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 to everyone joining us today. We delivered solid second quarter results, driven by disciplined execution in areas within our control despite a challenging global agricultural landscape. Weak farmer economics and delayed purchasing decisions across several regions heavily influenced the uncertainty in global trade that impacted demand. Net sales totaled over $2.6 billion, down approximately 19% year-over-year or 11%, excluding the Grain & Protein business we divested last year. This decline reflected continued softness in North America and Western Europe, coupled with our ongoing impact from reducing dealer inventories in several parts of the world. Despite the uncertain near-term outlook, we remain focused on executing our strategy, supporting our dealers and customers and investing in technologies that will fuel long-term growth. We are closely monitoring evolving tariff policies in the U.S. and other parts of the world. As I said last quarter, we will try to limit the effects on farmers by trying to minimize increases through supplier discussions and other supply chain adjustments. We will implement price increases where appropriate and feasible. For the quarter, consolidated operating margins were 6.2% on a reported basis and 8.3% on an adjusted basis, reflecting strong decremental margins in the mid-teens. This performance highlights excellent global execution by our teams, who continue to deliver on our sales strategy and with a richer mix of products in several parts of the world while simultaneously executing on our ongoing restructuring plans. Notably, we achieved these margins despite a 16% reduction in production hours compared to Q2 2024, as we are diligent in our efforts to align dealer inventories as quickly as possible. We made meaningful progress in reducing both company and dealer inventories. This discipline is reflected in our working capital improvements and free cash flow generation during the first half of the year, which was up nearly $400 million compared to the same period in 2024. In Europe, sentiment has been moving more positively for much of the past year. Granted, that improvement trend has paused in the last 2 months. As AGCO's largest and most critical region, Europe continues to provide better demand stability, strong consistent operating margins and helps dampen the impact of U.S. trade policy on our financials. In North America, farmer sentiment remains cautious. Although government aid is expected to support higher net farm income, tight margins persist due to elevated input costs and reduced export demand. The uncertainty for farmers on several fronts has continued to weigh on the willingness to update their equipment. However, North America ag barometers continue to show relatively strong sentiment. On a more positive note, South America farmers are poised to expand their global share in key commodities over the next year, supported by favorable trade policies. Despite the near-term uncertainty in some markets, we continue to believe that 2025 will be the trough for the ag industry with modestly higher demand in 2026 in all regions. Global tractor sales were the lowest last month at any time in the past 15 years, which supports our view of trough conditions. Turning to a couple of AGCO-specific items. We recently announced the resolution with TAFE on all outstanding commercial, governance and shareholding matters. This outcome was made possible through close collaboration with Sudarshan Venu, son of TAFE's Chairman and Managing Director. This agreement was a very positive step forward for AGCO and its shareholders. This agreement paves the way for a more shareholder-friendly capital allocation strategy, including the new $1 billion share repurchase program that Damon will discuss shortly. AGCO's Board and management remain fully committed to our farmer first strategy, which we believe will enhance customers' outcomes, drive operational success and deliver strong returns for shareholders. Slide 4 provides an overview of industry unit retail sales by region for the first half of 2025. The global farm equipment market continues to face significant headwinds, with North America and Western Europe experiencing the most pronounced declines. However, Brazil is showing early signs of recovery, supported by favorable trade dynamics, coupled with the fact that they were the first of our major markets to experience the downturn. North America tractor sales declined 13% year-over-year with consistent softness across the horsepower categories. Higher horsepower segments saw steeper declines in recent months, reflecting ongoing uncertainty around grain export demand and persistently high input costs. These pressures are expected to continue weighing on demand, particularly for large equipment. In Western Europe, tractor sales fell 12% in the first half of 2025 compared to the same period last year. This decline reflects more cautious farmer sentiment driven by policy uncertainty and softening commodity prices. We are now in the fourth year of industry decline, which is longer than the typical European market downturns in past cycles. Turning to Brazil. Tractor sales rose 6% in the first half of 2025, led by demand in lower horsepower categories. While the U.S. continues to face reduced access to key export markets, Brazil is well positioned to expand shipments to China, which could support a faster recovery. Despite the record soybean harvest and favorable trade conditions, demand for larger equipment remains subdued due to the weaker crop prices. That said, we are seeing early signs of recovery in the broader ag machinery market and expect continued improvement in Brazilian industry demand through the remainder of 2025. And for combined sales, we saw declines across all 3 markets: North America, Western Europe and Brazil, with North America experiencing the sharpest drop at 33% year-over-year. Despite these near-term normal industry challenges, AGCO remains well positioned for the long term. Structural tailwinds, including global population growth, rising protein consumption and increased demand for clean energy solutions like sustainable aviation fuel and vegetable oil-based diesel, continue to support our outlook. Although geopolitical trade actions may shift the source of grain supply, they do not constrain the global demand for grain. Our evolving precision ag technology stack, with a focus on retrofitting almost any brand, provides a differentiated competitive edge, helping farmers improve yields and meet the world's growing food needs. Slide 5 outlines AGCO's factory production hours. To ensure year-over-year comparability, we've excluded grain and protein production hours from the 2024 baseline. Quarter 2 production hours were down approximately 16% compared to quarter 2 2024. Regionally, production was down in Europe, up in South America and down over 50% in North America, where we are hyper-focused on reducing dealer inventories. Looking ahead, we still expect full year 2025 production to be 15% to 20% lower than the 2024 levels. For the balance of the year, we will effectively be producing in line with retail demand in most parts of the world, with the exception of North America, where we will continue to significantly underproduce as we continue to rightsize our dealer inventories. Reducing dealer inventory remains a top priority in light of soft market demand and elevated inventory levels. We're in good shape for the second half of 2025 in Europe and South America, while further work is needed in North America. Looking at a regional inventory breakdown. In Europe, dealer inventory remains just under 4 months of supply, in line with our target. Fendt is below this average, while Massey Ferguson and Valtra are slightly above. Overall, Europe's near-target inventory levels are a big positive given AGCO's significant exposure to the region and its stability. Looking to South America, we made good progress, reducing dealer inventory to around 3 months of supply, with units down around 3% and months of supply down almost 1 month from March 31. We are now at our target level. And in North America, dealer inventory units declined approximately 10% from quarter 1, 2025, driven by significant production cuts. However, inventory remains elevated at around 9 months of supply, above our 6-month target given the lower outlook. Given the continued challenging outlook, we expect to underproduce relative to retail demand for the balance of the year in North America. Slide 6 highlights AGCO's 3 high-margin growth levers, which are central to our strategy to achieve mid-cycle operating margins of 14% to 15% by 2029, while also outgrowing the industry by 4% to 5% annually. These initiatives reflect AGCO's transformation into a more resilient, higher-performing company, one that is not only targeting stronger mid-cycle margins, but also delivering higher highs and higher lows across the business cycle, which we are clearly demonstrating these past couple of years. To reiterate the 2029 growth lever targets we shared at our Analyst Meeting last December. Number one, our Fendt globalization and full-line expansion centers on scaling the Fendt brand across North America and South America, with combined revenues expected to reach $1.7 billion by 2029. Number two, our Precision Ag growth. For that, we are targeting $2 billion in global Precision Ag revenues, driven by our retrofit-first strategy and the integration of advanced digital capabilities that enhance farmer productivity and profitability. And third is our global parts expansion. We aim to expand our Global Parts business to $2.3 billion, focusing on increasing the market share of genuine AGCO parts and improving service penetration, leveraging our farmer-core strategy. These 3 levers are designed to drive sustainable, high-margin growth and position AGCO to deliver superior returns through the cycle. AGCO's continued strong investment in R&D has earned recognition from leading global organizations, reinforcing our commitment to innovation and our Farmer First strategy. Slide 7 highlights 2 award-winning technologies that exemplify this approach, each designed to enhance farmer profitability through improved efficiency, yield and ease of use. PTx OutRun is the world's only autonomous harvesting solution and was recently honored with the 2025 World Changing Ideas Award. It is the first commercially available autonomous retrofit grain cart system designed to help farmers maximize yield and address the global labor shortage. The OutRun kit enables autonomous grain cart operation and is currently compatible with competitive tractors, with Fendt compatibility coming in 2026. This breakthrough represents a major leap forward in harvest efficiency and smart farming. On the equipment side, you have heard me say before that Fendt is the best of the best. The Fendt 620 Vario is another example. It continues to set new benchmarks in performance and efficiency. It achieved the absolute best-in-class fuel efficiency in the DLG PowerMix test, recording the lowest diesel consumption in the 165- to 240-horsepower category. Thanks to its VarioDrive transmission and Fendt's low engine speed concept, the 620 Vario delivers unmatched efficiency and performance. Profi Magazine also praised the tractor for its exceptional field and road capabilities. These achievements reflect AGCO's commitment to delivering smart, farmer-first solutions that drive profitability, sustainability, and ease of use. I'd like to take a moment to recognize and thank the teams behind these innovations. Their efforts are helping AGCO fulfill its vision of being farmers' trusted partner for industry-leading smart farming solutions. On Slide 8, you can see the details of our 2025 Tech Days in Germany. We're looking forward to showcasing our PTx portfolio and how it will solve farmers' problems in late September. The key to delivering better customer outcomes for our farmers is our Precision Ag business. The performance of our PTx business is improving across many areas. We've been hitting our financial and operational forecast consistently over the last few quarters. Our margins, although at trough levels, are improving. We are seeing strong growth in channel sign-ups of dealers and are growing strongly throughout the world. The conversion to PTx Trimble guidance receivers on AGCO machinery is almost complete. Our innovation engine is firing with the team on track to exceed more than 10 innovations in 2025, well ahead of schedule. We hope you will join us and look forward to seeing you there for a hands-on and up-close experience. Now I'll hand it over to Damon to walk you through some of our financial results from the quarter.

Thank you, Eric, and good morning, everyone. Slide 9 provides an overview of regional net sales performance for the second quarter and first half of 2025. Net sales were down approximately 15% in the second quarter compared to the second quarter of 2024, when excluding the positive impact of currency translation. For comparison purposes, the impact of the divestiture of the Grain & Protein business, which was approximately $290 million in Q2 of 2024, has been excluded. By region, the Europe/Middle East segment reported sales down roughly 11% in the quarter compared to the same period in 2024, excluding the impact of favorable currency translation. Lower sales across most of Western European markets were partially offset by growth in Eastern Europe and Scandinavia. Declines were largest in high horsepower tractors and combines. South American net sales decreased approximately 5%, excluding the impact of favorable currency translation. Underproduction of retail demand drove most of the decrease. Lower sales of mid-range tractors, planters, and sprayers accounted for most of the decline. Net sales in the North American region decreased approximately 32%, excluding the impact of unfavorable currency translation. Softer industry sales and underproduction of end-market demand contributed to lower sales. The most significant sales declines occurred in high horsepower tractors, sprayers, and hay equipment. Net sales in Asia Pacific and Africa decreased 6%, excluding favorable currency translation impacts due to weaker end-market demand and lower production volumes. Lower sales in Australia and China drove most of the decline. Finally, consolidated replacement part sales were approximately $503 million in the second quarter, up 3% year-over-year on a reported basis and down approximately 1% when excluding the impact of favorable currency translation. Turning to Slide 10. The second quarter adjusted operating margin was 8.3%, a 200 basis points decline compared to the second quarter of 2024, but about 100 basis points better than our forecast. The weak industry conditions are resulting in significantly higher costs related to factory under absorption and higher discounts. However, our SG&A expense reduction program is helping to offset some of these volume-related pressures and helping us deliver a more profitable business in the trough year, as Eric mentioned. The multi-phase program is designed to reduce structural costs, streamline our workforce, and enhance global efficiencies by better leveraging AI, automation, and global centers of excellence while delivering better outcomes for our farmers. By region, the Europe/Middle East segment income from operations decreased approximately $34 million, while operating margins remained resilient at just under 15%. The decrease in income from operations was primarily a result of lower sales and production volumes and higher warranty costs. North American income from operations in the quarter decreased approximately $58 million year-over-year, and operating margins were negative in the second quarter. Lower sales from weak market conditions and significantly lower production hours were the primary drivers for the lower operating margins year-over-year. Operating income in South America increased approximately $17 million in Q2 of 2025 versus Q2 of 2024, and operating margins improved in the quarter to nearly 8%. This increase was primarily a result of improved factory efficiency and product mix. Income from operations in our Asia Pacific/Africa segment decreased approximately $1 million due to lower sales and production volumes. Slide 11 shows our free cash flow year-to-date. As a reminder, free cash flow represents cash provided by or used in operating activities less capital expenditures. Free cash flow conversion is defined as free cash flow divided by adjusted net income. Through June of 2025, we've generated $63 million of free cash flow, approximately $390 million more than the same period in 2024 when we had net cash outflows of almost $330 million. This improvement was primarily driven by better working capital performance and approximately $100 million lower capital expenditures year-over-year. For the full year, we continue to expect free cash flow to be within our targeted range of 75% to 100% of adjusted net income. Our capital allocation priorities remain unchanged; reinvesting in the business, repaying debt to maintain our investment-grade credit ratings, and returning capital to our shareholders. However, following the TAFE settlement, our Board of Directors approved a new $1 billion share repurchase program, recognizing this as a preferred method of capital return for many of our shareholders versus the special variable dividends we have issued over the last several years. In addition to the repurchase program, we also recently declared our regular quarterly dividend of $0.29 per share. We remain focused on deploying capital in the most effective ways to drive long-term value for our shareholders, and we are excited about the increased flexibility related to the share repurchases. Slide 12 highlights our current 2025 market outlook for our 3 major regions. We've made modest adjustments to the forecast for North America and Western Europe compared to the expectations shared on our first quarter call. In North America, we continue to expect significantly lower demand in 2025 versus 2024. While net farm income forecasts have improved due to government support, elevated input costs and uncertainty around export demands are pressuring margins and causing farmers to delay equipment purchases. We now expect the small tractor segment to decline approximately 5% compared to our prior outlook of down 0% to 5%, and we maintain our expectations for the large ag segment to be down 25% to 30% year-over-year. In Western Europe, we now anticipate industry demand to decline approximately 5% to 10% versus our previous forecast of around 5%. Persistent rainfall and unfavorable growing conditions have continued to weigh on wheat production across key markets. Combined with lower commodity prices and elevated input costs, this is putting further pressure on farm income and leading us to revise our outlook. Our outlook for Brazil remains unchanged at flat to up 5%. Strong soybean yields in the Midwest and favorable trade dynamics continue to support farm optimism and retail demand for tractors. Slide 13 highlights the primary assumptions underlying our current 2025 outlook. We continue to anticipate 2025 global industry demand to be approximately 85% of mid-cycle. Our sales outlook was increased modestly due to foreign exchange and still includes market share gains and pricing in the 1% range. Based on the year-to-date weakening of the U.S. dollar, we now expect around a 2% favorable foreign currency impact in 2025, revised up from our prior expectations of no impact. Tariffs continue to create significant demand uncertainty and increased costs for us. Our current full-year guidance reflects the tariffs currently in effect across our global markets, along with our anticipated mitigation plans through cost or pricing actions. That said, the potential for retaliatory measures or additional U.S. tariffs could influence our outlook. We are currently monitoring these developments and remain nimble in our approach. We will update our guidance as needed if the situation evolves. Engineering expenses are expected to remain approximately flat compared to 2024. With the continued need to reduce dealer inventories in the North American market, production hours are expected to continue to be down between 15% to 20% in 2025, as Eric mentioned earlier. These reductions were heavily concentrated in the first half of the year with more moderate adjustments expected in the second half, mainly in North America. Despite ongoing geopolitical trade conflicts and uncertainty affecting our farmers around the world, we've revised our expected adjusted operating margin to approximately 7.5%, reflecting the upper end of our prior guidance range. This outlook remains achievable based on our demand outlook as well as the structural cost changes and cost initiatives implemented across the business. We continue to view 2025 as the bottom of the trough, with our current margin projections approximately 350 basis points above AGCO's performance at the last trough in 2016. Lastly, our effective tax rate for 2025 is anticipated to be approximately 35%. Turning to Slide 14 for our current 2025 outlook. We've raised our full-year net sales forecast to approximately $9.8 billion, up from $9.6 billion previously, reflecting the current market environment and the continued weakening of the U.S. dollar. Our 2025 earnings per share target has also been revised upward to a range of $4.75 to $5 compared to the prior range of $4 to $4.50. These estimates reflect the projected impacts of tariffs in place as of July 31, including the recently announced EU tariff of 15%, along with our planned mitigation actions. Any changes to existing tariffs or additional trade measures could affect this outlook. Based on our demand outlook, we've lowered our capital expenditures to approximately $350 million, down from the $375 million communicated in the Q1 earnings call and compared to the $393 million in 2024. This level of investment still keeps AGCO well positioned to respond to future demand inflections. Our free cash flow conversion target remains unchanged at 75% to 100% of adjusted net income, supported by continued focus on working capital management throughout 2025. As Eric said, halfway through the year, we are pleased with our performance in this very challenging trough year. Our teams around the world have navigated dynamic environments, grown share, and remained intensely focused on reducing dealer inventories without compromising the needs of the farmers. With our improved outlook for 2025, we view our current performance as another data point as to how we've structurally improved the profitability of our business regardless of where we are in the cycle. Lastly, our Q3 2025 net sales are expected to be approximately $2.5 billion. If you were to exclude Grain & Protein sales from Q3 2024, our sales would be up roughly 7% on a like-for-like basis. We anticipate Q3 earnings per share to be in the range of $1.20 to $1.25, up significantly from Q3 of 2024. With that, I'll turn the call over to the operator to begin the Q&A.

The first question comes from Tami Zakaria with JPMorgan.

Very nice quarter. My first question is on the updated operating margin guide. Just wanted to make sure I understood what's implied. So if all regions, except North America, are going to produce to retail demand, shouldn't operating margin sequentially get better versus Q2 for the rest of the year? Basically, I'm trying to understand what's implied in that 7.5% and what that means for Q3 and Q4 versus Q2?

Yes. I think, Tami, there is a seasonality to our business. As you remember, Q2 is one of our stronger quarters. So Q3 will be a seasonally lower quarter and then Q4 will pick back up. So if I think about the back half of the year, the way I would frame the operating margins is probably around 7.5% in Q3, given that lower seasonality, lower production, and then a stronger quarter, a little bit over 9% to get you to that 7.5% for the full year that we have.

Understood. That's helpful color. And then I think I heard Eric mention in the prepared remarks that demand for next year would be modestly higher in all regions. I just wanted to understand, do you have order books open for next year? What gives you the confidence or what underpins the expectation that demand could actually be higher in all regions next year?

Yes. We have our order books open, but they're not reaching into 2026 right now. Really what drove that comment, Tami, is that our data scientists have built a forecasting model. It looks at all different variables of farmer sentiment, crop prices, inventory levels, a number of things. I think there are about 200 variables, and they assigned weightings on those variables based on their likelihood of predicting the future. That model is what we use to guide our expectations of the market demand, and it's pointing up in all of the regions for 2026. And it's been highly accurate so far in 2025. Now can things change between now and then with the tariff policies and things like that? Sure. But with our best estimate of what we think will happen, the world is not certain yet, but it's getting a little more certain these days. That's why we made the forecast we did. It lines up with a lot of what the rest of the industry is seeing, whether it's machinery or other parts of ag. They're saying 2025 is a trough at the very bottom and expectations that will move up. That's backed by the sentiment indicators in Europe or CEMA barometer and the Purdue Index in North America, farmer sentiment index, and both of those are up strongly over the last several months.

The next question comes from Stephen Volkmann with Jefferies.

Eric, I noted your comments around sort of Precision Ag, and I'm curious whether you think the adoption that you're seeing now, albeit in a weak market, is that actually ahead of your expectations? Have you changed your view of kind of the slope of that adoption line going forward?

No, I'd say it's really coming out according to plan. The PTx group overall, which is our overall tech business, is hitting our forecast every month this year. So it's delivering to plan, I wouldn't say we're raising our plan at this stage. We're just delivering to it. It's a combination of the innovation flywheel. That's going really well. I've been running this business now for the last 6 months and spending a lot of time with our engineers, with our salespeople, and with the whole organization at the different sites and out in the field. And so I've gotten very close to it. Innovation engine and the flywheel are kicking out new innovations each year. We're ahead of schedule on that. And then the other half is establishing the channel. We've got multiple paths to market. We have OEM partners. We've kept all of those, and we're looking to grow them, setting up our AGCO dealers to be PTx dealers and then this full-line tech channel. All of those, I'd say, are going according to plan. So happy with the business in a much better year this year than last.

Great. Okay. Great. And then just a follow-up, unrelated, I guess, but your TAFE agreement, I certainly understand your ability to buy back shares there. But is there kind of more to it than you think we should keep in mind?

Well, I think this is a huge win for AGCO and its shareholders. This agreement is very robust. It allows the 2 companies to part ways and go their separate ways. We can cash out of our ownership stake in TAFE. That brings in $260 million in cash. It removes the TAFE member from the AGCO board. It allows us to be very, very focused on the core of our strategy. It's the last piece in the overall structural changes we made. We exited Grain & Protein, we brought in PTx Trimble to form the overall PTx business. We've now resolved all of the TAFE issues that were a big distraction. That's now behind us. We are in full implementation mode on Reimagine and we're in full implementation mode on FarmerCore. These are the 5 pieces we've been wanting to establish to structurally get the AGCO we wanted to get. Now we've got it. We can focus on right at the core of our business, to be super innovative and farmer-focused, and we've minimized a lot of our distractions. So high focus, low distraction. We think it's a great outcome for our management team and our shareholders.

The next question comes from Tim Thein with Raymond James.

Eric, just to continue on that line of thought there. Just in terms of capital allocation, with the, call it, I guess, about $600 million of proceeds between the TAFE proceeds as well as the, call it, $300 million to $350 million of free cash flow. Just how you're thinking about capital allocation and specifically kind of the buyback cadence relative to that new authorization. I know there's other things that you have to leverage and balance, but maybe just some high-level thoughts as to how you're thinking about the timing of that buyback program.

Yes, I'm glad you brought that up. I should have addressed Steve's question earlier. This business isn't particularly large, but it opens up opportunities. I've mentioned the focus and distractions, and it aligns with what most of our investors have been asking for over the last five years. During my meetings with investors, they've expressed a preference for share buybacks over the special variable dividend. Unfortunately, we were limited in that respect due to the existing framework and shareholder concentration with TAFE, but that’s now resolved. We’re now free to align our operations with our investors' preferences. As Damon mentioned, our primary focus is on supporting the company's operational needs through capital and R&D investments, followed by opportunistic M&A. Now, we can prioritize share buybacks. You raised two points, and we're also exploring additional options to return free cash to investors via buybacks. This has become a higher priority since we know investors favor it over the special variable dividend. Moving forward, this will be our main strategy once our operational needs are satisfied. As for timing, it depends on when cash flows become available. When we have the funds, we can discuss how to return them to shareholders. We want to be cautious and avoid rushing into this.

Okay. Understood. And then maybe just on the topic of production hours. And you highlighted several times how the status of inventory reduction in North America, where that's heading. But I'm just curious, what you've seen and what you are seeing, and the dealers are commenting in terms of the early order patterns in North America. Is that informing you at all in terms of how you're thinking about Q4 production outlook? Maybe just thought on that.

You bet. Early order programs for AGCO don't really start until the middle of August. So we'll learn more here soon. When we talk to dealers, we were just out visiting some dealers recently, there's cautious optimism. I was just with a group of farmers and dealers last week, and it matches the sentiment indicator from Purdue for North America. They believe that essentially the tariff situation and uncertainty will get resolved. Ultimately, the administration cares a lot about farmers and will figure out a way that is positive for farmers. So there's some cautiousness in the market today, but they don't expect that to last forever. As the playing field gets clearer, I think that will unlock confidence. The market wants to be able to buy. They want to come off the bottom. The fleet age is getting older and older now for about 2 years. They are looking for the new technology. They want to get into the market. They just want a little more certainty.

The next question comes from Jamie Cook with Truist.

Nice quarter. I guess two questions. One, there's a lot of debate on 2026 and the market outlook. But I guess I'm more interested in the factors that AGCO can control to grow earnings next year. So assuming a flat market, Eric or Damon, what do you think the biggest buckets are in terms of your ability to grow earnings, whether it's restructuring, repo, producing in line with retail, just your confidence level there that if the market is flat next year, it still implies that AGCO's earnings are trough in 2025 and growing. And then I guess my second question, just given the excess inventory that we have in North America, understanding you're underproducing, that's what drove the losses in the first half of the year. Just what are you assuming in the back half of the year for North America? Like when do the losses stop?

Yes. Sure, Jamie. So for 2026, again, using the assumptions that you outlined, I think the 2 biggest drivers that would enhance the margins in 2026. One would be the underproduction lapping that next year, again, as we're already starting to produce to retail in South America and in Europe. As Eric alluded to, we're working hard to get North America. I've said in some of my comments in the prior quarters, today, we have about over a 1% headwind related to this under-absorption embedded in our margins. So if we were simply producing to retail, I think you're looking at sort of that level flowing back into the system. So that would be the top one. The second one is the restructuring actions. Again, we've said by the end of this year, we should be run rating somewhere in that $100 million to $125 million range. We've said there's about an incremental $60 million this year. So I'll get a little bit more next year. And I've also identified that $75 million that I would run rate by the end of next year, some of that will be incremental to the P&L in 2026 as well. So you're going to get a little bit of '25 rolling into '26 and the '26 execution starting sort of mid-year. So I think those are the 2 big variables. I'm not going to speculate on what we do with repurchases. As Eric alluded to, we're eager to jump into that. But how much we do and how fast we go, I would say, would be upside to what we do from the core operations.

The next question comes from Kristen Owen with Oppenheimer & Company.

I just want to follow up on the cadence of the production hours in the second half of the year. It looks like you're now anticipating that your production will be roughly flat in Q3 and maybe down a little bit more than what the original production outlook was for the year. So I'm trying to square that with your operating margin outlook that you provided in the first question. And I think the most helpful way of asking this is, can you give us a little bit of color on where that margin cadence is for, say, Europe relative to South America and North America for the rest of the year?

Yes. Sure, Kristen. And maybe I'll try to weave in Jamie's second question as we didn't get to answer her North American one, so I'll try to weave that in as well. I think when you look at the production hours, Q3 and Q4, you got to remember last year, this is sort of in a year-over-year comparison. You may remember last year, we took an elongated shutdown in Europe, given what we were trying to do with dealer inventory there. Then we sort of moved production back up in Europe in the fourth quarter. So when we're looking at the Q3 production, what you're seeing is Europe actually being up sort of, I'll call it, low teens. North America will be down over 50%, and then you'll have some improvement in South America in Q3. Because of that, what I did last year in Europe and I move into Q4, again, I'm still expecting North American down a lot, but South Europe will likely be down a little bit, just again, given more of the year-over-year comparisons. So that's sort of why you're seeing the change in the production hours here between Q3 and Q4 versus our last assumption. When I look at the margins here, again, for Europe, I think we're looking probably something relatively similar to Q2. So as I think about Q3, probably right in that same range. Then if we get the higher volume as we see in our fourth quarter, we would see the European margins pick up a couple of percent from the Q3 level. Again, more of that sales-driven margin in Q4. For North America, as I alluded to, with the production being down over 50% in Q3 and probably down over 50% again in Q4 as we look to right-size dealer inventory, we still see that position in a loss. We still see the North American margins being negative. Given Q2 is the strong seasonal quarter for them, as we move into Q3 and Q4, which are lower revenue quarters, I would say that those losses could be right around the 10%, 11% range, if not a little bit more, depending on the ultimate sales.

Okay. That is incredibly helpful. And then my follow-up question, just tying back to your comments on parts sales and just servicing the existing fleet, both with aftermarket technology and parts and services. Just can you expand on what's helping support that? And any color that you can provide on how that's impacted PTx Trimble sales in the quarter?

Yes. I'll touch on some of the general things of what we're seeing with parts, and then maybe I'll ask Eric to elaborate a little bit on FarmerCore, which has been a catalyst here in North America. But I think overall, parts sales have been relatively resilient. As I said in my comments, it was up around 3% when you look at the quarter year-over-year. I'd say it's a little bit following the regional pattern where Europe has continued to do quite well. South America is recovering. North America is a little bit more of a challenged market. Again, I think as Eric talked about in his comments, we're seeing a lot of hesitation. There's some optimism for the future. But at least right now, given the uncertainty, I'd say our geographic weighting parts have been a little bit more challenged in North America. But what we are seeing in the penetration rate relative to FarmerCore is giving us that optimism that as these markets start to stabilize as farmers get more comfortable, we definitely see the opportunity for parts to continue that annual growth that we've seen. But maybe I'll let Eric touch on FarmerCore and how that's contributing to parts as well.

Yes. There are several aspects of FarmerCore. If you recall, it’s our strategy where instead of farmers having to go to a physical store, we bring the business to them. Digital tools like online configurators for machines and e-commerce are essential. E-commerce is significantly boosting our parts sales and is one of our fastest-growing segments. Farmers often seek parts outside regular hours and tend to purchase larger quantities online compared to in-store, thanks to our recommendations. This approach not only offers greater convenience but also increases our share of the farmer's spending. We utilize AI chatbots to assist dealers with spare part inquiries, simplifying and improving accuracy for farmers. Numerous initiatives are advancing parts sales directly. Additionally, we established 25 new store formats last year and are on track for more this year. We have also rolled out over 140 new service trucks that provide on-farm maintenance services. All these efforts, including digital tools, new interactions, and expanding dealer footprints, enhance convenience significantly compared to existing farmer-focused distribution networks in the industry. This supports parts sales by being more convenient and capturing a larger share of farmers' wallets. We remain confident that this strategy is beneficial for farmers and contributes to AGCO’s high-margin growth.

The next question comes from Mig Dobre with RW Baird.

This is Peter Kellam filling in for Mig this morning. I have a two-part question regarding share gains. First, can you quantify what is included in the full-year guidance for 2025 concerning share gains? Second, can you provide some insights into what you're observing with shares, particularly with Fendt in North America? Specifically, I'm focusing on the U.S. where tariffs play a role with the Fendt product, which I would assume means Fendt might be priced higher compared to other machines in the market as opposed to a tariff-free situation. Please correct me if I am mistaken about that last point. However, I would appreciate any quantification of the share gains component of the guidance and any insights on the Fendt rollout in North America.

Yes. So Peter, we don't really break down share specifically by brand or by region. I can tell you, if we look at our 3 different brands, the teams have done very well in gaining share in all of the regions. Again, if you remember last year, Fendt had an exceptionally strong year and gained a lot of share, and they've done very well year-to-date holding that in Europe. Massey and Valtra are also gaining. South America, the team has done really well across the brands gaining share. In North America, the industry is down quite a bit. But when we look at the actual share for several of the different Fendt products, we're actually seeing the share tick up year-to-date. Now again, you raised a great question that as we think about the implementation of these tariffs, how will that affect our pricing strategy relative to the competition? Again, as you heard from Eric, Fendt is the best of the best. We know that it delivers better fuel efficiency, better performance to the farmers, but we've got to make sure that that value relative to the alternative fits what the farmer needs. I think that's what we're going to work through here. We have announced some price increases in North America related to parts for PTx and for our model year '26. But again, we're going to see how this unfolds over the next 6 months and make sure that we continue our strategy of growing Fendt because we know farmers in North America deserve the best of the best, and that's what Fendt offers them.

Let me build on that a little bit; everything you said is spot on. I want to discuss AGCO's pricing strategy and how it compares to our competitors based on what we observe from them. There are two distinct topics here that are not linked. One topic concerns the costs the company incurs due to tariffs on specific products imported from various countries into new markets. We gather this information, and our competitors do as well. The second topic is how we manage these costs. My point is that just because a product is subject to a tariff, it doesn’t automatically mean we set prices for that product in the same way. We manage pricing separately from costs. Therefore, certain products may be priced higher in different markets, whether they come from Indonesia, Japan, India, Germany, or Brazil. We are currently evaluating how to set these prices; it could apply to North America or other regions and may involve both tariff-affected products and others. Typically, the price adjustments are not solely focused on the products facing tariffs because it is important to maintain balance across our overall portfolio in relation to the rest of the market. Thus, it is more about distributing the adjustments across the entire portfolio and globally rather than just targeting the products subjected to tariffs.

And was there a follow-up to your question?

No, that was super helpful color, guys.

The next question comes from Kyle Menges with Citigroup.

I don't think you guys actually quantified the change in tariff impact in the EPS guide. So I guess that would be helpful, just how that influenced the change in the EPS guide. And then just now that we have an EU trade deal, any update on how you're feeling about production footprint and pricing you might need to take to offset tariffs?

Sure, Kyle. So if I think about the change in our guide, which was $4 to $4.50, now $4.75 to $5. I guess the way I would walk that change is we beat Q2 by around $0.30. The FX that we've now moved to a 2% positive is around a $0.45 positive. We've weakened the industries in Europe and in North America, small ag. I would say that's about a $0.25 headwind. The incremental tariff costs, I remember at the end of the first quarter, I quantified the net tariff cost at around $0.30 to us from an EPS standpoint. That's now around $0.45. So an incremental $0.15 headwind. What that means is we had some other positives in the numbers that get us to the $4.75 to the $5. The $0.15 incremental related to tariffs is driven by 2 things. One is as we've gotten better clarity with certain tariffs, so EU at 15%, what we're seeing with Indonesia, Japan, some of the places that we import our products, we've rolled those through. So that's been a negative. The other headwind is as we have announced some pricing actions, as I mentioned on a prior question, we've announced pricing actions for parts, for PTx, and for our equipment group. Some of that pricing is going in a little bit later than we had originally anticipated. And so there's more of a delay of that pricing dropping to the bottom line. Those 2 together are creating a little bit more of an EPS headwind related to the tariffs, as I said, to the extent of around $0.15. As it relates to the overall pricing, I think Eric just touched on some of the comments, now that we have clarity on how the EU tariffs are going to affect our production, we'll see how that compares to the competitive landscape relative to the value proposition that we offer the farmers and we'll adjust accordingly. From a production standpoint, again, we do review our production footprint on a regular basis. As we think about our volume growth, as we think about our long-term share and where we're going to be making or selling those products, we always step back and say, is there a lower-cost alternative for us to service the farmers the right way. Now that we're getting some more clarity on this, we'll revisit this as we do on a regular basis. I don't anticipate any sort of near-term changes given the market environment, given the demand. But it's something we're going to make sure that we're constantly assessing to keep our costs as low as possible.

Very helpful. And then I guess another question on the production hours and just kind of trying to square that with some of the other comments you guys made. I mean the guidance for production hours for the year was unchanged but did bring down the industry retail outlook for North America and Europe a little bit. Then I guess squaring that with some of the inventory comments, it sounds like just quarter-over-quarter, no change to Europe dealer inventory. South America, I guess, you reduced by a couple of months, but then North America inventory sounds like actually increased by half a month sequentially. So maybe just trying to square no change to production hours with some of those other comments in guidance.

Yes. So again, remember, our inventory outlook is a 12-month forward look. In the low horsepower change, we really don't make much of that. That's third-party produced products that we buy. That's not going to have a big driver on our production hours. Then when I look at the change in Europe, I would say, again, relatively modest tweaks, and what you saw is change in Europe is offset here by the sort of an increased level of production cuts in North America. So it's sort of a netting of what we're seeing to stay within the 15% to 20% range.

The last question today will come from Steven Fisher with UBS.

You mentioned the $0.30 beat in the quarter. Can you break down what the key drivers were? My second question is if you could share your perspectives on the potential changes to the ag policy in Europe and how influential these policies might be relative to core ag fundamentals.

Yes. At a high level, the beat was primarily driven by slightly better volumes across most regions and an improved mix. The majority of the beat came from overall volume, while cost savings contributed a bit as well. Eric, would you like to address the ag policy?

Sure. We keep our eyes on that very closely. That's just a proposal; it's not a policy yet. The farm groups are all pushing back pretty strongly. If you look at what happened on the diesel tax or on some of the regulations that were proposed for some of the green deals in Europe, farmers pushed back pretty hard, and then there's a balancing point that was found on all of those. I think that's going to happen again here. So this is a starting point for the discussion. There will be a lot of negotiations and challenges back and forth, and I think we'll end up in a reasonable place in the end. But we'll have to see where all that shakes out. It's too early to tell.

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 for joining us today and for the thoughtful questions throughout the call. AGCO continues to make meaningful progress in our transformation journey, building on the momentum we established in 2024, particularly with the launch and expansion of our PTx Precision Ag platform, which is a big part of our 5-piece puzzle. Grain & Protein out, PTx Trimble in to build PTx, the TAFE issue resolved, Reimagine project leveraging AI is in full implementation, and FarmerCore is in full implementation. These all together allow us to have the AGCO that we've been wanting, gives us more focus as a leadership team, less distraction, all able to accelerate our execution. We already delivered solid performance in the second quarter despite ongoing global trade uncertainty and soft industry demand. We made further strides in cost reduction and inventory management, both of which remain key priorities for the remainder of the year. Those are in our control, and we're hyper-focused on executing. Our long-term success is anchored in the execution of our Farmer First strategy. The entire organization is passionate about this, and our dealers and farmers appreciate it. We remain focused on growing our margin-rich businesses that we've talked about from the beginning, globalizing Fendt, parts and services, and Precision Ag, while maintaining disciplined cost management. To close, our updated financial outlook reflects our confidence in the strategy and the strength of our global team. Even in a challenging environment, we are investing in the future, gaining share and executing with agility. That is why we announced the $1 billion share buyback, the largest in our company history. We are bullish on the future of AGCO. To our shareholders, thank you for your continued support. We look forward to building long-term value and advancing our Farmer First strategy. Have a great day.

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