Agco Corp /De Q3 FY2025 Earnings Call

Good day, and welcome to the AGCO Third 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, and good morning. Welcome to those of you joining us for AGCO's Third 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 metrics in the appendix of the presentation. We will make forward-looking statements this morning, including statements about our strategic plans and initiatives as well as our financial impacts, demand, product development and capital expenditure plans and timing of those plans and expectations concerning the cost and benefits of those plans and 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 forward-looking statements are subject to risks that could cause actual results to differ materially from those suggested by the statements. These risks are further described in the safe harbor included on Slide 2 in the accompanying presentation. 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, 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 corporate website later today. On the call with me this morning is Eric Hansotia, our Chairman, President and Chief Executive Officer; and Damon Audia, our Senior Vice President and Chief Financial Officer.

Thanks, Greg, and good morning to everyone joining the call today. We delivered a strong third quarter performance, underscoring the effectiveness of our strategic execution and the resilience of our global team. While macro conditions continue to be volatile, we benefited from a more favorable regional mix and stayed laser-focused on what we can control. Our disciplined approach to production and cost management continues to position us well in this environment. Thank you to the entire AGCO team for their continued focus in these 2 areas, where we remain agile in the face of a complex and evolving landscape, and our people have been instrumental in helping us navigate this uncertainty, maintaining our momentum and continuing to put farmers first. Net sales were $2.5 billion, down approximately 5% year-over-year, or up nearly 6% when excluding the Grain & Protein business divested last year. Strong growth in EME led the quarter, which continues to be our largest, most stable and most profitable region. Near record global crop production in 2025 is leading to elevated grain inventories and putting pressure on commodity prices. While farm income is being supported by increased government assistance in the U.S., crop margins are still tight and farmers around the globe remain cautious on capital spend. During this industry downturn, we are staying focused on executing our strategy, supporting our dealers and customers, and investing in technologies that will drive long-term growth. We also continue to look for every opportunity to limit the impact of tariffs on our farmers. We are closely monitoring evolving tariff policies and government support programs around the world while continuing to engage with suppliers and adjust our supply chain. We continue to assess and implement price increases where appropriate and feasible. For the quarter, consolidated operating margins were 6.1% on a reported basis and 7.5% on an adjusted basis. Our results reflect strong execution by our teams. We maintained solid margins through disciplined operational performance, favorable regional mix and continued progress on our restructuring initiatives. This consistency underscores the effectiveness of our strategy and our commitment to delivering long-term value. Notably, we achieved these margins despite another quarter of significant production cuts in North America as part of our ongoing efforts to destock the dealer channel. When comparing the third quarter of 2025 to the same period last year, production was down nearly 50% in North America. Production levels are actually down nearly 70% from 2023. In addition to making further progress on reducing dealer inventories, we've also decreased company inventories. This continued discipline is reflected in our working capital improvements and free cash flow generation during the 9 months of the year, which was approximately $453 million up compared to the same period in 2024. The global farm equipment market continues to face significant headwinds. Brazil remains slightly up compared to the third quarter of 2024, driven primarily by demand for smaller and midsized tractors, coupled with favorable trade dynamics. Despite record soybean harvest and potential trade benefits, demand for larger equipment has yet to show meaningful improvement. High financing costs and political uncertainty are expected to continue, constraining demand in 2025, but the early signs of recovery point to a modest increase in 2026. In North America, tractor sales declined 10% in the first 9 months of 2025 compared to the same period in 2024, with the steepest drops occurring in the high horsepower categories. Driving this behavior is the significantly lower grain export demand, global trade uncertainty, and continued high input costs. We expect these pressures to persist, particularly with the demand for larger equipment. Recent announcements of government support are expected to support net farm income, which may help unlock future equipment investments. There are also potential upsides if further progress can be made on top of the trade agreement that was announced earlier this week between the U.S. and China. For Western Europe, tractor sales were down 8% during the first 9 months of 2025 compared to the same period 1 year ago. The industry experienced double-digit percentage decreases across most markets. Demand and mix are expected to remain soft through the remainder of the year as lower income levels weigh on arable farmers and correspondingly large tractors. As AGCO's largest and most strategically important region, Europe continues to deliver stable demand that is less cyclical than other markets with strong and consistent operating margins. This performance provides valuable balance to our global portfolio, helping us to offset fluctuations in other markets, including those influenced by evolving U.S. trade dynamics. We remain confident in the region's ability to support our long-term growth, especially as Precision Ag grows there. Combined sales continue to decline across all 3 regions with North America experiencing the largest year-over-year drop at 29%. Amid industry-wide pressures, AGCO is performing more resiliently than in previous downturns and remains well positioned for long-term growth. Looking ahead to 2026, current commodity prices and fundamental uncertainties continue to impact the global ag industry outlook. Positive market factors, including livestock and dairy prices, the replacement cycle, and government payments are being offset by geopolitical tension, tariff impacts, and difficult farm economics, which include elevated borrowing costs and rising input costs. Given the combination of all of these factors, there is an increasing likelihood of markets being relatively flat in 2026, with North American large ag down and Europe and South America modestly up.

Thank you, Eric, and good morning. Slide 8 summarizes our regional net sales performance for the third quarter and year-to-date. Net sales for the quarter increased approximately 1% year-over-year, excluding the positive impact of currency translation. For comparability, we've also excluded the $251 million of sales associated with the divested Grain & Protein business in Q3 of 2024. Breaking net sales down by region. Europe, Middle East posted a 20% increase compared to the same period in 2024, excluding the impact of favorable currency effects. This reflects a recovery in the production levels and corresponding sales following extended plant downtime last year. Growth was strongest in the high horsepower and mid-range tractors. South America declined close to 10%, excluding the favorable currency impact. Weaker industry demand drove most of the decrease, with lower sales across most product categories. North America was down 32%, excluding unfavorable currency effects. The decline was driven by continued market softness and our focused underproduction to reduce dealer inventories. The largest decreases occurred in high horsepower tractors, sprayers, and combines. Asia Pacific/Africa declined 5%, excluding unfavorable currency translation impacts. Lower demand across the Asian markets was partially offset by stronger performance in Australia and Africa. Finally, consolidated replacement parts were $498 million in the third quarter, up 2% year-over-year on a reported basis and down approximately 2% when excluding the favorable currency translation. Turning to Slide 9. Third quarter adjusted operating margin was 7.5%, 200 basis points higher than the prior year. The industry backdrop remains challenging with continued pressure from factory underabsorption and elevated discounting. The margin improvement was primarily driven by strong performance in our Europe/Middle East segment, where higher sales and production volumes supported improved operating leverage. By region, Europe/Middle East income from operations increased around $163 million, with operating margins approaching 16%. The improvement reflects the significantly higher volumes and sales compared to Q3 of 2024, which was impacted by the extended plant shutdowns. North American operating income declined approximately $56 million year-over-year with margins remaining negative again this quarter. Lower sales and significantly reduced production hours were the key drivers, coupled with a significantly weaker industry. South America operating income declined $23 million, with margins down to around 6%, primarily due to lower volumes. Asia Pacific Africa posted a slight increase in operating income of $1 million, driven by lower manufacturing costs, partially offset by lower sales volume. Slide 10 shows our year-to-date free cash flow performance. As a reminder, free cash flow is defined as cash provided by or used in operating activities less capital expenditures. Free cash flow conversion is calculated as free cash flow divided by adjusted net income. Through September, we generated $65 million of free cash flow, an improvement of around $450 million versus last year's net outflow of $387 million for the same period. This was driven by stronger working capital performance and roughly $120 million in lower capital expenditures year-over-year. We continue to expect full year free cash flow to be within our targeted range of 75% to 100% of adjusted net income. Our capital allocation priorities remain unchanged. Reinvest in the business, potential bolt-on acquisitions, maintain investment-grade credit ratings, and return capital to shareholders. As Eric mentioned, following the TAFE resolution and the Board approval of our new $1 billion share repurchase program, we expect to begin repurchasing $300 million of shares in the fourth quarter. We also recently declared our regular quarterly dividend of $0.29 per share. We remain focused on deploying capital effectively to drive long-term shareholder value, and we're encouraged by the increased flexibility to return capital through the preferred investor method of share repurchases. Slide 11 highlights our current 2025 market outlook across our 3 major regions. Our outlook remains relatively unchanged since the second quarter call other than a modest adjustment to our North American large ag forecast. In North America, we continue to expect significantly lower industry demand in 2025. While net farm income has improved, supported by government programs and record high cattle prices, sentiment remains challenged by weak corn and soybean prices. Investment confidence is declining and interest rate cuts haven't yet provided meaningful relief. We're maintaining our outlook for the small tractor segment to be down approximately 5% and now expect large ag to be down around 30% versus our prior range of down 25% to 30%. In Western Europe, we continue to expect the industry demand to decline 5% to 10%. The market remains soft but relatively stable. Wheat prices are below historical averages and geopolitical uncertainty continues to weigh on sentiment. In South America, record soybean exports, partly driven by U.S. tariff barriers, have supported trade flows. However, margins are under pressure from higher input costs, and elevated interest rates in Brazil are dampening demand, especially for large ag. Under these conditions, we still expect Brazil to be flat to up 5% for the year. Slide 12 outlines the key assumptions supporting our full year 2025 outlook. We continue to expect global industry demand to be around 85% of mid-cycle levels. Our sales outlook remains unchanged despite a slightly softer pricing outlook now in the 0% to 1% range, which is down from approximately 1% in Q2, given the increase in competitive pricing in certain regions. We continue to anticipate a favorable currency impact of roughly 2%. Our guidance reflects current tariffs across our global footprint, along with mitigation efforts through cost actions and pricing. That said, the potential for additional U.S. tariffs or retaliatory measures fosters continued uncertainty. We're monitoring developments closely and we'll adjust our outlook if needed. Engineering expense is expected to remain effectively flat year-over-year. We still expect our adjusted operating margin to be approximately 7.5%, reflecting structural improvements in cost initiatives, positioning us roughly 350 basis points above our last trough in 2016. Lastly, we revised our effective tax rate to 33% to 35%, modestly better than our prior estimate of approximately 35%. Turning to Slide 13 for our current 2025 outlook. We continue to expect full year net sales of approximately $9.8 billion, consistent with our prior outlook. This reflects the modest changes in demand trends across key markets. We refined our earnings per share forecast to approximately $5, reflecting strong execution across our global operations. This assumes no material changes to existing trade measures. Capital expenditures are now expected to be around $300 million. While this represents a decrease from the prior estimate of $350 million, we remain focused on supporting strategic initiatives and maintaining flexibility in response to shifting demand trends. We continue to target free cash flow conversion of 75% to 100% of adjusted net income, supported by disciplined working capital management and improved inventory efficiency. As Eric noted, we're pleased with our performance for the third quarter in what remains a challenging and evolving year. Our teams have executed well, grown share, and continued to reduce dealer inventories while supporting farmers' needs. With this updated outlook, we believe our results further demonstrate the structural improvements in AGCO's profitability. Even in a down cycle, we're delivering stronger margins and more consistent earnings, a reflection of our transformed business model. With that, I'll turn the call over to the operator to begin the Q&A.

Our first question today is from Kristen Owen with Oppenheimer & Company.

Wondering if we can start here with the strong Europe results. And maybe just ask a simple question, how Europe performed relative to your expectations? I'm just trying to parse through some of the onetime items versus the underlying trends there and what's supporting the outlook for a little bit more constructive growth in 2026? And I'll start there.

Yes. Sure, Kristen. So I think Europe, I would say, performed modestly better than what we had expected more on the top line. So volumes were a little bit stronger than what we had originally anticipated. The production, what you saw with the margins heavily influenced by the production schedule, I would say, was relatively in line with what we had expected. So overall, we feel good. I think the key point for us as we look at Europe right now, the dealer inventory levels are sitting below the optimal level for us. So we feel very good as we go into the fourth quarter and into '26 here that we're sitting in a relatively strong position from producing in line with retail or hopefully, if the markets were to pick up. And again, we haven't given a full outlook for '26 yet, but the dealer inventory levels are positioned well there for '26.

And then my follow-up, understanding it's very early days to digest, but any initial thoughts on the China trade agreement that was announced yesterday and how that might complement some of the government support that's been floated out there. Just early thoughts on what that could do for your North American outlook next year.

We see this as a clear net positive. The soybean purchases are looking more certain for this year and the next few years, which is essential for farmers who prioritize market stability and predictability. Additionally, government support has been strengthened, creating a dual positive outlook. However, we believe this will require time to materialize, as farmers will need to see actual trades occur, deals finalized, and beans purchased, which will influence real market pricing. We didn't receive a surge of purchasing orders following the announcement, but the overall outlook remains positive, although it may take some time to be reflected in the market, likely affecting us more in 2026.

The next question comes from Jamie Cook with Truist Securities.

I have a question regarding the dealer inventory in North America. It's good to see it decreased to 8 months from 8 to 9 or 9 months last quarter. However, it seems that the excess inventory will carry over into 2026. Could you provide insight on when in 2026 you anticipate we might reach the right size inventory? Additionally, considering your comments about North America, do you believe there's an increased risk that North America could incur a loss again in 2026? That's my first question, and I'll ask another one after you respond.

Yes, Jamie. Overall, I think the team in North America did a great job of reducing our inventory, with a decrease of about 13% sequentially, as Eric mentioned. Given the outlook for our industry this year, with large agriculture down around 30%, and as Eric pointed out in his opening remarks, we anticipate that large agriculture in North America will also decline next year. This situation is putting pressure on us to achieve our six-month inventory target. While we will see improvement from the current eight-month inventory, I don’t expect us to reach the six-month target by the end of the year, based on our current assessment. As Eric indicated previously, new developments have emerged recently, particularly regarding the China trade agreement and discussions about farmer subsidies. To provide some perspective, our inventory levels are calculated based on a 12-month forward outlook. If large agriculture in North America were to remain stable next year instead of decreasing as we expect, this could have reduced our current inventory from eight months to around seven and a half months. Therefore, any changes in the market conditions, particularly in 2026, could significantly impact our inventory outlook. If we observe a positive shift in the market due to improved farmer sentiment and increased purchases in 2026, we could align with our target more swiftly. It's challenging to provide a definitive answer at this moment, as there is still some uncertainty influenced by recent news.

Okay. And then I guess just my second question, tariffs and the lower price. I think last quarter, the guidance assumed $0.45 in net tariff impact to EPS. Any update sort of with Section 232, how that impacts you? And just curious how we're managing the higher cost, but then obviously, you lowered your pricing assumption. So where are you seeing the discounting? And how do you think about pricing into 2026, given what some of your peers have communicated?

Yes. The additional Section 232 items had a relatively small effect on our overall tariff costs. In terms of our projected net tariff number for 2025, we are slightly worse off by approximately $0.45 due to the estimated lost volume compared to the industry. This represents a bit of a challenge for us. Regarding our pricing outlook for this year, we have noticed some increased competitive pricing pressure, particularly in South America and Europe, which has led us to adjust our forecast from around a 1% increase to a range of 0% to 1%. We will still maintain a net neutral to positive price relative to material costs, which includes global tariffs. Although we will still be able to manage this situation, it may not be to the extent we had initially anticipated due to current market conditions. As we look into 2026, we're going to see how the industry dynamics play out. As we've said from the beginning, our goal is to limit the cost of the tariffs to us and to the farmers, where we can't do that, we know that those costs will be centralized likely here in North America, and we're going to look to try to spread pricing as broadly as possible.

The next question is from Kyle Menges with Citigroup.

Maybe just jumping off from the last question. It'd be helpful to just hear you guys elaborate a bit more on the pricing competition you're seeing, particularly, it sounds like in Brazil and Europe, just maybe what's going on there.

Yes. I think, Kyle, what we've seen is the South American market, especially Brazil, as we said the last quarter, has started to recover. It was the first of our 3 major markets into the downturn. It started to recover, mainly in the medium and low horsepower segments of the market, again, influenced a lot by the specialty crop farmers, coffee, citrus, and what we've seen is a little bit of a slowdown in those markets here. And so the market is still growing. I would say we were 0% to 5% last quarter. We were probably closer to the high end of that. And as we look at some of the competitive nature down there with some discounting, especially in that segment, it's reduced our outlook now closer to the lower end of that segment. Again, I think the markets are still doing well. But just given the push to try to drive volume there, we're seeing that segment of the market be a little bit more competitive in nature.

Got it. And then just on your earlier comments on global retail sales, looking like they could be flattish year-over-year next year, assuming that's more so just talking about unit sales. I'm curious if that includes Precision at all. And would be helpful just to hear you discuss a little bit the trends you're seeing in demand for your precision solutions into 2026 and how you feel like you're positioned in that retrofit market going into next year?

Yes. So maybe I'll touch on the industry comments, and then I'll let Eric elaborate on the PTx business. So our outlook for next year is really based on retail unit sales. It's not really including parts or our PTx business. Think of that more as whole goods sales.

Yes. And then PTx, we're hitting all our forecasts this year. It's going as we would plan it to be at this stage of the cycle. We're at the trough. So the margins are lower than where we ultimately want them to be. But we're signing up dealers. We've got over 90% of our AGCO machines now going out of the factories with Trimble technology. Essentially, if you look at the 2 channels that we inherited, the Precision Planting and the PTx Trimble channels, we've got over 90% of the market covered in everywhere except for Brazil, and that's in the low 80s with that dealer network, and we're working on melting those together. The effort to end up with combined dealers that have the full portfolio is well underway. We've got 50 of those done. The target is to have 78 of them completed by the end of the year. That will cover about 70% of the U.S. market, which is the fastest-growing Precision Ag business. So just trying to give you a few data points on both channel as well as technology and our product. And then new technology, we had our Field Tech Days, and PTx launched 11 new innovations this year, well ahead of what we had anticipated when we were putting the business together. So the innovation engine is probably running ahead of schedule. Financials and channel development are proceeding as expected. We have a new leader for PTx who is quickly acclimating and has visited many of our global sites and dealers. I am very pleased with this progress. It's important to note that retrofit doesn't decline as significantly as the overall business; it only decreases about a third as much. So, while there is a decline, it is not nearly as substantial. And as it recovers, we expect that that will recover as well.

The next question is from Tami Zakaria with JPMorgan.

I wanted to get a little more clarification on the pricing outlook being changed. Can you help us with which regions or region is driving that reduction in outlook? And I just wanted to make sure, is fourth quarter pricing still positive? Or are we talking about negative pricing?

Yes, Tami, the fourth quarter will still show a positive outcome. Looking at our year-to-date performance, we're up about 50 basis points. Overall, pricing is expected to increase by around 1% for the fourth quarter across the entire company. In terms of the pricing changes, as noted in a previous question, the reductions were primarily observed in South America and Europe compared to our outlook for Q2.

Understood. And my next question is, I think I heard you say North America large ag, you now expect to be down next year. Can you help us frame what that down means as of right now? Are we talking about flat to down or down to some degree, but less than this year's 30s? Any way to frame that?

Yes. Prior to the news of the last 2 days, we would have said down, like, say, single digits, nowhere near as much as this year. But then since then, we've had a couple of pretty significant positive indicators in terms of farm support for farmers from the government and pricing stability of China buying soybeans. So where that will actually end up is unknown, but it won't be anywhere near what we saw this year. We believe we're at the bottom of a global industry. We believe pricing is probably at about its worst. We think pricing power will be stronger next year. And so I think that '25 is probably, in many cases, the worst of the cycle.

The next question is from Stephen Volkmann with Jefferies.

Damon, can you just give us a little bit of a walk into the fourth quarter? There's a pretty big margin expansion kind of implied in your guidance. And I'm just curious what are the buckets that kind of deliver that?

Yes, for us, the margins in the fourth quarter should finish at around 9% or slightly above that to achieve the 7.5% for the full year. In terms of improvements, Europe generally has a strong fourth quarter, and we expect to see margins improve there due to volume. Asia Pacific, which faced early market challenges, is showing signs of recovery, and we anticipate some margin growth from that region as well. South America is another area we are looking at. However, North America remains a challenge. When considering margins in North America compared to the third quarter, we are facing challenges due to higher levels of underproduction. We previously mentioned that production was down around 50%, and we expect Q4 to be down by over 50% as we focus on managing dealer inventory, which will likely lead to sequentially lower margins in the fourth quarter for North America.

Okay, helpful. And then maybe just to focus on the restructuring program. So the $175 million to $200 million, is there a benefit of that in the fourth quarter? And then what would the benefit of that be in '26?

Yes. Again, year-over-year, we're picking up steam as we move through the restructuring actions. So there will be some benefit in the fourth quarter relative to last year. That's embedded in the outlook already. As I look at next year, you're going to get the carryover from the original $100 million to $125 million, and you'll get some of the early parts of the incremental $75 million. So next year, as we look at the restructuring benefits today, I'd say it's probably in the range of $40 million to $60 million of incremental improvement relative to 2025.

The next question is from Mircea Dobre with R.W. Baird.

I want to go back to the tariff discussion, if we can. And what I'm confused about, frankly, is this interplay between Section 232 and just the normal reciprocal tariffs. And I guess the way I would ask the question, when we're sort of thinking about your guidance for 2025, there was a sort of cadence in the way these tariffs kind of came into play, not much impact in the first half, maybe more impact in the second. You also have FIFO accounting. So I'm wondering, is it fair to think that the impact from these tariffs is actually greater in 2026 than what's embedded in the 2025 guidance? And if so, is there a way to maybe quantify it for us?

Yes, in response to your question, there are several factors to consider. We have some costs related to tariff payments that are reflected in our profit and loss statements, with some still tied up in inventory. We can expect to have a full year run rate of those tariffs, assuming no changes occur. We have also implemented price increases in various segments of our business, such as parts and whole goods for model year '26. Currently, we've only seen a portion of the effect from these changes, which is why we're providing you with a net impact this year. To clarify the cost of the tariffs, without accounting for price increases or other measures, I can say that next year, assuming current conditions remain unchanged, the total tariff costs will be less than 1% of our overall sales. This year, we're forecasting $9.8 billion in sales, so the annualized tariff cost will be less than 1% of that amount. These costs will be more concentrated in North America, so the percentage will be higher there. However, our strategy has been to adjust prices in competitive regions where we can. When it's not feasible to pass on all costs due to competitive pressures, we seek opportunities to adjust prices in other parts of the world to balance out the total costs for the entire company.

Okay. That's really helpful. And then maybe a quick follow-up on South America. And I don't know if this is the right way to think about it. But when I'm sort of looking at margin here, your revenue has gradually recovered sequentially through the year. We've seen a sequential step down in margin from the second to the third quarter despite revenue being higher. And I'm kind of wondering if this is a function of pricing, as you talked about earlier or if there's something else going on that we need to be aware of as we think about the fourth quarter?

Yes, Mig, there are a few factors to consider. Looking at year-over-year comparisons, the mix is important, particularly in the high horsepower segment. Even with the geopolitical situation suggesting Brazil might benefit, we haven't seen an increase in the large agricultural segment of that market yet. Instead, we've observed a focus on medium and low horsepower specialty crops, which has created a mix challenge. In this past quarter, there was a slight year-over-year rise in warranty claims, although nothing major. Considering the fourth quarter, we anticipate continued mix challenges in South America since the large horsepower segment is still not gaining traction. Additionally, last year we noted a specific tax benefit for R&D which provided a margin boost of about 1% to 1.5%, but that won't be repeated this year. So, the key factors for the fourth quarter will be the ongoing mix decline and the absence of that tax benefit we had in the fourth quarter of 2024.

The next question is from Chad Dillard with Bernstein.

A question for you guys on North America. So can you walk through the path to margin recovery? Is there further restructuring that you can do? And then also, I guess, like how much of that headwind is just coming from tariffs?

Yes. The restructuring programs we are discussing include a portion in North America, which should provide some marginal benefits as we head into next year. Currently, the negative margins we are experiencing are largely due to underproduction. As Eric noted, our production levels in 2023 compared to the second half of '25 show a decrease of over 70 percent in hours in North America. Operating factories at such a low utilization rate significantly impacts our margins. Additionally, the tariff costs are concentrated here. Although the team is making efforts to mitigate this, we are not seeing an offset in margins, which will naturally lead to margin dilution. The crucial factor for us is to increase volume. Looking at the industry last year, excluding Grain & Protein, we were around $2.3 billion. We must work to restore that volume, whether through industry recovery or focusing on market share—both are essential.

Got it. That's super helpful. And then just secondly, you were talking about your pricing strategy to mitigate tariffs and talking about spreading it, I guess, more globally. I'd love to get a little bit more color on that. I guess what I'm trying to understand is how successful are you seeing pricing stick if you're looking to expand more globally than merely focusing on pricing in North America?

Our largest market is Europe, where we are continuing to increase our market share despite implementing pricing changes. In contrast, South America is currently very price competitive, making it challenging for us to maintain pricing power there. However, I believe South America will recover as the industry improves. Overall, we've had strong success in Europe by increasing prices while simultaneously gaining market share, and our strategy for handling tariffs has been effective. There's a three-pronged strategy in place. The first is to collaborate with our supply chain to reduce cost impacts and manage the movement of products within our supply chain and manufacturing operations. The second is Project Reimagine, which aims to reduce our cost structure by approximately $200 million from a base of just over $1 billion. Lastly, the third aspect involves pricing actions. We have been clear that we will implement price increases globally wherever possible, particularly focusing on North America.

The next question is from Joel Jackson with BMO Capital Markets.

On your outlook that you expect next year, global sales flat, Europe up, the rest of the markets is down a bit. Can you speak to knowing what your inventory levels will be at the end of this year, what that might mean for underproduction in the various regions we might expect next year?

Yes, Joel, obviously, I think if we look around the world, Europe, we continue to be in a really good position. You didn't see much underproduction in Europe this year. And again, given the dealer inventories right now are sitting below our optimal level, I would say, sort of consider that relatively flat year-over-year, again, producing closer to retail or in line with retail, excuse me. South America, again, the industry is picking up year-over-year. If you remember, we had a lot of underproduction here in the first half of 2025. And so as I think about South America, you probably see some incremental positive from absorption on the full year. It will be first half weighted, and then we'll start to lap the comps that we're seeing here in the third and fourth quarter, where we're producing closer to retail. North America, again, is a little bit of a wildcard. Again, if you look at what we've said with North America large ag potentially being down, our dealer inventories at 8 months right now, hoping to get that closer to our target. That would likely result in some underproduction here in the early part of 2026. But as Eric said, given the recent news with the trade deal with potential incremental subsidies in my comment that if that changes the industry outlook for large ag, that may help us accelerate or not have to underproduce. But again, North America is still a little bit of a TBD next year.

And then finally, can you maybe talk about what sort of subsidy package states to package in the states of magnitude might move the needle for your end customers, $5 billion, $10 billion, $15 billion programs, whether that's $50 an acre, $100 an acre, have you thought about sort of what's needed to move the needle to get farmers to look at capital purchases and not just deleveraging or working capital?

Yes. I think it needs to be over $10 billion. $10 billion to $20 billion, anything in there will get farmers' attention. Granted, that money is not seen as the same as market-driven profitability. They're more likely with subsidy money to pay down debt and other things because they're not sure if it's going to be sustainable into next year and year after. So if the trade deal really sticks and there's a 3-year commitment to purchase 25 million metric tons type purchasing or more, that's going to drive confidence way more in farmers than will the subsidy.

The next question is from Angel Castillo with Morgan Stanley.

I just wanted to go back to maybe one of the earlier discussions on North America margins and tariffs. I just wanted to check, I guess, am I doing the math right based on what you talked about with the 1% of sales impact next year that, that kind of implies something approaching or kind of roughly $1 of tariff headwind. So if you could just comment on that? And then just related to that, I guess, based on what you're estimating today for kind of the North America outlook, fully accepting that there's a lot of moving pieces still, which quarter would you kind of expect to see the kind of peak pressure in?

So Angel, can you give peak pressure in what regard?

In terms of how you kind of spread that tariff headwind, which I'm assuming there's a little bit of a ramp-up as you kind of work through inventories and the flow-through of that tariff impact on your kind of P&L. So just curious which quarter would kind of see the peak of it before it starts to comp the year numbers?

Yes. The first question is regarding our current sales of $9.8 billion. I mentioned that the impact is less than 1%, so it's likely around $0.80, although this can vary as some tariffs are still changing and will affect the small horsepower tractors we import. I want to clarify that this is a rough estimate, and it does not include pricing actions I also mentioned. The number I provided was solely the tariff cost and does not reflect the net effect on our profit and loss next year, as I already have pricing adjustments in place for model year '26 equipment. Therefore, the final figure will be lower. Again, we haven't given a specific outlook. We want to see how the fourth quarter unfolds, but it will be a lot less than that absolute number that I'm quoting you for the tariff costs themselves. as I think about the cadence, we're starting to already see that flow through our P&L in North America, depending on the product. Again, as you know, we buy a lot of these medium and low horsepower tractors from other companies, depending on the level of inventory that we had in stock and that our dealers had in stock, that's flowing through over a period of time, coupled with the cost that we're incurring for some of the raw materials that we're purchasing for our assembly operations here in the U.S. So again, I think it's going to phase itself in. As we get into the second quarter, I would think we'd work through most of the inventory that we've had, and we start to see more of the full effect, I'd say, directionally around Q2.

That's very helpful. Earlier, you mentioned that flat volumes next year would reduce your inventory levels by about half a month, and your current assumption was a decline in single digits. Can you clarify what that assumption is for North America? Is it closer to mid-single digits or high single digits? If, for some reason, volumes in North America, particularly in large agriculture, are down in the mid-teens—which some investor feedback suggests could be a realistic risk—what would the sensitivity or impact be on your inventory levels? Additionally, what would that imply for production next year?

We haven't provided a specific number for 2026 yet. As we analyze the data and the analytical models, we are starting to see a decrease. I think, as Eric mentioned, we are generally looking at a mid-single-digit decline. I prefer not to speculate right now given the recent news. However, I believe that both of those factors are positive for farmers in North America, and we hope they act as positive catalysts as we approach 2026. If it does drop and we are dealing with mid-teens numbers, we would likely need to maintain lower production for a longer period to decrease dealer inventories. Our goal is to reduce this to six months as quickly as possible. Given that our production numbers are down more than 50% in the fourth quarter, we are doing everything we can to limit the additional inventory sent into the dealer channel.

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 all your thoughtful questions. AGCO is making significant progress on our transformation journey. We posted a strong performance in the third quarter with robust margins, disciplined inventory management, accelerated cost reduction, and healthy free cash flow generation year-to-date. I am very proud of the team for achieving this in the face of macro volatility by concentrating on what we can control in a dynamic environment and always keeping the farmer at the center. In fact, the feedback we're getting from our farmers is really strong. Our Net Promoter Score is at our all-time highest level in the company's history. They like the net impact of our products and what we're doing with our dealers to serve them better. In the quarter, Europe is our biggest market, continued to provide stability. We know farmers around the world are under pressure. Our priority is supporting them with efficient machines and technology that keep them productive and profitable. We continue to execute our strategic shifts that sharpen our focus and unlock long-term potential, including the TAFE exit, the PTx creation, and Project Reimagine. Our innovation flywheel is spinning faster than ever with new autonomous solutions and the launch of FarmENGAGE, reinforcing us as one of the most progressive leaders in smart farming. And I think you'll see that on display big time at AGRITECHNICA, the world's largest ag show coming up here in a week or so. That will be a great way to engage with all the exciting things that AGCO's got going on. Our 2025 financial outlook reflects our confidence in the strategy and the strength of our global team. Even in this challenging environment, we are investing in the future, gaining share, executing with agility, and always putting the farmer first. Thank you for your participation today. We really appreciate it.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.