Well, good morning. We're going to go ahead and get this started this morning. Let me take this opportunity to welcome you all to New York. For those of you joining us on the internet, thank you so much for being part of AGCO's 2019 annual investor meeting. My name is Greg Peterson. I head up investor relations for AGCO. This morning, we'll be using slides, as you can see, and the slide presentation will be available on our website, and we'll post those there following each speaker's session. We're going to start this morning on slide three. Possibly on slide three. Here we go. Okay. Here you can see that we have our objectives for today's meeting. We remain very optimistic about the long-term fundamentals of our industry and for AGCO. During our session today, we'll provide you some support for that optimistic view.
We'll review our long-term strategy aimed at growing our business and improving returns for our shareholders. Slide four, which we'll get to in a minute, details our agenda for today. You can see when we get there maybe, can I try that remote over there? Thanks. There we go. You can see that Martin will start with an overview of our strategic priorities focused on creating value for our shareholders. Following Martin's presentation, Eric Hansotia, our Chief Operating Officer, will provide an overview of our smart farming platform focused on satisfying our customer needs, and then give you an update on our operational initiatives. We've scheduled a short break following Eric's presentation, and after the break, Andy will discuss our cost control initiatives, provide an overview of our priorities for cash flow allocation, and he'll finish up our session with a review of our preliminary outlook for 2020.
Also here with us this morning is Uli Stockheim, who's our Chief Communication Officer, so he'll be with us throughout the morning. We ask that you hold your questions till the end of Andy's presentation, and then all the speakers will be available to field the questions. Here we have on slide five is our safe harbor information. Some of our remarks today will contain forward-looking statements, including statements regarding our strategy, demand for our products, and economic and other factors that drive that demand. We'll talk about product development plans, acquisition expansion and modernization plans, and our expectations with respect to the costs and benefits of those plans and the timing of those benefits. We'll talk about future revenue, earnings, expenses, cost savings, capital expenditures, and other financial metrics. I want to remind you that actual results could differ materially from those statements.
For a discussion of the factors that could cause actual results to differ materially, I refer you to our Form 10-K for the year ended December 31st, 2018. Then all subsequent Form 10-Qs that have been filed with the Securities and Exchange Commission. Slide six gives you some historical perspective for AGCO's development over the last decade. During this time, we've shifted our strategy to focus on organic growth, margin expansion, and improved returns on invested capital. We also further developed our product line and entered new markets. Our improved cash generation allowed us to increase investment in our products and facilities while strengthening our balance sheet and improving our credit rating to investment grade, which we intend to keep. Market demand weakened considerably in 2014, the downturn continued through 2016.
Through this period of weaker industry demand, we continued to make strategic investments in our technology and our products to ensure that we deliver on our strategic imperatives. Martin, Eric, and Andy will cover those strategic priorities in their presentations. The trends that support increased demand for grain and lower grain inventories are still intact. Humanity keeps growing populations. The global population will be 8.5 billion by 2030, and by 2050, it's going to be 10 billion. The middle class is also growing. Growing faster than that, as a matter of fact. As standards of living rise, so do demands on agriculture. The middle class demands high-quality food and animal protein. In the next 40 years, the farmers of the world will have to grow more food than humanity has grown since the dawn of agriculture, and there are constraints. There's limited arable land for agriculture.
Climate fluctuations and rising temperatures threaten the productive agricultural land we do have. As living standards rise, so do expectations. People demand more sustainable ways of growing and eating. Even as demand for animal protein rises, so do concerns about animal welfare. The production of animal protein requires great amounts of feed, usually in the form of grain. The increased protein consumption will continue to drive increased demand and support grain and commodity prices, which is the primary driver of farm income. Farmers will be looking for smart solutions to make them more productive. That's where we come in. With these positive trends as a backdrop, I would now like to introduce AGCO's Chairman, President, and Chief Executive Officer, Martin Richenhagen.
Thank you, Greg. Maybe you can ask the guys here next door. Those might be employees. Good morning, ladies and gentlemen. It's a great pleasure to see you again, and I really appreciate you being with us today and for your interest in AGCO. This is, by the way, my 15th analyst meeting. I know some of you already for many, many years, it must be boring for you to listen to me. When I came here in 2004 first time, I was talking about the growing world population. Nobody believed me, it happened. At that time, we were 5.4 billion people on Earth. It's impressive to see how quickly the world population was growing. Our goal this morning is to share some of our optimism about the future global demand for farm equipment.
That's always when you have nothing great to tell about next year, you talk about the long-term perspective. Yeah, I'm not sure whether that's a great strategy because they know too much about our markets already. We also want to talk about how to improve our financial performance, and I think that's important. While Greg just reviewed the fundamentals we believe will support healthy long-term demand, our focus is to ensure AGCO succeeds in an industry that is changing at an increasingly faster pace due to the influence of technology, environmental awareness, and also politics. My presentation will reinforce that our strategic priorities are addressing the challenges and opportunities that arise in the dynamic industry in which we compete. We already this year decided to focus on ourselves instead of complaining about outside impact too much.
Our long-term focus continues to be growing AGCO profitably and improving our return on invested capital by expanding our margins. My time this morning will be spent emphasizing our strategic priorities focused on profitable growth and of operating sustainability. I'll finish by highlighting some of the ways we are investing in our most significant assets, which we believe are our people. At AGCO, we are focused on consistent execution against strategic principles that are driven by our vision, mission, and our purpose. Purpose is maybe new to you. It became a fashion to now not talk only about the vision, but also talk about purpose. We have it. Our clear vision at AGCO is to provide high-tech solutions for farmers feeding the world. This has not been changed. The only thing we changed was we started with the vision high-tech solutions for professional farmers.
We took the professional out because we expanded also into emerging markets more like Africa, Pakistan, India, and so on. AGCO is dedicated to providing farmers the expertise they need to be successful. AGCO's mission with the shareholder in mind is to achieve profitable growth through superior customer service, innovation, quality, and commitment. Finally, our purpose, very simple, is improving farm income. By improving farm income, our primary stakeholders in the value chain all benefit, including our customers, dealers, employees, suppliers, and finally, our shareholders. AGCO will continue to invest in new products, new technology, and improve distribution over the next few years in order to improve our margins and produce higher returns on our invested capital. Slide 11 provides an overview of our specific focus areas that will drive success in our business.
Market-leading distribution, farmer-focused solutions, quality-driven products that growers can rely upon and that are differentiated, operational improvement, and developing and retaining a very strong team. I think we have most probably the best team in our industry. Well, we actually also generate CEOs for competition, so that's not so bad. The guy who is in charge of CNH reported to me as well as the guy who's in charge of CLAAS. We can be proud of our people development. You can also see on this slide the specific initiatives that we have put in place to support our key focus areas. Successful execution of these initiatives will allow us to enhance our business and our competitive position. Underpinning these initiatives are AGCO strategies on digitalization and platform design of our products.
Slide 12 highlights our overarching purpose, to provide greater value through a farm-centric mindset by delivering smart and sustainable agricultural equipment to help feed the world. The center of our focus is the farmer. And not the legal department, like in some of the other companies. In today's reality of relatively low commodity prices and increasing environmental awareness, farmers' margin for error is declining. In order to be successful, farmers are focused on improving yields and lowering their costs. Our focus is to meet the farmers' requirement through our digital product strategy, all with these requirements in mind. We strive to ensure our customers' operations are running, always running, optimized, coordinated, and connected throughout all stages of the crop cycle: seed processing, field preparation, planting, growing, harvesting, grain storage and handling, and animal welfare in the area of animal protein production.
AGCO's smart farming innovation helps farms and machines run more efficiently with lower inputs and higher yields, producing more with less. Our smart solutions are built for productivity from the ground up. They sense the environment, determine action based on the information gathered, and then execute based on the data in real-time. Eric Hansotia will provide more information on our smart farming approach in his presentation. Slide 13 gives you some perspective on AGCO's strategy development over the last decade. Market demand weakened considerably in 2014. The downturn continued through most of 2016. We responded early and took action far before anybody else to manage our working capital and align our cost structure with the lower demand. We first had to focus on managing through the downturn, focusing on cost and inventory management.
Throughout this period, we maintained healthy investment in our products, distribution, and our facilities and factories. We also began our development of Fuse technology to support a new way to improve farmers' yields and costs. Our results improved starting in 2017, and we refocused the business on the 10% operating margin goal. Implementation is pretty much with Eric. In the last few years, we have been making investments supporting improvements in our business through the introduction of technology-driven products and margin improvements. Slide 15 highlights our progress towards a 10% operating margin target. We made good progress through 2013 when our sales reached almost $11 billion, and our operating margin exceeded 8%. We did not lose sight of this goal as we moved through the difficult cycle. During the downturn, we worked diligently on our cost reduction strategies targeted at purchasing actions, factory productivity, and new product development.
As a result of our past and future cost reduction initiatives, we are confident that AGCO has the capability to reach a 10% margin under more normal market conditions. To hit the target, we will need to make additional progress on our cost structure as well as reach volume increases, benefiting sales and production over $1 billion beyond 2019 in terms of cost reduction. Our initiatives include strategies to reduce our material costs, improve productivity in all areas of our operations, and lower the new product cost through intelligent engineering. That's also different from competition. Eric's and Andy's presentation will address the programs we have in place to affect both our growth opportunities and our cost structure. The last section of my presentation addresses AGCO's focus on sustainability.
The world's future depends on food security. We understand there are changing societal expectations related Greg does that to me because I'm a foreigner still. I'm an American, my language, when I was sworn in, I was very surprised that I didn't get that nice Georgia accent. Greg puts those words in you'd normally never use. We are working hard to exceed those expectations. Slide 17 highlights our focus on smart solutions for sustainable agriculture all across the agricultural value chain. AGCO is pushing its product development efforts to make agriculture more efficient, more profitable, and at the same time, more sustainable. In doing so, we make our contribution to achieving healthy and affordable nutrition for all people while at the same time caring for our environment. Helping farmers grow crops more efficiently with lower inputs and higher yields is what AGCO is all about.
Around the world, we leverage our efficiency design mindset to solve real-world production challenges, and our practical reinvention approach has led us to pioneer smart solutions related to mixed fleets, synchronized connectivity, sprayer application pump technology, and harvesting, to name a few. The AGCO team is also rethinking the way grain is stored, conditioned, moved, and managed. Our dryer control system and 3D moistening mapping products help make after-harvest gentler, safer, and smarter to help our customers protect what they've worked hard to produce. As standards of living rise around the globe, driving demand for animal protein, so do concerns about animal welfare, and AGCO's engineering solutions that promote improved treatment of animals while also improving efficiency and productivity. We want all farm animals to have a happy life, happy, not only healthy.
AGCO's innovative product, and my dog, Frida, is actually the ambassador, became the ambassador of the farm animals globally, and her name is Frida. She actually reports now to Uli Stockheim, me anymore. That's a great dog because you can walk with the dog on Fifth Avenue during Christmas time with no leash. That's different for my team. AGCO's innovative products for animal protein production strive to address physical comfort, biosecurity, and real-time next generation monitoring. Our SmartProtein integrated solutions of the future will use sensors to monitor individual animals' behaviors, and they do it already today, activities, physical characteristics, so the producer can sense, analyze, monitor, and manage their animals in a humane way that also drives productivity and profitability down and doesn't need as much medication finally.
I'd like to finish my presentation by spending a few minutes on what I consider to be our most important asset, our people. I really believe in it. That's not just a lip service. That's why AGCO continues to invest in obtaining and retaining the best people in the business to bring our customers the best machines, equipment, and service in the business. This slide describes some of our most important people-centered programs. The AGCO Academy provides coursework and training to keep our dealers current and constantly connected to their customers. AGCO University develops employees for their and AGCO's future. When AGCO's people grow, the company grows. AGCO's core values of transparency, respect, accountability, integrity, and team spirit foster inclusions, and from that, the foundation of our diversity and inclusion initiative we call TRADE.
TRADE embraces the power of unique perspectives and thoughts while creating a culture that drives business success and individual fulfillment. This is good for our people and good for our business. As a private philanthropic organization created last year, the AGCO Agriculture Foundation, by the way, managed by my daughter, that's nepotism, but she does a good job, supports nonprofit initiatives that contribute to global food security, support sustainable agricultural development, and have a positive economic and social impact on communities around the world, particularly in developing countries. I just want to add, we had just the first 20 graduates from a program in Africa where we, together with a university, run a course which basically ends in a graduation. They're all Africans, and they will all be employed by us after they have graduated. That concludes my remarks.
I will now turn the presentation over to Eric, our Chief Operating Officer. I can tell you he has a great future in the company. I can't tell you much more. Eric will do a thorough review of our smart farming strategy, as well as look in detail at our operations. Knowing that next Friday, Hanukkah starts, I still wish all of you a very merry Christmas. Thank you very much.
Thank you very much, Martin. In my presentation, I'm going to cover a couple topics here. First, I'm going to walk you through the details of what Martin described as our smart farming initiative. I'm going to go deep on how we're getting much closer to our customer, understanding their farming operation and the economics behind it, the impact on our machines, and in turn, the impact on our distribution. I'd also like to cover with you the focus we have on operational improvement, as Martin outlined, to make not only the company more lean in how we deliver our solutions to our customers, but also improve our operating margins for our investors. Let's start with this slide that Martin introduced already, and it's essentially the slide that represents our purpose.
At the center is the farmer, and we're essentially using this slide to help us shift from being a machine-centric company to a farmer-centric company. On the left are some tools that we're developing and putting in place throughout the organization, and on the right are some of our strategic focus areas. I'll unpack these one by one. Starting on the far left, we hired agronomists all through the company as new specialists coming in, embed them within both of our product development teams as well as our go-to-market teams. The mission here is to help us understand the application of agronomy into our business, how a plant grows, and also farmer economics. We want to understand where a farmer makes money and loses money, and how AGCO impacts both the plant and the farmer economics. With those experts, we've developed something called Crop Tour.
Essentially, this is a program where we work with farmers all around the world, North America, Europe, South America, Africa, and so on, where we develop test plots showing how is farming done in your local area, your local way. Right next to that, we'll have a variation using the new technologies, the new approaches that AGCO's developing. We'll take that crop all the way through the growing cycle to yield, and we'll calculate and capture all of the costs that were involved with that crop and all of the revenues from the yields and be able to show both the machinery impact, but more importantly, the impact to the plant and the impact to farmer economics.
There's no better way to bring understanding into our organization, and there's no better way to convince a farmer about the new opportunity than to show them right in their own operation, in their own setting. That's what the foundation is built upon. Digital customer experience, as we call it, DCX, is a major transformation effort we've got going on throughout the company. We believe it's the broadest digital transformation effort in our industry. The attempt here is to digitize all the touch points we have with our customers and our dealers. We've mapped those all out, and we want to shift them from analog to digital. I'm going to dive deeper on that later on. Fuse, you've heard us talk about for a number of years now.
It's essentially the capability to be able to have a machine sense its environment and then transmit that information wirelessly so we can remotely monitor the machine and the farming operation. That collection of tools, along with a better understanding of our farmer, helps us deliver on the strategic focus of smart machines. As we make progress on that, we also recognize there's a shift in how distribution happens. I'll talk about both of those. Martin also opened up the topic of animal welfare. The changes are happening more and more rapidly now to our customers in the protein business, where they not only want low-cost protein solutions, but they also want to understand, and they put requirements on our customers about how that animal is raised, and so in terms of health and happiness.
We're working on solutions to help those farmers be out in front of the customer solutions and the industry trends for farmers to be both productive and doing a great job with animal welfare. That sets the stage. Let's go a little deeper now. To explain smart solutions, we essentially break it up into a pyramid here. There's lots of different categories. It starts with the foundation of just collecting the information, either off the machine or off the field. We add more value to it by being able to visualize that information, looking for trends or outliers. When we start really adding value is when we can take those trends and visualization and through data analytics, create insights, adding even more value to be able to turn those insights into advice.
Our ultimate mission for all of our machines across the AGCO business is to make the machines smart. When we call them a smart machine, really what we mean there is that the machine has sensors to be able to understand its environment, be able to do onboard data analytics, to be able to analyze that information, and be able to make diagnostic changes onboard real-time to optimize the use of that machine for the farmer. Essentially going to autopilot mode, where that machine is taking care of itself. In addition to doing that technology development work, AGCO also took on the advent of open data systems, both in Europe and North America. We've worked with DKE in Europe and AgIntegrated in North America to create an open and safe data highway. This allows the removal of a pain point for customers.
As all this data is being generated on the farm, one of their challenges was getting it from their farm to their trusted partner. The data highway work we've done in creating an open platform and essentially the Android approach is removing a pain point and allowing the farmers to feel much more comfortable about embracing the data era. All this work, though, is still focused in the foundation. This is something I've talked to you about before and is at the cornerstone of how we think about these smart solutions. It's all about looking through the crop cycle at the prioritized areas, where on the top line in green, where we can help the farmer improve yield, or on the bottom line in red, where we can help the farmer reduce cost.
We've taken a look at something like 200 discrete elements of the farming cycle and prioritized those areas where we think we can make the biggest impact in the short run and focused on those first. You can see the results. We're adding value in the marketplace. When we add value to our farmers, we can also show that residing as margin in the company. Our margin over the last couple of years has tripled in terms of dollars and doubled in terms of percent. Our scope of thinking around smart solutions is throughout the entire crop cycle. We want to be able to be a partner with the farmer throughout the entire journey, from planning through planting. You see a new Momentum planter. I'll talk to you more about that. Our smart solutions on spraying, I'll talk about that as well, and harvesting the IDEAL Combine.
Also in grain solutions and protein solutions. This is an area of the business, both in grain and in protein, that has not had a tremendous amount of technology brought to it. We think the timing is perfect, where the demands are going up, like we talked about in terms of animal welfare, and the opportunity to bring technology to this area to help farmers optimize their operations. We had to rewire how we think about delivering these types of solutions compared to how we build our big machines. We still have a lot of in-house development, tractor engineers, combine engineers, planter engineers, and those kinds of things, developing very high productive machines. At the same time, we've had to bring on capabilities like robotics and electronics and things like that. We've shown the Xaver program, which is a autonomous vehicle, electrically driven, that works in swarms.
It can either do field scouting or planting or so on. That's a research project that we've been working with a couple universities to be able to understand how this could play in the future of farming. We also believe, are a strong believer, that not all good ideas in smart agriculture are going to come from AGCO. We want to embrace and incorporate ideas coming up throughout the entire ag industry. We've set up our data and our engineering infrastructure to be able to invite and welcome and embrace ideas from partners all throughout the industry. You can see those listed on the slide. When we find a partnership where the innovation is so strong and the culture fit is so tight, we actually take it even further.
We've formed some joint ventures, like with the Intelligent Ag Solutions group, and some acquisitions, like with Precision Planting. We think they are the most impressive ag tech company in the world, which we were able to acquire a couple years ago. That's our approach, leveraging outside ideas, incorporating them, and expanding our capabilities. As we think about framing our internal activities, we frame them in something. Our acronym is CAREF. It stands for the first letter of five categories. Our strategic focus is in the five categories we think are going to change the most over the next several years in the industry. There's going to be a lot of change on connected machines. We see that in other industries and our industry. That's what the Fuse solutions are all about. Autonomy and automation. Autonomy is easy to understand.
That's when you take the operator out of the cab of the vehicle. Before we can do that, we've got to automate many of the functions that the farmer changes today. Everything that they're adjusting or visualizing or monitoring need to be handled through automation, and that's what we're working on through that V diagram we showed a couple slides ago. Robotics and electrification are two other areas, alternative fuels. We think those are going to show up in our industry as well. I picked a couple areas here to be able to explain in the flesh, what does a smart machine look like? Our IDEAL Combine was the first new development in the past couple of decades in our industry.
Not only is it a great machine with maximum productivity in the industry, but it's also a great solution of our smart solutions, a great example of our smart solutions, where it not only can harvest the crop, but it can visualize the crop as it's going through the combine. The operator in the cab or off-board can watch how the crop is performing inside the machine, front to back, left to right. Sensors throughout the machine are monitoring the condition of that crop and the condition of the machine to be able to then use that information to send automatic changes back to the settings of the combine to keep it operating optimally. That's an example of a smart machine controlling itself to run in all varied crops and conditions.
Momentum planter we've launched in South America. It'll be coming to the rest of the world soon. It's a ground-up redesign, much like IDEAL Combine was, and it's loaded with technology from Precision Planting. In addition to that, we've got smart technology on the frame concept, where it now can contour automatically to the contours of the field, keeping that row unit in perfect contact with the field to allow the best use of all of the precision planting technology on the row unit. Again, it's not only making all of those adjustments real-time, but it's visualizing the data coming from each row unit. If we drill into some of those solutions from Precision Planting that I referenced. Precision Planting, we are so impressed with the innovation pipeline that we saw when we bought them, and it continues to grow and accelerate.
We want to continue to blow wind in the sails of this company. Each year, they come out with new, groundbreaking innovations. I've highlighted just three of them that are some of the recent ones. These are all new to the industry, new to the world innovations that no one else has. SmartFirmer on the left is a sensor that you put on the planter. It can measure things real-time as it's going through the field, like moisture, temperature, organic matter, and residue in the furrow, in the slit that we open up to put the seed into. Well, why are these things important? What it allows the farmer to do is take that real-time data and turn their planter or their planter system into an autopilot, automatically adjusting planter.
As the planter is traveling through the field and gets to an area that's got higher organic matter, that's highly correlated with higher yield. The planter then, when they put it in autopilot mode, will plant a higher population of seeds and/or switch to a different hybrid, a high performance hybrid to capture the maximum potential out of that high yielding area. When we get back into a low organic matter area, it will adjust the planter back down to a lower population of seeds, saving input costs because the yield will be capped, and even switching to a different, more defensive hybrid. It can also be used in conjunction with the feature in the center called SmartDepth, where by measuring moisture, it can change the depth automatically at which we're planting that seed.
Today, all the other planters have a mechanical turn crank that you have to go and change row by row physically. How often do you think a farmer is going to do that in a field or in a season? They don't. When you can automatically electronically adjust it from the cab, or even better, in an autopilot mode when paired up with SmartFirmer, that planter can intelligently change the depth so that germination happens optimally and consistently throughout the field. FurrowForce, if I way oversimplify the planting operation, essentially what happens is you make a slit in the soil, you place a seed, and then you close the slit back up. That closing operation is something that has not been given a lot of attention. We've automated the closing function now.
We've got sensors to look at how well is that job being performed and automatically adjusting what's happening on the closing operation to make sure that it's fully closed every time based on the varying soil conditions and moisture conditions. That way, you never have an air gap to disrupt seed germination. These are just some examples. I wanted to go a little bit deeper to give you a feel for what does it mean when AGCO talks about smart solutions and some of these partnerships and acquisitions that they've made. We're so happy with this business that we continue to invest and grow it. Precision Planting's essentially culture and innovation process is built on getting really close to customers.
They've got a saying that, "If you don't show up to work with mud on your boots, you're not doing your job." That's a phrase that says, "Get out with farmers, get in the cab and out in the field, understand your farmers, understand their pain points, and understand what we can be doing to make their operation more profitable." They're very fast to develop. We've got labs and equipment, prototype equipment capability there, where the engineer can design a new product, understand a customer problem, come back, create multiple solutions, create some prototype examples, get out in the field behind the test center, test them out, find what didn't work out, come back and reiterate very fast in an agile development mode. That's the development cycle.
We've also got a test farm, 200-acre farm, purely dedicated to both capturing data on what's happening, but also deploying learnings to farmers. We bring farmers from all around the world to this farm all through the growing season. In fact, we even took the AGCO Board of Directors out there last year and spent a day in the field understanding agronomy and farmer economics and the impact of these new technology solutions on the farm. The way we take customers through it is showing them, like our Crop Tour, how is farming done traditionally, and then how could it be done in these new approaches and with this new technology. We're expanding this farm and putting in more infrastructure, and we're also installing some of our digital development people inside the Tremont headquarters to be able to leverage this culture that we talk about.
Very customer connected, very fast at creating multiple solutions and getting out and trying in an agile development mode. We're trying to take that culture and inculcate it back into AGCO, the larger operation. I also want to mention the role that the Fendt brand has in our smart machine story. Fendt has always been having the reputation of the premier brand in the industry, bar none. It is the Rolls-Royce of farming, the best of the best. Historically, it's been more focused on tractors than the full line. We've been changing that over the last year. We've got a two-pronged growth effort with Fendt. The first dimension is broadening out the portfolio to the entire crop cycle and providing a full line of solutions to our customers. You can see that represented on the slide here.
That allows us significant more growth in our home market for Fendt in Europe. We also have a second dimension of growth for Fendt, and that is taking this full-line solution and taking it to the rest of the world. You might ask, "Well, why didn't you do that sooner?" The tractor design had inherently a characteristic where it was designed for the farming system in Europe with its certain tread spacings, but it didn't fit so well with North America and South America. We've redesigned that whole tractor family now to be able to open it up to still be fantastic, a perfect fit for Europe, but flexible enough to be a perfect fit for the other regions around the world. With that, we've now bringing this whole portfolio to the other markets.
It's not really a product story, although the products are the industry trend setter. It's about the Fendt experience. We've spent a lot of effort on the products, but even more effort on the overall Fendt experience, planting that experience in the new markets. We've created a Fendt Experience Playbook, where we've mapped out all of the steps that make Fendt. Which customers do you go after? How do you sell to them? How do you support the customer? So on. We've mapped all that out into essentially a cookbook or playbook, turned it into videos, and we're going now to our dealers and immersing them into, here's how you become the best of the best. Here's how you bring the Fendt experience, and we keep that extremely high standard to go along with the standard of the machines. The transition now to smart distribution.
We recognize that all this work and all the delivery on these smart solutions are also going to have an impact on our distribution. We started with thinking about what's our customer doing and expecting. They clearly are expecting more and more of their world to have an online presence and an online interaction. They want to interact with their machines in a smart way and be able to remotely monitor. Their uptime expectations are going higher as they become larger, and they want to improve communications, both with their machine and their dealer and the company that supports them. That formed the foundation of our effort, and the smart distribution effort started with a toolset that I mentioned in my opening slide.
It's a combination of Fuse and our digital customer experience programs. Fuse is connecting our machines, that you can understand what's happening with the machine in the farm. The digital customer experience is the tool set that we're bringing to our customers and dealers to be able to have all of the interactions now become digital. I'll talk to you a little bit more about that. As we've been deploying these digital solutions to our customers and to our dealers, we're monitoring what changes. What new insights do we have. What changes does it cause for our customers and how they want to interact.
We're doing a strategic evaluation on those changes, putting experiments in place in the marketplace, and understanding how that may change the role of our company and our dealer organization to make sure we're staying out in front of serving the customers the way they want to be served. Talk to you a little bit more about this digital customer experience that I've mentioned a couple times. It's really the broadest digital transformation in the industry. It's focused on bringing lots of enhancements to the marketplace. A customer portal and dealer portal where they can have a one-stop shop instead of having to go all over the place to interact with different elements. Bringing heavy data analytics. With all of this data, we want to be able to turn that data into insights.
We're bringing an online tool to help the customer online be able to configure, price, and quote either machines or service parts, to be able to interact with the company the way they can interact, like in automotive or on Amazon and things like that. E-commerce capability to buy machines or service parts. Customer relationship management tools to be able to identify which customers are the best fit for our solutions, what's their characteristics, and how do we go target them specifically with targeted marketing efforts. That's the camp of solutions that we're bringing to the marketplace with digital customer solutions. One of the results that you see is like, "Well, show me the money. What will change here?
Why do we care about these types of things? One of the measures is that as we get closer to our customers and can become a better partner with them on smart solutions and a digital partnership, we expect our services and after-sales and parts business to increase and have higher penetration. We've already seen a nice growth rate over the last several years. We expect that growth rate to not only continue but accelerate. Our focus is on making the most of our connected machines. As we better understand the farming operation and how our machine's being used, we can better target that customer with better solutions. We're using a lot more data analytics to be able to target customer applications and help our dealers manage their inventory.
We've got a program that we offer to our dealers that essentially uses data analytics to say, "We understand the machine park in the field in your area. Why don't we help you with a recommendation of exactly which parts you should be ordering to have on stock?" All the dealers that have adopted it have found two things. First, they've seen their parts fill. This is essentially when a customer comes and asks for a part, do we have it or not? Their parts fill has gone way up and their inventory of dead parts has gone way down, meaning they ordered the wrong thing. They're more efficient and they're more effective. We're rolling that advisory program out to all of our dealers worldwide to help them be more effective and a better partner to our customers.
There's some good old-fashioned dealer development work underway as well, as I wrap up this distribution portion. I highlighted an example from our European business where in every one of our businesses, even our strongest, biggest business, we have areas where distribution isn't as strong as we'd like it, or we even have some open territory. The European team focused on Poland and Ukraine as markets with better opportunity than we were achieving at the time. They went in with a very focused attack and said, "How do we become world-class with our distribution partners here?" Redesigned how that layout happened, brought in some new partners, canceled some existing partners.
The result in a short amount of time, in the first year to year and a half, we've seen a significant rise in market share in this area, helping lead and contribute to the overall growth story that we've had in our European business. Transition now to operational improvement. Martin already highlighted our objectives and our vision here. You've already seen the results this year so far through three quarters where, when most of our competitors are seeing their margins going down, we've already delivered margin improvement. That's really what we mean here, is operating margin improvement regardless of what's happening in the marketplace on our journey to a much higher margin overall. We've got a lot of initiatives that we talk to our employees about consistently, they fall in two camps. One is that we've got some great businesses that we can grow.
They're not at their full potential yet. I've talked about Fendt globalization and the full line offerings throughout the business. I've already talked about the parts growth business, which is also a high-margin business. We still have untapped potential in emerging markets of Africa, Eastern Europe, and China, and being more intelligent with how we price. Pricing in different markets to different customers to be able to better set value to the products and services we deliver. We also have opportunities in cost. We're a company of 40 acquisitions. That could lead to things being done 40 different ways. We've done a lot of work over the years to be able to bring that together and make ourselves a more lean company. One of the big initiatives that's been going on for a number of years is taking out product complexity and platform consolidation.
I'll hit that a little bit more on the next slide. We've also got product cost reductions. Over the last several years, we've introduced a lot of product programs through the emission regulation requirements. If we're honest with ourselves, we left some cost on the table with the speed at which we had to deploy. We're going after that now and making those products more efficient. We also believe that like the platform strategy is with our products, where we design once and we build globally and sell globally, we can do that same thing with our processes. Develop a process once and do that activity one way around the entire company instead of doing it 40 different ways. Ideally, whenever we can, we'll automate that process or make it more digital.
The last section here I'd like to talk about on this slide is a focus area that I've had since taking on the role that I'm in today, and that is really getting out and spending a lot of time with our employees and helping them understand this mission. Understanding the importance of margin improvement to our investors, but also to them as employees, to our customers, and to us as a company. In doing that through a lot of interfaces at the sites, town hall meetings, virtual town hall meetings, video communications and things like that. We also put our money where our mouth is. We tied all of our incentive system and built an infrastructure around this topic. All of our bonuses and incentive structures are tied to achieving margin improvement. When the organization delivers that outcome, they also get rewarded for it.
We've got a heavy infrastructure in terms of a project management office to gather all the ideas from the organization, prioritize them, and then manage them rigorously through the implementation phases. To touch a bit on this platform strategy, you've heard that for a number of years from AGCO, and we're really proud of the progress that we're making. You can see on this slide real briefly that we've got much of the portfolio already converted to a platform mindset. Many of our tractors, of course, the IDEAL Combine coming in and being our new global combine. We've already integrated the Lely acquisition. That was a hay tool business and baler business. We've already integrated that and turned it into a global platform. Momentum planter that I mentioned is going to be our global planter business.
Platform strategy as well, as Wayne, is very deeply rooted in the culture and mindset of AGCO. I'm excited to talk about quality. When we started this journey a few years back, we started at the focus point of what's closest to our customer, and that was manufacturing. We wanted to make sure that if there was any error that occurred throughout the organization, that we caught it before it got to the hands of our customer. We invested in mistake-proofing, robotic welding, robotic checking, dyno cells, things like that, to make sure that we would catch any issue, any non-conformance before our customers would observe that. That was a good step forward.
Since then, we've taken the attack to the full AGCO portfolio, moved the effort upstream into our design and development process to put poison to the roots of the quality issues at the design phase. There's no better, more robust way to make sure you've got great quality than to design it out on the front end. We inject this in on the front end of all of our development programs of, here are the areas or the suppliers or the problems we've had in the past. We need to design those out in the future. We're using data analytics to be able to understand when we have an issue earlier.
Using the data analytics of warranty data streams plus several other data streams to be able to more rapidly identify when we've got a problem so that our teams can more rapidly solve that problem and reduce the field population of customers that were impacted. Wrapping around this is a set of tools and programs to raise the customer experience in terms of things like Tech Connect and others. As I'm heading to the home front here, I wanted to also talk about grain storage and protein production. This is a business that's unique to AGCO, different than many of our major equipment competitors. It's over a billion-dollar business. It's a collection of grain storage, grain handling, and protein production, especially focused on swine and poultry production. I visited some of our big customers over the last few weeks in this segment.
Number 11 swine producer in the world and one of our biggest egg producers and so on. As I listened to them, it was clear that they're under a lot of pressure from things like the China-America trade wars and the impact that brings, but also African swine fever. Just to put that in context for those that may not be familiar with it, China is the biggest producer of pork protein. They have about half of the pigs in the world. This terrible disease, African swine fever, has impacted them so significantly that about half of their pork population has needed to be culled because of this disease. When you think about that is a massive impact to the global protein production system, and it's showing up as an impact to our business as well.
With those headwinds for our customers and to our business, and the fact that over the last several years, we've been really busy at acquiring a number of companies to put together this market-leading business in grain and protein. We said this is a perfect time to be able to take a step back and say, "How do we run this business most effectively for our customers?" We used a lot of the same tools that I've covered throughout my whole presentation. How do we get closer to our customers? How do we bring more technology to them, differentiate our product more? How do we help optimize these systems on their own, like we do with our machines? How do we reduce our footprint and inefficiencies? You've already seen some plant closure announcements that we've announced.
How do we integrate among the businesses we bought and between that business and AGCO? That's been underway through the year, and we've already got a lot of implementation underway. In closing, I'd like to just wrap up with a communication that I use in what I talked about when I talk with employees frequently. I also like to really hit this point hard. As we talk about our vision, I want to make it very clear to all of them that they need to keep their eyes on two main priorities. The first one is about delivering greater customer value through a farmer-centric mindset. We've got to get closer to our farmers, understand agronomy, understand how a plant grows, and how farmers make money. As we understand that, we need to understand their pain points and how AGCO can impact them.
We add more value to farmers, we will capture some of that value in terms of margin to the company. This is foundational. Since we've got the history we have, we still have untapped potential in terms of operating efficiency, both in product cost and process efficiency. We tell this story to be able to make sure that we're keeping our balance set properly and to inspire our organization to say, "Hey, some of the best days of AGCO in terms of margin delivery are in front of us." Thank you. With that, I'll turn it back over to Greg.
Thank you, Eric. I have three pieces of good news. Your behavior during the first session has earned all of us a 10-minute break, so we'll do that. Piece number two is there's some piping hot coffee that the amazing staff from the Palace Hotel has ready for us in the library, which is in the adjoining room. Piece of information number three, there are restrooms on the fifth floor, and there's an elevator right outside the room to take you there. We'll see you back here in 10 minutes. Thanks, guys.
Okay, we're going to get started again. Good morning to everyone here today. We appreciate your attendance and interest in AGCO, and also thank you to everyone listening online this morning. As both Martin and Eric mentioned a few minutes ago, margin improvement is one of our top priorities, and I'm going to start my session with an update on a number of initiatives we have in place aimed at making us more efficient. Next, I'll recap the performance of AGCO Finance, our captive finance joint venture, and then we'll review our capital allocation options and plans, and then we'll conclude the remarks with some information on our preliminary targets for the next year, 2020. First, talking about R&D. We remain committed to investments in research and development. The objective of these investments is deliver the highest quality products and services that exceed our customers' expectations.
Slide three details the increase in our R&D spending over the last two decades. We intend to maintain a strong level of investment in our products, resulting in R&D spend at about 3.9% of our sales in the year 2020. We're continuing to refresh our full line of equipment with a focus on smart machines, as Eric discussed. In particular, high horsepower tractors, combines, and sprayers for the growing professional farming sector, as well as new products which will expand our current product offering. Our plan includes investments in new products and our common platform initiatives. Our engineering program covers our increasingly large portfolio of precision farming technology. AGCO's material spend makes up about 75% of our manufacturing cost, and we have further opportunities for savings through our global purchasing excellence and best cost country sourcing initiatives. The benefits of these programs are captured on this slide.
Our GPE program involves using global commodity teams to better leverage our total material requirements, resulting in lower costs. Another important accomplishment in the area of material cost management has been the growth of our best cost country sourcing initiative. Our sourcing from Asia, India, and Eastern Europe is gaining traction, resulting in cost reductions compared to our current supply base. The savings from these material cost reduction programs is a key source of margin improvement, as along with pricing, helps to offset normal material price inflation and adverse changes to hard commodity prices, including steel. Direct labor is 100% variable cost to our production levels. As a result, we adjust our direct labor force to match the changes in production levels. In addition, we have initiatives in place aimed at improving our labor productivity.
This slide details the savings from our manufacturing optimization program, which is addressing our direct labor costs. This continuous improvement program is designed to reduce delivery lead times and costs while improving quality. Six Sigma and lean manufacturing programs are in place across our manufacturing footprint. We continue to benefit from the sharing of best practices across sites and from employee involvement in the process. We are also investing in technologies that provide direct labor savings, like robotic welding and paint systems or automated guided vehicles that reduce material handling expenses. Smart factory digitalization incorporates the latest technology along with standard lean methods to create smart factories. Each AGCO plant has annual productivity goals. We expect AGCO production systems to generate $15 million-$20 million of incremental annual savings. Our cost reduction actions allow us to operate our business more efficiently and will provide long-term benefits to our cost structure.
A portion of these savings are being reinvested in initiatives which are aimed at also providing long-term benefits in the form of growing our sales and market share through expanding our technology capabilities and improving our distribution. These projects include additional expansion of our Fuse and digital commercial capabilities and demonstration and dealer preparation related to our new harvesting and full line offerings. We also have a number of areas where we're investing in the development of our dealer network. These investments include restructuring of our network in key central and Eastern European markets, where market share gains were achieved. In addition, our distribution initiatives include development of our Fendt dealer network outside of Europe and our Precision Planting dealer network and sales force outside of the U.S. Lastly, our investments include further development of global systems platforms, our SAP ERP system.
The cost of these initiatives mainly are included in SG&A expense. In addition to these items, our SG&A costs will also increase due to inflationary increases and foreign exchange impacts. Moving on to a discussion about our finance company, AGCO Finance. AGCO Finance is owned 51% by De Lage Landen, which is a subsidiary of Rabobank, and 49% by AGCO. Rabobank is one of the largest banks in the world, commanding one of the highest credit ratings for an international bank. Rabobank specializes in banking for the food and agricultural sector, they understand the global agricultural market very well. AGCO Finance provides financing for approximately 55% of AGCO's retail sales in our major markets. Our joint venture is well-capitalized with term-match funding, liquidity guaranteed to maturity, and no term or interest rate risk.
AGCO Finance presently has no reliance on the commercial paper or securitization markets for its funding, and it stands ready to increase participation in our financing should our retail sales grow. On slide eight, you can see the recent trends in the size of the portfolio, and as of the end of December 31, 2019, the total portfolio is expected to be about $9.4 billion. Slide nine details the split of the portfolio between retail and wholesale, and by region. Today, 81% of the AGCO Finance portfolio consists of retail financing for AGCO's farming customers. The remainder is made up of wholesale floor plan financing for our dealers. AGCO Finance has consistently produced strong profits. AGCO accounts for its 49% of interest by the equity method, and AGCO Finance results are reflected in our equity in affiliates line on our financial statement.
In 2019, AGCO's share of the joint venture's earnings are expected to be in the $40 million range. The quality of the finance portfolio is reflected by the low level of write-offs. For the five-year period of 2015 through 2019, write-offs have averaged less than 50 basis points as a percentage of the total portfolio. In North America, AGCO Finance retail products do include leases.
As of September 30th, 2019, leases represented about 39% of the retail financing portfolio in North America, with an average lease term of about 52 months. Now, moving on to discussion about capital allocation. As you have already heard this morning, return on invested capital and operating margins are currently AGCO's principal financial metrics. ROIC development is predicated on strong free cash flow generation. You can see from the chart on slide 11 that we've generated solid cash flow in all points of the last cycle.
The key to this achievement is managing working capital and, in particular, dealer and company inventory levels. Our future focus will be on improving our inventory management to achieve consistent free cash flow generation. Our free cash flow is funding important investments and is supporting our dividend and share repurchases as well. The following slide addresses cash deployment. Slide 12 lists our capital deployment priorities. We intend to continue investing in our business to improve the efficiency and maintain the pace of our new product introductions. Over the last decade, we have built a strong capital structure, and we strive to maintain our investment-grade rating. We remain opportunistic with regards to acquisitions in order to add new products and expand in new geographies, while our healthy balance sheet and strong cash generation has enabled us to return cash to shareholders, and we plan to continue this practice.
Slide 13 looks at depreciation and capital expenditure trends. Our capital expenditures are focused on new product development, improving the capabilities and efficiencies of our manufacturing operations, and upgrading our system platforms. Looking ahead to 2020, we expect our CapEx to be up about $25 million compared to 2019 due to the increased investments to refresh and expand our product line, upgrade systems, and improve our factory productivity. As we look beyond 2020, we expect our CapEx range from 2.5%-3% of sales. Slide 14 details cash returned to our shareholders. We expect cash distributions to continue to be an important component of our long-term capital allocation plan. We've executed share repurchases of approximately $1.3 billion, which has had the effect of reducing our share count by over 23%. For 2019, we expect to complete about $130 million of share repurchases.
Last week, our board of directors approved a new $300 million authorization that will enable the continuation of our repurchase plan. We're also committing to responsibly growing our dividend in the coming years. We expect to fund both our share repurchases and dividends with free cash flow. Now to our outlook. The next section reviews the assumptions supporting our 2020 forecast. Slide 16 details North American industry tractor sales for the last two decades, and it shows how AGCO sales have trended during this time. North America industry demand weakened during the four-year period from 2014 to 2017.
Significant declines in sales of high horsepower tractors, combines, and sprayers were partially offset by stability in the lower horsepower set categories due to healthier conditions in the region's livestock sectors and improvement in general economic conditions. In 2018, the market was up modestly with strong sales in the low horsepower categories and growth in row crop tractors. With the ongoing trade dispute and difficult growing conditions, we are expecting 2020 industry demand to be flat compared to last year. The USDA is projecting 2020 farm income to be down modestly compared to 2019, due primarily to uncertainty with Market Facilitation Program payments next year. Low horsepower equipment sales are expected to be lower than their historically high levels, and high horsepower equipment sales are also expected to be under pressure. Overall, we project industry tractor sales to be down between flat and down 5% in 2020 compared to 2019.
Slide 17 details the same 20-year outlook, the trend, excuse me, for North America high horsepower tractors. These large tractors are purchased almost exclusively by row crop farmers who benefited from record levels of income and heavily invested over the peak years through most of 2014. Following the decline in crop prices and a refreshed fleet, farmers deferred purchases of equipment. Farmers remain cautious due to concerns over lower farm income, trade issues, as well as a difficult harvest this year. We would expect to see 2020 demand remain weak until there's more clarity in the trade situation. Moving on to Western Europe. We show the industry sales for AGCO's most important market, Western Europe. Recovery in the dairy sector provided support to retail sales and helped improve overall confidence in the region over the last few years.
Farm income is expected to be down modestly in 2019 due to challenging economics for arable farmers across parts of Western Europe and lower milk prices in the second half of the year. As a result, industry demand in the second half of 2019 has trended lower in Western Europe. For 2020, farm income is expected to be down modestly, driven primarily by lower milk prices, partially offset by more normal crop production. Based on these assumptions, we expect sentiment to remain weak in 2020, industry demand to continue to soften modestly across the European markets. We are forecasting lower demand in nearly all major European markets. Over the last few years, AGCO's improved its product offerings while offering a much broader product lineup. The benefits of our full line product offering is providing opportunities to grow in market segments outside of our core tractor business.
South American industry is addressed on the next slide, with Brazil representing about 75% of the industry volumes in 2019. Industry sales remained weak in South America this year as the benefits of improved grain production in both Brazil and Argentina were offset by interruptions in the government-subsidized finance program in Brazil and weak macroeconomic conditions in Argentina. Industry demand in 2020 in South America is expected to be flat compared to 2019. Farm income is expected to remain supportive in Brazil in 2020 as Brazilian farmers should benefit from a weaker real and strong crop production. However, uncertainty around export demand for the soybean crop and potential changes to subsidized financing programs are likely to temper farmer sentiment. Slide 20 highlights the assumptions underlying our 2020 preliminary outlook.
While we are optimistic about the long-term growth opportunities for our industry and our business, the priority for 2020 continues to be managing our cost and continuing to invest in products and business improvement opportunities. Our 2020 forecasting assumes softening industry demand in Western Europe and North America and relatively flat industry sales in South America. Our plan includes market share improvement with price increases of approximately 2% on a consolidated basis. At current exchange rates, we expect currency translation to negatively impact sales by over 1%. In 2020, engineering expense is expected to be relatively flat compared to 2019 and be about 3.9% of sales. Operating margins are expected to range from flat to modestly improved despite lower sales and production levels. The benefit of our productivity and purchasing initiatives, partially offset by the investments we're making in long-term programs, is expected to produce the improvement.
We are targeting an effective tax rate of approximately 33% for 2020. Interest and other expense is expected to be approximately flat compared to 2019 levels. Slide 21 lists the preliminary view of our selected 2020 financial goals. We are projecting sales to be in the $9.2 billion range. The impact of sales and production declines are projected to be offset by our cost reduction and margin improvement initiatives. Based on these assumptions, we are targeting 2020 earnings per share of approximately $5 to $5.20. We expect capital expenditures to be up $25 million compared to 2019 levels and free cash flow to be in the $325 million-$350 million range. That concludes our prepared remarks. Before we take your questions, let me recap what you've heard this morning. We've highlighted our optimistic long-term view of our industry and for AGCO.
We've reiterated our long-term strategy aimed at growing our business and improving the returns of our shareholders. Finally, reviewed actions we're taking to align our costs with the current demand environment we're facing. We're happy now to open it up and take your questions. Since it's a webcast, we ask that during the Q&A session that you please wait for Mary Grace to come by with the microphone, before you ask your question. Thank you.
Yes. Hi, good morning. Jerry Revich, Goldman Sachs. In the long-term margin targets that you laid out on a $1 billion of incremental sales, that implies about 40% incremental margins. Can you just step us through the roughly looks like $200 million in embedded cost savings and pricing, just the biggest ticket items out of that timing? Separately, in South America, we've had a challenge with the product transition. Can you just talk about what your expectations are for margins in South America embedded within the guide?
Sure. On terms of the margin progression, as we mentioned, in order to achieve that 10% goal, we would expect to achieve that in more normal market conditions. There should be some market recovery that would achieve sales improvement. If we could get, as we said, over $1 billion sales improvement from the market recovering, then it would put us in a position where we have a path to reach that 10% through all our other margin improvement initiatives. The key ones we've really highlighted today in terms of what we do with product design, what we're doing with our material cost improvement, because those are where the big costs are. Also, there's an element of labor productivity there. The other sector of improvement comes from growing high margin, some of our most successful businesses.
The improvement in our parts business that Eric discussed, expanding some of our premium product lines, some of the higher performing businesses we have, we think will also be part of that margin improvement story that gets us to that 10% target.
What I also would like to add is that this outlook is based on the current situation between the U.S. and China. We do not assume any deal in our outlook. If there would be a deal, we believe that that would also support more growth in the United States for our customers and for us. As usual, our outlook is very realistic and conservative. I would be very disappointed if we couldn't do better. Brazil. Eric will talk about Brazil.
Yeah. In Brazil, Real briefly, there's a story about the tractors. When we converted to Tier 3, we focused on a higher technology tractor platform and did not bring our, what we call our heritage product line along to that Tier 3 configuration. We thought that the market would really embrace a higher level of technology. We recognized that there were some customers that were left out when we did that, we've brought back into production. We've taken our heritage product to Tier 3 levels and now have that back in the marketplace. In addition, we've got the Momentum planter that has been a super success down in South America, designed in South America for South America, and we're launching IDEAL Combines down there through the demo program this year.
It's not an engineering problem or manufacturing or product problem. It's a decision-making mistake, maybe if you want so, because we thought that the smaller farmers would already be interested in higher technologies, and we were proven to be wrong, which means that we have to reintroduce a historic or traditional small tractor to the market, which we can easily do. We have discontinued it for just a year, so we will make it. We are already in the process to make it, and that will help to gain market share again in this segment.
Thanks. Staying on Brazil, a lot of investors, I feel, thought that Brazil farmers would benefit from the trade issues with U.S. and China. To see your outlook flat again in 2020 is probably a little disappointing for some investors. Can you just talk about the fundamentals down there, and why are we not seeing an improvement? We're seeing an improvement in production and productivity, but we're not seeing an improvement in investment in equipment. Thanks.
Yeah. Maybe we are a little conservative here again. We didn't see any kind of tailwind from the Brazilian market. It's true that Brazilian exports to China did increase substantially. The reason we believe is the farmers in Brazil don't trust the government yet, and therefore they hold investments back. We think that this could be ongoing also. That's an assumption in our, as I said, conservative budget, so hopefully we are wrong. There are no signs for a substantial improvement. We just had a review of our business in Brazil, and maybe Eric, you want to expand a little bit on how we think the market will develop.
You're exactly right. The farmer's actually making money in South America. As Martin has mentioned, there's so much uncertainty of what's going to happen with this trade deal. They don't want to find themselves in a position where they're over-invested if the trade flows switch back. That's what we're hearing in terms of market uncertainty and the hesitancy to make capital expenditures. Our focus is to make sure that whatever investment there is, that we're staying very close to that with the product portfolio that I described already in those three areas. We've opened up our own distribution company-owned store in Mato Grosso, which is the heart of the Cerrado region, the high growth, large farmer area, to introduce the Fendt product line.
Yeah. Let's say we all know that the Brazilian market slowed down already some years ago and didn't recover, which I think normally would create a kind of catch-up demand in the future. The question is not does it come, the question is when does it come in. Therefore, I'm slightly more optimistic for next year.
Without a trade deal, it would not be back for Brazil?
Yeah. A potential trade deal basically would move that business back to the U.S. I know China pretty well. Image and face is very important for Chinese, I think the way how we negotiate it might cause them to dual source in the future to continue to buy from Brazil, Argentina, as well as the U.S. That will be split in a way. What you can also see is that pig business in Europe, mainly in Germany, Northern Germany, is exploding, booming. Pig prices are through the roof. Schnitzels in Germany have never been more expensive. I do not believe that everything goes back to the U.S. because the European quality is excellent. They're very reliable. They're good partners. I think also there we will see some kind of a split. This business is not as relevant for farm equipment.
It's more the food production which goes into those pig farms. Jamie.
Hi. I guess, Eric, on slide five, I thought it was interesting you talk about the profit contribution and margin contribution from smart machines from 2017 to 2019. Profits tripled, margins doubled. Can you just talk about what your expectations are for 2020 and how we think about that profit growth for smart machines over the longer term, and what your assumptions are in that? Greg, just a follow-up question just on your assumptions by market, just production versus retail for each of the geographies for 2020. Thanks.
Yeah. I would like to start with one statement in general. While a lot of companies give IT solutions away for free, we decided that we offer solutions which add value to our customers and which we therefore can sell. That's a big difference between us and some of our peers.
Mm-hmm. That's right.
Eric, hopefully, we do even more in the future.
Exactly. That's why I highlighted some of the pipeline introductions that are still coming out of Precision Planting as examples of the foundation of this. That's our focus is to shift our investment into that area and delivering more and more solutions. We expect that growth trend to continue. I don't think I typically carve that out as a forecast, the trend is continuing on an upward trend. In terms of precision ag, we have more solutions. I don't know if we get more specific.
In terms of the Precision Planting business, we're looking for about a 10% growth in 2020.
This was really great acquisition, I can tell you. Because it brings us also on farms we have not been welcomed so much in the past, and that helps, of course, also our Fendt market introduction here in the U.S.
Precision Planting's had a really strong business in North America, quite good penetration in South America. When we bought the business two years ago, it really wasn't present in Europe. Our last two years, we've been doing a lot of work, or that group has been doing a lot of work where they're capturing data on these test farms that I described throughout Europe, all the way from Ukraine to France, and measuring in European farming conditions with European farming equipment, how does our solution compare to what's available on the market? We've captured all the data now to show that again, in that market, we have the leading solution. We've got enough data now where we've got the war chest, we're injecting more SG&A funds there to be able to really grow our European business to take the existing portfolio to that market.
You were asking about, Jamie, production and especially how that kind of compares to retail demand. As you think about our production schedule for 2020, it'll be modestly lower. We're saying about 2% lower, and that's primarily in Europe and North America. Where we typically, especially over the last four or five years, have had issues with our dealer inventory has been in North America. We feel like coming into the end of 2019, we're in a reasonably good position. We talked, and we've talked this quarter about expecting kind of some late arriving demand here in the U.S. after the late harvest. If we hit our forecasts for our fourth quarter sales in North America, we would expect our North American dealer inventory to be pretty close to targeted levels.
We would not expect to have to underproduce retail demand in North America in 2020. I would say similar comments as you go into Europe and South America. As you know, typically, the dealers carry less inventory in Europe and especially so in Brazil. We're obviously watching the European market very closely. That, as Andy mentioned, is softening in the back half of this year. We feel, though, we should be in pretty good shape as we get into the end of the year, and similar comments for Brazil. No plans right now in terms of underproduction for next year.
Yeah. Just mentioning Europe, we are in our red zone, so to say, for 2019, and things look very tough and difficult. That means Europe is not doing very well right now. Therefore, we are also a little bit more conservative on Europe for 2020.
Hi, Chad Dillard from Deutsche Bank. I just wanted to touch on some of the new product launches. First of all, on the IDEAL Combine, I think a couple of years ago, you guys talked about being able to double that business. I just want to get an update to where you guys stand right now. On the globalization of Fendt. I believe it's about $2 billion in the business. How should we think about what a successful rollout would look like over the next three to five years?
To double the Combine business, it's just an easy job because the demand is there. We just can't make more than we plan to make for 2020. We need to ramp up our suppliers. We still have, as usual, for the first generation, certain designs to be changed. Little things, but many little things. That will take some time. Therefore, we are, let's say, the numbers you see for next year are not really impressive. Let's say to double that business is not difficult because we do get a big pull from the market because this Combine outperforms everything you have. Therefore, it's not so difficult.
Then on the globalization of Fendt, what does that look like in the next three years or so, three to five years?
I think my vision would be to justify a localization of a product of a tractor like this. You would want to see 8,000 to 10,000 units sold, and I see that to be realistic within five years here in the U.S. and also in Brazil. The capacity at Fendt is almost getting to an end, so to say, but it's a one-shift operation, so we could change that with only small investment. I think in order to be prepared for future tension related to free trade, I think we are much better off to start to think about the localization of important products in markets like Brazil or the United States. Make America a leading tractor producing market again.
I wonder, a little bit following up on that, I wonder if you could size the Fendt opportunity, the IDEAL, and the new planter opportunity, say, over the next five years. You can fuzz it up a little bit and give us the sense. Underneath my question is how much internal momentum could there be or potential could there be to close that billion-dollar gap without a cyclical recovery in the market?
Yeah. I would like to have Eric answer that. I could easily do that because it might potentially, theoretically be that I wouldn't have to do the implementation. Therefore, I could easily say, "Well, within three years, we will be there." Eric, why don't you answer that and give an optimistic view on the future?
Sure. Yeah, very good. Our forecast, as we project those two product lines in particular, it's somewhere between a 2x and a 3x growth on each of them over the next three to four years. Say three to five years.
If that would happen without tailwind from the market, we would be there. Also these products are high-margin products. I didn't do the calculation. It could be even easier to be there with IDEAL Combine, the big planter, and the Fendt tractor than with a general increase of our revenues.
Is that $500 million? Those over five years?
I think it's $1 billion, easily.
It's $1 billion. Okay. To follow up for Eric specifically, can you talk a little bit about PLS? As you look across the platform, product line simplification, what areas could be eliminated, or what areas could you not be as strong in to try to help the margins?
Yeah. Essentially, the primary opportunity we saw early on was in our global Massey Ferguson portfolio. It had allowed to creep into lots of different models, features, options, and things like that grew the complexity beyond where we thought was effective. We had a team that came out of Massey Ferguson. They actually raised their hand and came up with the idea themselves, and we applied some data analytics expertise to them to give them some tool sets. They were able to then go in and say, "What is the true market demand looking at our sales and competitive sales in these areas?" Go right down to the option and feature level to be able to have a more consolidated portfolio, streamline the offering.
That helps us internally, but even more so, it's a multiplier effect because if we're honest, we had gotten to a point where it was complicated for our dealers to be able to explain all of that portfolio and for our customers to understand it. By streamlining it somewhat, it's got a three-pronged benefit. To being able to be a simpler story to our customers.
In addition to that, I think the simplification of manufacturing and engineering helps as well. That means there's a certain requirement for markets to get specific, special products for their local demands. With the platform solutions, you have a box of components out of which you can basically create this kind of special product without additional cost, no additional testing, and so on. That's, I think, another way how you'll get there. Yeah.
Hi. Ross Gilardi from Bank of America. I just want to come back to South America a little bit. You guys are characterizing the issues with the business as sort of a shorter term tactical product decision. You haven't made any money in South America in four years. You used to have double-digit margins. It just feels like there's something else going on here. Can you address that a little bit more, like your competitive position? Are there structural issues here? Do you need to do a deeper restructuring in the South America business to get your margins even remotely close to where they used to be? Just get back to Jerry's question, what do you have for South America margins in your 10% target?
Just talking a little bit about our strategy for Brazil. We took certain decisions which did basically hurt us. One was we decided not to go quickly into the areas of Mato Grosso and Cerrado, because at the beginning, a lot of farmers in that area were short of liquidity and a lot also went bankrupt. Therefore, we didn't want to take too much risk there. Now we go there because we think the time is right to do that. Second, we also restructure our distribution because with more advanced technologies, we need to make sure that we have also professional dealers, and we train and educate the best dealers and grow their business. Third, we have all products you could think of available, but we did not localize the big combines, and we did not localize big tractors.
That was maybe the problem of our guys, that Massey Ferguson had a very strong position in the low end, in the small tractor business, and therefore, they didn't really believe so much in the big tractors, and we had to carry them into that direction. Now that localization is almost done, and you will see this business growing. We are very optimistic about that. We also have a new leader there. We, as you remember, combined North and South America for a certain period of time because we thought that the advantage of a North American leader would be that he knows competition better and therefore, could help there. This was true, but in the meantime, also, we have developed internally a great guy who is running it, Luis Felli. The last question was about.
What's the margin that you have in South America?
Yeah, that's Andy or Greg.
Yeah. When we look at how we get to 10%, we'd like to see the South America business be in a mid to high single-digit margins. I think if we can get somewhere in that range, we think that'll be sufficient to get to the 10% target. We need the other objective.
My target setting is more straightforward and simple. I want to have 10% from all markets and all products, period. That includes also acquisitions. We, in the past, made acquisitions which basically didn't support margin improvements. I think if you add to your portfolio smaller deals which come in with 2% or negative margins, it doesn't help. You have to be very disciplined with acquisitions, with new products, product development. We should try not to develop product with low margins. For me, the target is very simple and straightforward. Instead of saying, I know what Andy wants to say, but instead of saying, we want to be somewhere in the high one-digit area, I make it 10%, period. That's what Eric and I and our teams really want to work on, so to say.
Then Andy comes in and says, "Oh, we will not get there till next year." That's all okay, but this is not how you run a company.
Hi, Brian Sponheimer from Gabelli Funds. Just thinking about the smart machines and your current take rates, can you talk about where those take rates are and what's a reasonable expectation five, 10 years out? Then just expanding upon that, is there any subscription revenue that you can generate from selling these machines? Start with you.
In terms of take rates on some of these solutions, if you take a look at intelligent planters, let's start with that one. The portfolio that AGCO owns of intelligent planters through Precision Planting, plus our AGCO branded planters, is larger than anybody else's in the market. When you take a look at the precision portion of that, it's by far larger. In terms of planters, we are the clear number one penetrator of intelligent planters in the marketplace.
What percentage?
We're over 50% of the market.
Well, it is basically Eric's segmentation is percentage of penetration in the high end. That means depending on how you define your market, you can also size the penetration in percent. If you took the total planter market globally, of course, the penetration would be in the low single-digit numbers, right?
Right. Yeah. Even in North America for the installed base, we're still not to 20% yet.
We also have those simple planters, so therefore that's not a big issue. When you look into it, the high-tech planters have better margins and they're growing. The future is more in this area than in the small traditional planters.
Yeah.
Subscription revenue?
Subscription revenue, my view on that is that I was expecting it to come more than it has as an industry. Like Martin said, many of the players, whether it's equipment companies or adjacent companies, are bundling this with machinery. As a company, we've not seen a lot of subscription revenue coming yet. We still believe that there's a potential and we're looking for opportunities, but it hasn't been a major force in our industry yet.
Just on your parts sales, you talked about how you're rolling out some advisory services worldwide. You gave us some good guidelines for how to think about your new products over the next five years. How much opportunity is there to move the needle in parts? You obviously talked about it accelerating. Where could that go? How many lost sales do you have to a third party at this point?
Greg, can you answer that?
Well, yeah. We look at that in a couple different ways. One is the percentage of parts sales of our total sales, which today is about 15%. If you go to the Europe region where we have a higher market share with big, sophisticated machines, we're in the upper teens. Right? What is happening is that the more technology you put into products, the more your own dealers have to do the parts and service work. That's great news for us because our market share is much higher when our dealers are involved. Step 1 is to get, obviously, more penetration for high technology products into the marketplace. Step 2 then is to make our dealers better at selling parts, make them at better servicing parts.
Eric talked about some initiatives we have that'll help us gain market share for parts when our dealers are doing the business. We're going to approach it in a couple different ways. Some of it is a function of selling more sophisticated products. The rest of it is going to be about helping our dealers and our distribution to get better.
Also, some years, because we wanted to participate in that market and it's not avoidable, invested in a company who does non-original parts. We want to grow that as well. We want to grow that without basically cannibalizing our original part business and compete with the other, we call them pirates.
Thanks. Just to follow up on the Brazil questions. How should we be thinking about that business next year, assuming a flat sales environment?
Yeah. As we said, next year we assume it will be rather flat. You could also defend the idea that it could go up so slightly. Brazil is very difficult to predict. We saw that in the past. Brazil is going up and down in much higher numbers than other markets. Therefore, I don't think that it will go down a lot. I think we are conservative. We don't want to get too excited about something we don't know for a fact.
Thanks. Good morning. Larry De Maria, William Blair. Two questions. First is related to Brazil. There's a lot of concern around financing, especially with spreads widening with the real, I guess, going down, but the rates for farmers not going down, and therefore there's a need for private funding and private capital to come in. Are you seeing that, and is that a risk? Is that an opportunity? How do you think financing is going to play out over time? Secondly, you guys talked about the new products a lot, obviously, and what you're doing in distribution. When we travel around the Midwest, we often hear that you guys lack some coverage, lack the technicians and the ability to actually go serve 24/7, et cetera, like some of the competitors do.
What are you doing to address your territory coverage and the technicians at the dealer level, which obviously you don't own? Thank you.
I'll handle the question about Brazil financing. Over the last few years, what we've seen in Brazil is less of a subsidy on the interest rate within the Finame program. With interest rates declining, really, there's not much of a subsidy there. There's no finalization of a program, but the talk is that, or what we would currently expect, is that the Brazilian government will start to phase out any subsidy on interest rates. Since rates are coming down, I think that would keep interest rates relatively stable to what they're being offered today. The advantage still, if there is financing through the development bank in Brazil, is they can give longer terms than what you can get from a commercial bank. Terms up to maybe seven years, whereas a commercial bank may be giving a four to five year term.
Still will help the affordability of the equipment. I still believe that the government will provide financing alternatives, and that will still be an important part of what we see in Brazil. To your point, there will be a much stronger. You know, influence from traditional bank offerings now, and our AGCO Finance JV and other local banks will be providing financing, and I think the interest rates will be very similar to what's being offered today. Again, the terms may be a little tighter than what we see. Our finance joint venture's ready to fill any gaps with financing that may occur from what the government's changing its program from. The second question?
Distribution.
Distribution. Sure. The short answer would be digital plus coverage. Coverage, I gave the example in Europe about how we had that issue that you're describing in Poland and Ukraine and how the company went in and said, "Let's put a robust footprint in place to have good customer coverage there." We're doing that also in North America and South America. South America has probably upgraded 30% of their dealers over the last two years. And like what Martin talked about, it's not only upgrading the existing one, but a shift northward up into the areas that were uncovered. That same planning and activity is underway in North America. You combine that with digital and being able to offer more tools to customers.
Instead of having to go to a brick-and-mortar model, digital allows customers to be able to interface with the company in a second pathway. It's not separate from our dealers, but it's in conjunction with our dealers.
Hi. Thanks. Ashish Gupta from Stephens. First question would be, what's implied in terms of euro and real in the guidance, Andy? The second question would be, how much do you expect to outperform your initial guidance this year, like as you did in 2019, in the sense that I'm just wondering what level of conservatism is baked in?
In theory, this could be my last bonus, so that means we would really want to outperform a lot.
The rates we're using are consistent with where the rates are today.
Who else had a question? Yeah. That's a good question. [crosstalk]
Just in terms of the conservatism, though, would you say that you were entering 2019 with sort of a very cautious/reasonable outlook? The sales didn't come through for you, but certainly earnings did. Some of it was tax rate driven. I'm just wondering how you would want us to think about 2020, where you're sort of guiding sales flat, production down a little bit, but tax rate appears a little high. How much room do you think there is to sort of outperform?
I think, as Martin.
You can get two answers. The one from Andy would be not too much, and the one from me is a lot. Now it's up to you.
That wasn't what I was going to say, but it's okay.
What did you want to say?
I was going to say that the opportunities are, as Martin discussed, about where these markets are really going. There could be opportunities, as we talked about North America and South America, depending on what's happening with trade and other factors. The European market appears to be trending down, but with a better crop year, we could maybe see some improvement in the back half of the year. I think it's all about where you gauge these markets. Hopefully, we've called them fairly conservatively. I think that's one of the real keys.
Great. Steven Fisher, UBS. Just wanted to ask you about small ag. I know you said overall that you're expecting to produce at retail in North America. I'm wondering specifically if that includes the small ag as well. Your peer is having some big underproduction in small ag this year. I'm wondering if you went into 2020 with a lower degree of inventory in the small ag product. Second question would be just your thoughts on the large ag replacement cycle. How do you view that over the next couple of years relative to technology investments need to lower costs, but fiscal discipline amongst farmers? Thank you.
Yeah, I think when it comes to inventories in small ag, we are well prepared. Typically also the lead times are shorter, so that means in case the market is going up, we can quickly adjust. When it comes to the recovery in big ag, I think we have two factors here. One is the normal cyclical recovery coming from basically the hours which has put on equipment with no investment. The second one is more a luxury problem we have. Our high-tech solutions, of course, are required more than normal. We see a lot of track on the Fendt 1000. It's a comparable small market, and it's a niche market, if you like so.
Hi. Just to follow up in case I missed it. Andy, what's implied for the South American margins for 2020? Just your thoughts on the other regions, if you care, but I think South America's most important. Thanks.
In terms of our margins that are implied in our first guidance, what we're looking for South America, as you know, we're going to have a loss in 2019, and we'd be looking to still have a loss in 2020, but probably cut that in half, something like that. We certainly, with market improvement, could likely do better. That's our initial view of that. In terms of the other regions, North America margin's relatively flat, and some improvement in the European margins.
Eric, of course, is working on getting South America to break even quickly. This is the conservative financial assessment, but we push everything in order to get to breakeven quickly, because we are not in the business of running and owning loss-making units.
Just two more. Can you talk a little bit about engines? Can your engine platform deliver all the different solutions, natural gas and propane and electric and all that? Does it make sense to continue to invest in that platform to be able to drive all the improvements or maybe it's cheaper to have someone else make the engines for you?
Actually, that's strategically extremely important to own and control your engine business, because this is also something where you can differentiate. Our low fuel consumption is a direct result to the off-highway engine business we own. We basically can do the answer of do you do everything? The answer is simple, and it's yes. We don't believe everything you hear from some of our peers who have no CO2 emission, low fuel consumption, no fuel at all, and whatsoever engines, because this is all simply and straightforward, this is bullshit and not based on facts. When you saw their product, or they had a prototype they displaced on Agritechnica, this looked like a suicide equipment for terrorists. It's easy to put a big gas tank in front of a tractor, but it will never be allowed to do that, and it's by far too dangerous.
We are the only ones who already have an electric tractor in the pipeline. Of course, we will not produce electric engines because this is a volume business. It's pretty standard, and you can buy it from suppliers. To own the combustion engine business is important. We look carefully also into future trends. We have just launched a study to look into hydrogen. I'm not saying that this is a solution, but for sure, batteries are not a solution for high horsepower arable applications because the battery would weigh about 40 tons. You would have to pull the battery with a trailer, and then you couldn't add any other equipment. That doesn't make sense. Also, you certainly are aware of some of our peers who decided to have a power line on field. That's, of course, ridiculous.
This will never work. That's just not practical. You need to be a little bit more creative here in that area. That's why we think it's very important strategically to own and control the engine business, which by the way, is also generating very nice margins.
Okay. You should have been careful on your margin target because I don't think you want Europe to have 10% operating margins. Just, can you talk a little bit more like, I see what's right in front of you, right, with the Fendt and the IDEAL.
Well, the 10% is the minimal target.
Yeah. There you go.
Of course, we don't allow anybody to now say, "Okay, I have already 20. Let's go down 10%.
Yeah. Can you talk about sort of like in the two to five-year timeframe, what platforms really need to be leveraged? We don't hear much about Valtra. It sounds like there's things starting to percolate inside of GSI. Maybe there's a lot more potential to double that over the next decade or whatever it is. Can you talk about sort of the next wave of platforms inside of AGCO that could really be the driver kind of three to five years out? Thanks.
Yeah, I think there's two answers to that. One is to become a strong full line player. We've got strong tractor market shares in all of the major regions. We don't have strong market shares across all product lines. The first answer is planters, combines, and in some areas, hay equipment is certainly a potential, and that's why we bought Lely, that's why we bought Precision Planting, that's why we invested in IDEAL Combine. With our sprayers, with LiquidLogic, we'll be the only ones who can self-prime the system. We can spray three acres on the field before the competitors can even get going because their system's primed. There's a full line opportunity there for sure. Grain and protein, that one hasn't had precision ag brought to it yet.
We believe that there's a fair bit of upside there, especially with the Anytime there's change in a marketplace, there's opportunity in the marketplace. That industry is going through change. We believe that one's got a fair bit of upside. Then we've already covered, I think, the other ones in terms of service parts and Fendt and things like that.
We are dangerously over our time, Ann, and we'll be back in the office on Monday.
Well, why don't we say last question from my friend Ann Duignan.
Last question is from Ann Duignan. Thank you, Anne.
Thank you, Martin.
Happy to take it.
Thank you. Martin, a two-part question, if I can, since it's the last. First, if we go back to the 1990s before ethanol came along, equipment sales, tractor and combine sales in North America stayed below trend for nine years. Why couldn't we be below trend again for nine years this cycle? Everybody talks about being 10% below normal, it could take us seven or eight more years to get back to normal if things remain as they are in U.S. agriculture. Can you talk about what's your competitive reaction or strategy against Deere's Blue River Technology? If you could just address both those.
Yeah. When it comes to the market, there's a big difference between you and I. You were always very conservative and pessimistic. I was always more fact-based and most of the time, sorry, Ann. I could almost say I was right, but I don't do that. When it comes to answering John Deere's challenge, I would leave it to the former. How long did you work for John Deere?
20 years.
I'm very sorry for that.
Blue River, if you take a step back, that's essentially a see and spray technology offering. The concept is to be able to have vision systems, to be able to see a weed, differentiate that between the crop and the weed, and understand what kind of weed it is and only spray the weed. A couple of comments there. One is we're working on a similar outcome in terms of see and spray. We're doing it like I described, where we have some partners involved, as well as some of our own technology and Precision Planting is involved. We're bringing that same. The other thing I would offer to you.
Yeah. What I would like to add is, that is, let's say this is an example where the industry supports basically consumer requirements and requirements of the society for more sustainable farming. Therefore, I very much support John Deere's strategy, and we could say we do the same, but we didn't talk too much about it yet because we typically first have a product and then talk about it.
Yeah.
The trend as such, we really support a lot.
Agreed. Yeah, I think it's been covered.
Thank you.
Have a great holiday season. Thank you so much for your attention this morning and your interest in AGCO. We look forward to working with you in 2020.