All right. Well, welcome, everyone. My name is Adam Seiden. I'm the U.S. Machinery and Construction lead at Barclays. Joining us for this session here is the folks from AGCO. So we've got Damon, Chief Financial Officer, and we have Greg from the IR side. So the format of this session here is going to be a fireside chat between myself and the fellows to my right. We will, though, invite you guys to participate in the session, either if you have a question, certainly, raise your hand with a mic. Otherwise, we will be doing our audience response questions a bit later in the session, where we'll talk over a couple of high-level points that we're addressing throughout the whole conference.
With those ground rules out of the way, welcome, fellas.
Thank you. Very nice to have you here in Miami.
So I wanted to, I wanted to start off, and, you know, we'll certainly talk a bit of cycle across the board here. But when, you know, so, but we'll start out. So to start off on the cycle side, when you look over the last couple of years, you know, the annual improvement that you guys showed on a mid-cycle basis on margins was about 70-100 basis points. In 2023, your judgment of mid-cycle improvement went up by 220 basis points. So could you just talk to us as far as, you know, what was specific to 2023 that you believe is more sustainable to the business profitability longer- term?
Yeah. So I think if, Adam, as you look at that mid-cycle margin, over the last several years, we've been structurally improving the mid-cycle margin every year since 2018, and we've been doing that through an array of areas. We have our three growth levers that we'll probably double-click on here in some detail, but we've seen very good growth in our parts business. It's been growing at that mid- to upper mid-single-digit level, very high margin business for us. We've been seeing our precision ag business that's been growing at double digits, and we continue to see good growth prospects on that, and again, high margin. And then there's been the Fendt market share, the Fendt rollout to gain market share, heavily focused on North America and South America.
So we've had those three high-margin growth levers that are delivering above average margin for each of them. And at the same time, we've been doing some structural things to improve the profitability of our Massey Ferguson brand, trying to create more commonized platforms with the Valtra brand as well, to improve the efficiency, the cost savings in there. And we've gone through a lot of restructuring in our grain and protein business, as well as we've consolidated factories in that business over the last couple of years, and as the volumes improved there, you know, we started to see that contribute to the bottom line. So those have been helping us structurally drive the profitability over the last couple of years, and we saw a lot of that going on in 2023.
If I think about maybe what were some of the things that maybe enhanced 2023 a little bit more than what you saw in the last couple of years is, you know, a couple of things. One is the channel fill. If you remember, a year ago, this time, everyone was talking about how dealer inventory levels were below where they needed to be. In the course of this year, as supply chains improved, we were able, and the industry as a whole, were able to produce more units to get that inventory up to the optimal level, maybe even a little bit above the optimal level as we finished the year. So you got a little bit of an incremental channel fill, versus the retail sellout in many parts of the world.
Obviously, we reaped the benefit of that with incremental absorption, good pricing, and I would just say it's a little bit of a positive there. I think the second thing that was a little bit special for 2023 was our price versus our cost. You know, we work very hard to have pricing that is netting some sort of a positive margin versus our inflationary cost. We delivered better pricing than what we had expected. We started our year with 8%. We actually delivered 10% in a market that continued to get weaker as we went through the year. And at the same time, we didn't quite see as much material cost inflation as what we had expected.
And so again, I would say that the net of the two was better than what we would historically see, which helped contribute to the little bit of a higher margin that we delivered for the full year. But overall, we feel very good about the structural improvements that we made and what's sustainable as we keep talking about how we've changed the structural profitability of this business as the market weakens here in 2024, and we're now looking at something gonna be below mid-cycle. We're still forecasting a margin that would be the second highest margin ever in the history of the company, despite it being below the industry at 11%. And, you know, we can double-click on that if you want to go into detail, but again, that's to the credit of what we've done structurally to this business.
Yeah, I would like to double-click if we could just, you know. So you said below mid-cycle-
Mm-hmm.
Essentially where we are. You know, so on that 11%, how would that translate into, you know, a mid-cycle margin now going the other direction?
Yeah. So again, maybe we'll just do an apples-to-apples comparison, and then. So if we did 12% last year, that was, I would say, directionally about 105% of mid-cycle. If you look at the value creation lines that we provided our investors and the slope of that line, 2023, 12% at mid-cycle would be about 11.5%.
Mm-hmm.
If I look at where I'm telling the industry right now, being at around 95%, and we were to move up that line, that would again put us at about 11.5%. So effectively, apples to apples, same mid-cycle margin as last year. Now, you'll say, "But Damon, you tell me you're raising it every year. Why is it not going up?" So I, I'll jump ahead of that question.
Yeah, exactly.
I think there's two variables in last year's numbers.
Yeah
That are, you know, making this year's numbers a little bit more challenging to increase the bar as we see.
Sure.
We talked about the channel fill. Again, I got that incremental sale into the channel last year. I got the absorption in my factories. That's not gonna repeat itself this year. So I know I have that one time or sort of a temporary benefit there last year, that's not repeating this year. The second part is, if you go back for three of the last four quarters, South America margins have been extremely positive.
Yeah.
They were delivering 20% margins for the first three quarters. You know, we talked about it on our calls about that wasn't a sustainable level of margin in South America. We just weren't getting any discounts. And as we saw in the fourth quarter, that market started to move south. And so as we look at 2024, we sort of see a negative net margin in South America that's going to effectively dilute the incremental value that we're getting from our three growth drivers. And so when you look at those two things in last year's numbers, and you look at where we are this year, those are negative year-over-year that are offsetting the incremental growth we would see through parts, precision, and Fendt market share.
Got it. So on, well, we'll get to market share in a half second here, but if you think about R&D, actually, aside from when it comes to investment in the business, certainly the company has, you know, done a lot of that.
Mm-hmm.
The last couple of years. So, you know, putting that in context with a cycle that's now, you know, trending a little bit below the mid-cycle levels, you know, what would it take, you know, how big of a downturn would it take for you to pull back on some of that spend?
Yeah. Well, again, I think we're always gonna be good stewards of capital. We're always gonna look to see where are there trade-offs to reduce the spend, especially in a weaker market condition, without compromising things that will deliver value to our farmers. And whether that's new product introductions, whether that's improving in the quality, we're gonna continue to invest at a high level. I think the best rule of thumb is we're—you know, we try to target around 4%, R&D as a percentage of sales at around 4%. The last couple of years, because of the job market, the ability to hire workers, we've been trending a little bit below that. When you look at our numbers this year, the $13.6 billion revenue, we said engineering or R&D will be relatively flat.
You start to see a relatively close to that 4%. And so if you were to project the number dropping on revenues, you know, we would obviously be looking to look areas to curb the R&D. But 4% is probably a good rule of thumb to think about regardless of where we are in the cycle.
Got it. And I kinda, you know, when I look at Trimble, I think of that as inorganic R&D, per se.
Mm-hmm.
So, could you guys talk a little bit about, you know, Trimble's results of the ag business, how that finished in 2023, and then, you know, on Q4, you know, they or on the Q4 earnings call, they talked about, you know, the ag business being down, you know, 45%. So was that decline, the magnitude of that decline, was that a surprise to you?
Yeah. So I think they, you know, they finished the year just around $510 million in their ag business. So, you know, relatively strong performance for the full year, a little bit less than what we had expected, given the fourth quarter decline. You know, when they gave their outlook for the first quarter, you know, and the numbers that you quoted, I would say not a lot of surprise to us in the order of magnitude. We knew through our diligence that there were a couple of things that were gonna be happening in 2024. You know, Trimble and their largest customer had ended their relationship. We knew that those OE sales were going to be ending.
We had said publicly, we factored that into our valuation, knowing that that OEM sale was going to go down to zero at some point in 2024. We also knew that as part of their relationship, CNH was the one that was selling to the dealers, Trimble equipment, and as Trimble ended that relationship, they began to go direct to the CNH dealers or using their Vantage dealers in order to help service the farmers with the Trimble-related products. They've talked about seeing very good conversion, getting the dealers signed up as much as they can, but we knew there would be some churn in that, especially as CNH was gonna be moving the inventory that they had into their dealer channels to make sure that their dealers had the products they needed to service their farmers.
So we knew there would be some churn. It was always hard to predict the velocity of how fast that churn would come, but we knew a lot of that would happen here in 2024 as we were working through the regulatory approvals, probably in advance of closing. So I would say, you know, we weren't shocked, hard to predict the exact number. The one new piece of information is the markets are significantly weaker now than where we were nine months ago when we started the conversations. I think that's, again, not surprising to us, but if I just look at the year-over-year numbers, you know, that's probably a surprise relative to what we had originally thought. You know, we see the margins there.
Again, I think it goes back to a reminder of how profitable this business is, that when you look at the numbers, again, you're talking about a business that was delivering 30%+ EBITDA margin.
Yeah.
As the revenues decline, the cost structure is relatively fixed, it results in a, you know, a much lower margin. You know, philosophically, it doesn't change anything. We can't wait to get this as part of our portfolio and start to build our technology stack off of that Trimble positioning signals and what they've established in the marketplace already.
Got it. So you kinda just addressed a bit of the margins, you know, their Q1 guidance, right, implies closer to 15% versus, you know, 30%, the low 30% range. So, you know, does that at all impact your view of, you know, the valuation compared to what you guys had thought about, you know, five months ago or so?
No. Again, I think this is a lot of this is temporary. Again, a lot of it is just the nature of the environment that we're dealing with right now. Again, we did factor in a certain level of churn. We factored in certain things in our valuation that we built. And again, if you look at the multiple that we paid for this business, you know, pre-synergies, we paid a multiple that was below Trimble's ongoing multiple at that time. And so there was already an inherent level of discounting, and then when you factor in the synergies, the multiple that we paid was even lower than that. So we knew there was there, and if you compare it to other market transactions, you know, what we were paying was significantly lower.
So we knew there was gonna be some churn, we knew there was gonna be some noise in their profitability, and we tried to take as much of that into account. And obviously, Trimble doing a good job on their side, getting as much value as they could, but we feel very, very good about the, the acquisition and hopefully closing it here in the first half of the year.
Got it. And, I guess in just touching on the go forward on 2024, just, you know, you mentioned the market having been, having weakened, you know, a bit, broadly, and of course, them being involved in that. So can you just provide a bit more color as to where you expect, you know, full year sales to look like in 2024 for that business?
For Trimble?
Trimble, yeah.
Yeah, we, we don't have any influence on it right now. Once we get closed, which hopefully happens here in the, you know, likely in the first half, you know, we'll have a better insight, and then we'll give our sort of market outlook for, for that business once we get control of it.
Got it.
And in our assumptions, when we announced the transaction, we did assume those sales would step down.
Mm-hmm.
In 2024. So the, the declines that we talked about aren't a surprise, they were factored in. The timing of when all of that transition took place was the only bit of a surprise, but, we, we do expect the business to be lower in 2024.
Got it. Got it. And I don't know, Greg's mic may not be working, but he just said timing is the-
Yeah
Factor there.
Yeah.
So going back to AGCO, the base business per se, ex Trimble. You know, so when we're looking at your 2024 guide versus versus your 2023 performance, embedded into that 2024 was market share was one of the drivers there.
Mm-hmm.
So could you just elaborate on that as far as how much market share is embedded in the guidance, and then ultimately, from which regions is that coming from?
Yes. So we do have some market share growth planned in our 2024 outlook. You know, for competitive reasons, we don't give specific numbers.
Fair enough.
But the way I would articulate it is you're seeing—we are seeing very good market share growth in a couple areas. Our high horsepower equipment, in areas like our Massey Ferguson brand, our Valtra brand, you know, as we've sort of been able to segregate the market, those two brands compete at a very different segment of the market than what Fendt does. And as we've introduced higher horsepower equipment there, we're seeing good penetration, good adoption, and some good share growth there. I think the bigger driver for us, though, as part of those three growth drivers, is the Fendt market share rollout.
Yep.
As we've brought the full line of Fendt offering with now, we have the best planter in the industry. We've just introduced a phenomenal sprayer. We have the IDEAL combine and all of the Fendt tractors, which are the best in the industry. You know, we're seeing. And we bring those here to North America, and we're continuing to bring those into South America. We're seeing very good share capture. You know, and I guess, statistically, I would say, as you go back to 2020, we talked about doubling that revenue, which was around $350 million. In 2022, we hit just over $700 million, and we said we're gonna double it again over the next 3-5 years. Last year, we did about $1.4 billion, so we almost met our goal within one year.
Now, some of that is the strong prices, not all units, but you can see that we're getting significant traction as farmers now have a really good alternative of a product, especially the tractors, that are more fuel efficient, have the latest technology, better cabin comfort, and then you layer on things like the warranty—the Gold Star warranty here in the U.S., where farmers are getting three years, sort of bumper-to-bumper, versus an industry that's more two. And then you layer on the dealer service aspects. Again, we talk about that dealer being a critical part of our Fendt experience. We're seeing very good share as farmers are finding the benefits of the tractor, coupled with those other attributes, making the switching costs or the risk of switching a lot less.
Got it. So there's definitely a bunch of reasons that, you know, make that switching cost a bit less, as you're just talking to. In a more challenging market year on year, does that make that conversation harder, even though there are those benefits there? And I guess. You spoke about dealers for a little bit, so maybe could you just talk about the path to close the remaining gap of your targeted amount of, you know, Fendt locations versus where you are today?
Yeah, I think, you know, in a weaker market environment, you know, we still see Fendt as a product that we sell based on the value proposition it's bringing to the farmers.
Yeah.
So as farmers' net profitability is going to, here in the U.S., at least, is gonna be weaker this year than the prior couple of years, the point is, we think about the value proposition to the farmer is: what is he or she saving in fuel?
Yep.
Right? What are you saving now in parts and service by the three-year warranty? And although there may be a higher price point today in your purchase, what is that doing to your overall farmer economics as you think about not having to worry about parts and service, or what you save in diesel fuel in the course of a year, and how does that work for you? And so, again, we'll continue to sell based on the value. And again, Fendt is not going to be the price - it's not gonna be a price leader in the sense that it's gonna be the lowest cost option. That's not its value proposition. It's the premium priced option because of the value it's bringing to the farmer. And so we see, we've seen very good adoption.
When you talk to the farmers, they are all positive with what they see once they get their Fendt tractors or their products on, on the farm. And so we continue to see that, continuing to work in our benefit, even in a down market. For a penetration rate.
Yep.
Y ou know, here in North America, we're sitting at just over 80% of the white space covered. We have about 76 dealers. They together have about just over 250 points of retail points. So we still see the opportunity, ideally getting closer to around 95%. And you'll see that, you know, filling in that white space, either through our existing dealers, buying more retail stores, consolidating smaller dealers, making them Fendt dealers. You'll see with the announcement of our Farmer Core initiative, you know, helping the existing dealers understand the value of what we saw, of being more connected to the farmers, leveraging the digital tools, leveraging this less brick-and-mortar intensive environment by using mobile fleets.
We have our own retail stores in the Kentucky area that we can demonstrate to them the profitability of being more Amazon-like, more on the farm for the farmer, doing the repairs and service. Our AgRev store does 85% of the service on farm. So leveraging technology, leveraging mobile trucks to expand the scope or the circumference of what your store can do by getting the trucks out on the farm. And so we see the ability to capitalize and fill the white space in there, and then likely adding a few professional dealers in other areas where we need to build a presence. So, you know, we see that happening both in North America, and we see that happening in South America. We won't hit the 95% this year. It's more of an iterative process.
Again, part of that Fendt experience is the dealer, so we got to make sure he or she is capable of having the loaner vehicles, doing the service with the technicians, and all the attributes we want that farmer to experience when he or she buys that Fendt product.
Got it. And you brought up South America there. So just, you know, it does seem like, you know, the industry saw a bit of, you know, destocking.
Mm-hmm.
At the back end of 2023, potentially some of that rolling over here into, you know, into 2024. You know, just how would you characterize the competitive environment there as a, as a whole? And, you know, how typical or atypical is that in that market comparative—compared to other, other markets globally?
Yeah, I mean, I've had operations in South America for 30 years, and it's always, for 30 years, it's been sort of this feast or famine. The level of volatility in South America is always been probably the most extreme. You know, what we said on our fourth quarter call is we saw an extremely competitive market environment. Farmer sentiment weakened, commodity prices were dropping, the FX rates were going against many of the farmers. There was concerns about yield in the Mato Grosso region, really made farmer sentiment drop, put a pause on their buying behavior. That created a catalyst for retail incentives to try to drive through. You know, we reacted, and, you know, we followed the industry. We want to make sure we're being competitive from a pricing standpoint.
You know, at some point, we decided we were only going to go so low before you start to compromise the value of the brand. You saw our sales, they were lower than what we had expected. The margins that we dealt with in the quarter were well below what we were hoping. We see that working through, likely in the first half. We've cut our production over 30% in the fourth quarter, which incrementally added to that negative, to that margin we saw. We see cutting our production again here in the first half of the year to try to rightsize dealer inventory to balance more with the retail sellout.
And we sort of hopefully see that working through in the first half of the year, margins coming back as the subsidized financing, the government-subsidized financing, the FINAME programs come in place in the back half of the year. We sort of see margins getting back to more of the normalized in that mid-teens level. And again, right now, they're being a little bit overly influenced by the retail incentives. But if I look at my margin into the dealer.
Mm-hmm.
They're still at an attractive level. We're comfortable. It's just being a little bit more influenced today on the retail sellout and the incremental incentives that we're applying there.
No, that's excellent. That's very helpful. So, we're going to shift here to the audience response questions for a second, pivot back. Welcome to the game show here.
Yes.
We got a blank screen. All right. Well, then we're going to continue while they work on those audience response questions. So if we look at, you know. So you talked a little bit about South America production, actually. So maybe could you just in the last several, you know, days and over the last week, some of your peers have spoken about some weakness in Europe.
Mm-hmm.
Some of that may be regional amongst where we are.
Mm-hmm.
Where they are, rather, in Europe. But curious, you know, what your view is on the region and if there has to be any sort of underproduction there.
Yeah. So I think, simple answer, yes, there's like. We will produce less than retail, generally speaking, in Europe, not to the same degree that we're seeing in areas like South America. We saw what, you know, one of our major competitors came out with their outlook. I think it's important to understand what, when their comment was an outlook for broader Europe, I think they clarified, they added incremental information, that they were seeing incremental weakness in Central and Eastern Europe. When you look at our guide for 2024, our guide is for Western Europe.
Yes.
And we would agree with you, or we agree with them, that the Eastern and Central part is likely going to be weaker than what we articulated for Western Europe. We're comfortable with our outlook as we sit here today, and I think the question may be: How can Western Europe be less down than Eastern and Central? And it's important to remember, in Western Europe, a lot of the farmers' income, you know, directionally, around half of it, is coming from subsidies. And so you usually see less volatility in that Western European market because farmers have a more traditional cadence of upgrading their equipment, because a lot of their income is coming through those government subsidies.
And so as we look at that part of the market, again, we still feel comfortable with that 5%-10% for Western Europe. And again, I think it's a little bit of an apple and orange because they're layering in that Central and Eastern Europe, which again, we would agree is probably down more than that.
Got it. No, it's helpful. Looks like we've got the audience response system working, so we'll go back to that. So, for everyone, we've got clickers on your desk, if you wouldn't mind helping us out here and participating. So do you currently own this stock? One , yes, overweight, market weight, underweight, or four, no. All right, 44% say no. Next one up, please. What is your general bias towards the stock right now? Positive, negative, or neutral? And when the timer comes up is the best time to click, I think. All right, there goes the timer. A third. All right. I think that may have been a timing issue. So we'll go on the next one here.
In your opinion, through cycle, EPS growth for AGCO will be above peers, in line with peers or below peers? And once that timer is up, we're good to participate. All right, there she is. All right, about 50% say in line with peers. Next one up, please. In your opinion, what should AGCO do with excess cash? Bolt-on M&A, larger M&A, repos, divvies, debt pay down, internal investment. Next year, I'm gonna ask this question to you guys before you come in, just to see what you say. Once that timer is up. All right. All right, got about 50%, towards the repos. Next question, please. In your opinion, on what multiple of 2024 earnings should AGCO trade, and it spans from less than 10x to higher than 21x?
This is a standardized range across broader conference, just so you know. We get that timer rolling. All right, survey says. There it is, about 13-15x . Then, I think the last one here. So what do you see as the most significant share price headwind facing AGCO? Core growth, margin, capital deployment, and execution. Ready to roll, guys? There you go. Timer. There she is. Nice, long one second. 56% say core growth. So with all this cycle talk, right, I don't think that should be too much of a surprise to hear that. Maybe to wrap up here just on, you know, free cash flow.
If you could just talk a little bit about, I guess, as, as far as the free cash or the, the cash flow guidance?
Mm-hmm.
Operating cash flow guidance, you know, for this year, and, you know, balance that with the 75%-100% conversion that you guys targeted.
Yeah. So again, we continue to stay focused on delivering somewhere in that range of 75%-100%. Uh, as I said, on the fourth quarter call, we fell short of our outlook last year. Part of that was timing due to, you know, the year-end over the weekend and things flowing into January. So as I look at that sort of a carryover, I would sort of say we're probably be at the higher end of that outlook, given the rollover from last year's numbers into this year. So, again, we see great cash flow generation for the company, but probably on the, on the upper side of it for 2024.
Got it. The question I did have to ask is, so in 2021, you know, AGCO came out with a special dividend for the first time.
Mm-hmm.
Since then, the ag market has been, you know, mostly going up since then, right?
Mm-hmm.
Just curious, you know, curious how you guys or how the board is generally thinking about a special dividend through cycle?
Yeah. So, you know, we touched, I guess, important is, and one of the questions, your share repurchase was, the biggest preferred option. Given our shareholder ownership structure, again, we, we only buy back stock to the level of offsetting dilution. We use that special variable dividend as a way to return surplus capital, back to the shareholders. We've always said that it's the surplus. And over the last couple of years, we've done several acquisitions, a lot of bolt-on. We've generated a lot of surplus cash. As we've now done the Trimble acquisition, as I've said, I'm going to use some of my free cash flow to fund that versus $2 billion of debt. So we're gonna look at that.
We understand that many of our investors find that variable dividend as an important part of the TSR to them. So we'll look at that here in the second quarter, whether or not we do one, and if so, how much would we do relative to the last couple of years, along with the industry outlook and our cash flow generation for the full year here. So, you know, that's probably a second quarter. We usually announce something in that April, May timeframe, after we have a chance to review with our board, and, you know, we'll see how we finance the Trimble acquisition in that time as well. And, that'll lead us to make a decision on the variable dividend going forward.
All right. So stay tuned, I guess, on that.
Yeah.
Well, with that, I really appreciate the AGCO folks for being here. So thank you, Damon. Thank you, Greg, and let's give them a round of applause.