Okay, good afternoon. Thanks for coming to this session. I'm Steve Fisher, UBS Machinery, Engineering, Construction, and U.S. Building Materials Analyst. We are really thrilled to have the management of AGCO Corporation with us. We have Damon Audia, CFO, and Greg Peterson, who runs investor relations. Just one quick disclosure before we get started. As a research analyst, I am required to provide certain disclosures relating to the nature of my own relationship and that of UBS with any company in which I express a view on this call today. These disclosures can be found at UBS.com/disclosures.
Or you can reach out to me afterwards, and I can get them to you. So thank you, Damon. Thanks, Greg, for being here. Really appreciate it. So just to kick it off, we're coming to the end of 2025 here.
Before we talk about '26, thought maybe you'd like to highlight some of the key accomplishments and highlights of 2025, the five big strategic shifts that you've been talking about, and then we can get some into the details of each of those along with some of the cyclical dynamics.
Yeah, sure, Steve. I think, obviously, the industry dynamics create a lot of questions as to what's going on. But if I look at underlying what's happening in AGCO, we've gone through a significant amount of transformation over the last year, year and a half that have really positioned us well for when the industry recovers. And if I think about what are those five key changes that we've gone through, first is the PTx organization, this umbrella of our technology stack with the joint venture with Trimble Ag, bringing that and pairing that with Precision Planting. Under this PTx umbrella, we now have the industry leader in mixed fleet retrofit.
And that was a significant transformation for us in really building that brand and positioning ourselves to grow that technology stack, both with other OEMs but also in the retrofit channel.
Once we did the announcement of that acquisition, it allowed us to revisit our portfolio when we made the decision to exit our grain and protein business. So as you recall, that was a low-margin, low-growth business, really never got the synergies that we had hoped through in that acquisition, but it allowed us to divest that business to focus purely on equipment and technology. So two big portfolio changes. At the same time, we were very aggressive in reducing our costs. We have a restructuring action in place inside. We call it Project Reimagine. And Project Reimagine, by the end of next year, will run rate in the range of $175 million-$200 million of structural cost savings.
And that's ranging from a combination of us just reducing our overall footprint, but it's also migrating a lot of our services into lower-cost countries or to third-party service providers, and then leveraging AI where appropriate to really streamline efficiencies. So this is not really industry-dependent. It's more about a structural change that we've gone through. And again, that'll generate somewhere in the range of $175 million-$200 million of run rate savings. So we've got those three from a portfolio and a structural standpoint. The fourth one is what we're doing more with our dealer network is what we call FarmerCore.
And if you think about, in a simplistic way, FarmerCore is shifting from the old way of doing business, the old mall structure where the farmers were required to come into these large brick-and-mortar dealerships to being more on the farm, more like Amazon.
We're leveraging mobile fleets. Our dealers are able to do 85% plus of the service more on the farm and service the farm rather than the piece of equipment that the farmer was looking for. So a real structural shift as to how we're approaching our distribution and how our dealers are servicing our farmers and seeing a lot of good traction on that. And then the fifth one is some of the changes that we've made more from a governance standpoint with our largest shareholder and the resolution that we brought together with TAFE, which really has allowed us to simplify our strategy of how we're working with our low-cost or our low-end tractor supplier with now SDF in lieu of TAFE.
A little bit of change from a governance standpoint.
But most importantly, as part of the structural agreement with TAFE, is the ability to change our capital allocation. We now have an agreement with TAFE where they will participate in share repurchases on a pro-rata basis. And that's allowed us to pivot our capital allocation from special variable dividends into share repurchases. And with that announcement, we did announce a $1 billion program, which we expect to commence around $300 million of that here in the fourth quarter. So a lot of structural changes that have positioned us for success to deliver those next-stage margins that we talk about of 14%-15% as our industry gets back to that mid-cycle here.
Fantastic. So maybe we can dig into some of the details here on PTx. I think it's roughly $900 million of revenues today, about 10% of where you are at this point in the cycle. Any sort of breakdown you can give in terms of the products and services? And what do you think that mix will be when you hit that kind of $2 billion target that you have? Are there multiple paths to getting to that $2 billion? Maybe you can talk a little bit about that.
Yeah. So if we look at the business today, the vast majority, I'd say probably close to 90% of that is products. We do have some service-oriented parts of the business, some SaaS-based revenues. So if I think about some of the programs that we offer, Radicle Agronomics, which is the soil sampling, that is a pay-per-use sort of basis. If we think about some of the autonomy offerings that we have, the operator is buying hours of service. And then if we think about FarmENGAGE, which is our new mixed fleet farm management system, that is a service fee that the customer would pay for on an annual basis.
So we see those parts of the business as growing over time in absolute dollars, but 90% plus of it is actually products. And I think it'll stay that, a high percentage for the foreseeable future.
As we think about the growth from $850 to $900 to $2 billion, it's really going to come through a couple of different ways, and break down the $900 today, you can sort of look at that as sort of in three different buckets, so about a third of that is products that PTx is putting into AGCO products, so what's going into the Momentum planter, what's going onto the Fendt, Massey Ferguson, or Valtra tractors, so about a third of that revenue is sort of intercompany sales. About one-third of it is other OEMs, so we have relationships with over 100 different OEMs around the world.
Pretty much every player outside of the industry, the large industry player, we service almost everyone else in some form of a product that we're selling to them, so we have about a third of our revenues coming from those other 100-plus OEMs.
And then we have about a third that we sell through this unique distribution channel that we call the retrofit channel that's focused on the mixed fleets. So this is going in from a separate dealer network. These are not your typical equipment salespeople. These are the seed salespeople, agronomists, people who are more technology-orientated, more on the farm. And they're trying to sell a solution to the farm, helping drive productivity or helping drive improvement in yields, lower input costs. And about a third of our revenue goes through that unique retrofit channel. So that's sort of the basis today.
If I think about how we're going to grow to $2 billion, there's a couple of different facets. The largest part of that growth is going to come from that retrofit channel. And it's going to come really in two categories. One is new product introductions.
So historically, we've been introducing a couple of products per year. As we brought Trimble Ag and Precision Planting together, we had a goal of introducing more products. This year, we're going to introduce over 10 products. And our goal is to try to introduce these high single-digit number of new products per year. And if you look at what's in the marketplace from AGCO today, Symphony Vision, so that's our targeted spraying, really starting to ramp that up, which is a huge opportunity for farmers. Autonomy. Again, we're the industry leader out there. We already have autonomous grain carts for sale.
We've introduced autonomous tillage. So really starting to ramp up the autonomous offerings around the crop cycle, coupled with some of our core legacy technology products. So when I think about the opportunity for growth, part of it's going to become more of that product introductions.
We've got a lot more in our technology pipeline as we bring those to market here at winter conference and then subsequent after that at other events. We see the portfolio of products growing and a big opportunity to grow the revenue there. The second one is more of the geographic expansion. Again, when we brought together the Trimble Ag business, which had a strong presence in Europe, and Precision Planting, which had a strong business here in the U.S., we saw synergies and growth opportunity of really expanding the two portfolios in those other markets and really expanding both of those products, both in Australia and New Zealand, as well as the South American market.
We're going to see some geographic expansion with the full tech stack now being offered around the world.
New product expansion will be the two primary growth drivers facilitating the retrofit, and then we have the other OEM channel. Again, I mentioned over 100 different OEMs. Several of our investors were at our tech day in Germany earlier this year, where they got to see the technology firsthand, but what we did the day after that is we had a PTx tech day for those other OEMs. We brought them to the same farm. They got to see the same technology, and so these were OEMs who may have been buying some of the legacy Trimble products, or they may have been buying some of the precision planting products.
They got to see all of the tech available to them as part of that relationship that we have with them.
So we see a lot of opportunity for growing our share of business with those other OEMs, which will be a catalyst for the growth on top of that retrofit channel. And I think those sort of three pieces are really what's going to drive the revenues from the $900 or so up to $2 billion by 2029.
Great. Yeah, I was going to ask you which sort of products within broader precision ag do you think are going to have the biggest impact on your revenues? It sounds like you would say it's those new products like the Symphony Vision and autonomy. Or are those still smaller in the grand scheme of things? It's more just sort of base precision planting?
Yeah. So there's probably three that get me the most excited. I'm not sure they're necessarily going to be the biggest dollars. But I think about what are the three that are going to really drive, in a lot of ways, transformational change. Symphony Vision, so the targeted spraying, huge opportunities for the farmers as they think about their input costs. Reducing their chemical spend is huge for them. And what we have, and again, this is a retrofit application, so we're not asking farmers to buy a new piece of spraying equipment. They can buy the vision system, the nozzles. They can bolt it onto their existing sprayers. So a much lower entry point, and they own that equipment.
So if they question the efficacy of the spraying, they can go back into the field two times, three times, and there's no incremental cost for them other than chemicals and the hours on the sprayer. They're not paying a per-use basis today. So it gives them an opportunity to really test that out in a retrofit application without having to buy a brand new piece of equipment. So I think Symphony Vision targeted spraying is a huge opportunity for us. Autonomy, as we hear everywhere we go, as I'm talking to a farmer panel on Monday, labor is a challenge for them. And as you get into the harvest, the opportunity to get that crop off the field during the optimal window is critical for them.
And as labor is a challenge, the more that they're able to leverage autonomy, the better it's going to be for them.
So I think the autonomy offerings, as we continue to introduce new offerings around the crop cycle, will become critical. So I think those are two big ones. The third one, though, I think, which is a little bit different, is our FarmENGAGE platform. So that's our farm management system that we introduced at Farm Progress earlier this year. And it's a farm management system for the mixed fleet. And it allows our FarmENGAGE to sit, in theory, over the top of the other offerings that our competitors have. And it allows the farmers who are using that mixed fleet to be able to do the task management they need to collect the data.
And it allows them to either extract data from their existing legacy system into FarmENGAGE or collect this information off their equipment and send it into their legacy system. So really a complement.
So if a farmer was more loyal to a competitor's brand for years and has collected lots of data, with FarmENGAGE, he or she now has that capability to create more of that mixed fleet so they get the best product for what he or she needs and not worry about the data being in two different systems or not talking to each other. And FarmENGAGE really sort of complements what they were looking for from a data management standpoint. So I think that's probably not going to drive a lot of revenue growth in PTx, but as an enabler for the equipment growth, as I think about how Fendt is growing its market share,
that really reduces one of the barriers that some of the farmers may have had if they were solely focused as one legacy or had one brand that was managing their entire fleet.
Yeah, I was going to ask you about that because I was trying to understand exactly how that was going to be executed. So it sounds like you're not, if they have Farm Management System A or Farm Management System B, and yours is C. You're not telling them to get rid of A or B. You're layering it on top, basically, is that fair to understand it?
Yeah. When we think about Fendt penetrating in North America, South America, more often than not, Fendt is creating more of the mixed fleet for the farmer. When you look at the strength of what Fendt is doing, it's got a lot of strengths, but some of that was, well, hesitation from farmers. Is it really better? Will it do all the things I think it can do? But then ultimately, at the back end is, well, how do I handle the data coming off of that tractor if I'm using a legacy or a competitor system? But FarmENGAGE is a complement. It allows that farmer to do all the tasks that he or she needs to do, whether they're running a different green, a red, a blue, or a Fendt.
They can set their task, collect their data, and it works between the two systems, allowing them to keep their data in their legacy system, or they can convert it all into the new system if they find it easier or more user-friendly. So it's more of a complement or an enhancement rather than a replacement if they want it to be.
Interesting. And what would you say would be the benchmark for success for FarmENGAGE over the next 12 months and then over the next three years? Do you have a metric of adoption or anything that we should be keeping in mind?
Yeah, it's going to be adoption, right? What is the penetration rate that we're seeing? So the good news for us is we've announced for model year 2026, all Massey Ferguson and Fendt tractors are going to come with a three-year FarmENGAGE option or offering as part of the initial purchase. So we'll get to see farmers. In theory, we'll get to experiment with FarmENGAGE upfront. I would tell you when we announced it at Farm Progress, there was a lot of initial excitement by farmers who had been using some of our products alongside competitors' products as it gave them an avenue to start to consolidate data.
But I think user activity, the data that we're able to see or the farmers are able to see is going to be a huge variable we'll watch and how it's penetrating those mixed fleets.
That's very exciting. Maybe to kind of bring this up to a higher level or a different angle on precision ag, in terms of you mentioned before, I think around 10% or so of your PTx revenues are around services and SaaS and things like that. Just curious how you view the concept of subscription fees and recurring services as a critical element of the future revenue mix and just the overall, if the revenue model today is 90% machines times price times volume, is that a sustainable model going forward, or does the industry have to move to more of a recurring services model?
Yeah. So I think it's evolving. We're going through a tremendous amount of transformation from the technology side of the house than we ever have in this industry. I think historically, farmers have been reluctant to sign up for subscriptions. Again, you look at their profitability. Generally speaking, when they're profitable, they want to buy large pieces of equipment. They want to pay for all of it upfront, be done with it. And then when they go through a downturn like they had the last couple of years, they want to be able to hunker down and reduce their cash outflows. So that's been the historical model.
As we've talked with them, they've sort of said, "I'd rather buy it all upfront." Now, what we are seeing here is probably more willingness as technology becomes more and more evident to them and the improvements in technology, more of a willingness to things that are more subscription-oriented. And I'll give you a couple of examples. When we think about things like autonomy, there, in that case, in the way that AGCO has handled it, is you buy the equipment or the hardware itself. You pay an upfront price for that, so the farmer likes that. But you buy hours.
And whether it's you buy per hour, you buy a bundle of hours or unlimited, and that is more on an annual basis. And in that case, the farmers appear to be more willing because they know that there's a lot of system upgrades.
You're getting the latest technology where if I just buy a piece of equipment one time, as we make upgrades to the algorithms, the software, by paying that recurring system, you're getting the latest and greatest. So as we look at things like that, we're seeing more of a willingness because they know they're getting something better. Now, we also see others in the industry looking at more SaaS-based systems on things like spraying. And I'd say we're watching that. We're monitoring it. All of our targeted spraying has the capability to move into that type of pricing model or that type of pricing methodology.
But at least right now, we haven't seen, I think, the desire to migrate to that. But it's something we'll see how the industry evolves and, again, farmers' willingness to pay for that.
Right. Makes sense. I want to dig into also FarmerCore a little bit more. Can you talk about what differentiates it from other mobile service offerings that are out in the marketplace today?
Yeah. I think if you think about FarmerCore, for us, it's a complete redo of how we service the farmers. Our industry for hundreds of years has done very well of forcing the farmers to come to the dealer. Think about when you and I used to grow up and we shopped at the mall. You go to this big, giant mall, 12 bays. We had to go down there. The evolution of Amazon, Amazon brings most of the stuff to us. FarmerCore is a derivative of that, right? Leveraging the technology, the connected machines, we're able to service the farm better on the farm.
And so what FarmerCore does is it's sort of servicing the farm through connected machines, leveraging mobile trucks, doing 85% plus of the service on the farm at a time when the farmer needs it. And for us, it's working quite well.
So as we roll out Fendt in North and South America, we're training these dealers to use or leverage this FarmerCore process that helps improve that for them, for the farmers, and for us. And what does it mean for the farmer is you can see a lot better engagement, net promoter scores with the farmer because they're getting the work done in a time that's more convenient for them. A lot of times when there's a service technician on the farm, he or she's there to service the farm, not just the piece of equipment.
So when we look at our retail stores that we own, the first question they ask when they're done servicing the piece of equipment they were there for is, "What else can we do for you?" And so for that farmer who's already got the technician on his or her farm, what else can I get done? Great. I got another highly capable technician who can do more work, making it easier on the farmer. So good engagement for the farmer. He or she's getting a lot more work done. The dealers like it because the investment for them is lower cost. They're usually building a much smaller brick-and-mortar store.
They're putting them further apart, and they're adding these mobile trucks and parts depots to cover more white space in between. So as a dealer, your investment cost is lower. You're able to service more white space.
So your parts and service or your absorption is a lot better. And because you're sort of servicing the farm, you're usually getting a higher ticket price on the farm, driving better profitability for the dealer. And then for AGCO, again, better connection with the farmer, hopefully better engagement with him or her, and better parts and service because, again, usually that's facilitating more sales for us. So we think it's something we've been doing that at our Ag Revolution stores that we own here in the U.S. now for several years. The team has done great from an absorption standpoint, seeing great traction.
And as we start to roll that out in our North and South American dealers, seeing good momentum with them as to how the farmers are responding.
Once you get used to being serviced on the farm, it's sort of hard to go back to having to bring your equipment into the dealership versus having them come to you.
Relative to your peers that have some version of this offering as well, would it be fair to assume that perhaps your trucks are out there being a little more proactive, making sales calls to be more a little aggressive and trying to take market share with it, or is there any other point of differentiation with it?
No. Again, everyone has the ability to do it. But when you look at the infrastructure, when we look at the Fendt rollout of the dealerships, we're trying to space those brick-and-mortar stores further apart and letting the mobile fleets cover more of the white space. For some of our competitors who have phenomenal dealer networks, part of their strength has been having the proximity to the farms, having them be closer together. Well, as you start to add trucks on top of that, you can service the farm, but you still have that 12-bay store that has to be serviced. So if I've added trucks on top of a big store, my cost structure has gone up.
So again, not that it can't be done, but it makes it harder from an absorption standpoint where if I have a smaller store with a parts depot and a couple of trucks, if my investment cost is lower, I can get better absorption. And I think that's kind of the trade-off that we're dealing with as we roll it out. We have more flexibility where if I'm already well-established, I have to figure out, do I close a store? Do I accept a higher cost structure to manage the farm? And it's a trade-off that others will have to debate.
So you have a little more flexibility with it, basically.
Got it. Okay.
Another pillar of your core strategy is Fendt. And I wanted to ask you about some of the successes you've had with Fendt in North America in the last year or so. And how do you build on that? What lessons have you learned? And can you kind of improve on that to have a bigger impact on this initiative in the next few years?
Yeah. So one of our three core growth pillars is growing the Fendt share in North and South America. And again, done quite well in penetrating here. We're gaining share. And when I step back, I think Fendt has got a tremendous opportunity. And some of the things that we've done in the last couple of years has really positioned it for tremendous success. And if I sort of step back and, again, think about what a farmer wants, the first question a farmer asks as he or she's going to switch products is, is it better? When you look at the equipment itself, the Fendt products, generally speaking, are better-performing products than the competitors. If I look at the Fendt tractors,
they're more fuel-efficient than the competitive products. So if you're a farmer looking at this product, I got 20% more fuel efficiency.
I got better technology, better cabin comfort. There's a reason to consider the alternative. Second step is, well, what about parts and service or warranty? How's it going to handle? Well, Gold Star warranty in the U.S. is three years. So the industry is generally two. So as a farmer, I've got a third-year bumper-to-bumper. AGCO has the best parts and service fill rate in North America and Europe, and that's by third-party standards. So if I'm a farmer, I got a better-performing product. I got a better warranty. I have a company backing with the highest parts and service fill rate. So I've got a good position there.
Next question is, who's going to service it? Do I trust that dealer? Because I'm walking away from dealer A to move to dealer B. Is dealer B going to be there? Well, every Fendt dealer is handpicked.
Every store that he or she opens has got to meet the Fendt qualities, loaner vehicles, technicians, layer on FarmerCore, as we just talked about, being on the farm. That dealer should turn into being a positive for you because if I'm going to be on the farm servicing your connected machines, three-year bumper-to-bumper warranty, everything's taken care of, that dealer becomes a positive. The last part that we were dealing with was, well, what about the data? Because a lot of times Fendt is creating this mixed fleet. So I've got this legacy farm growing up with competitors' data. I can't use it.
Do I got to create two? With FarmENGAGE now sitting over the top and complementing the existing legacy systems, data is no longer an issue.
And so when I think about those different pieces that may have given farmers hesitation, whether it was product, dealer, or now the data, each of those have been addressed between FarmerCore, FarmENGAGE, and just the Fendt product performance. So we feel really good about where we're sitting. Industry's challenged right now in North America. But when I think about what Fendt's doing, gaining the share, I tell you, I was at Agritechnica and we had 300 Fendt North American farmers and dealers with us in Germany. And everyone I talked to raved about the products.
They raved about what it was doing, exceeding their expectations. So there's good momentum. We've got to continue to build the brand awareness. And we don't want to compromise any of those three pillars on dealers, technology, or the product quality.
But I think we're in a good position here as we continue to roll Fendt out in North and South America.
Awesome. One bigger picture question that I've had in looking at how this last cycle has played out, you guys are really rock solid in Europe. And the profitability there has been really very, very steady. North America and South America have been much more cyclical and variable. Scale, I think, is a big element of that. As you kind of focused your resources on how to get to the next cycle and the next level of profitability, does it make sense to focus more on South America, given that that is also a structurally growing area relative to North America? Or is the reality that if you're going to be a global player, you really have to focus on all regions in the same way?
If you have finite resources, do you put it all in the structurally growing one, or do you have to split them in both?
Yeah. Well, I think I'm going to put the Americas in one bucket and Europe in a different bucket. If I think about Europe, all three of our brands have done exceptionally well there. Fendt has grown share. Fendt has introduced new products that generally result in a higher mix. So we've seen great performance by the team, by the Fendt team in Europe, hands down to them. But at the same time, when you look at the profitability of Europe, over the last several years, what's maybe less visible to our investors is all of the work that Massey and Valtra have done as well. They've grown share, maybe not to the same degree as Fendt.
But at the same time, we've been able to commonize a lot of the cost structure, the platform, where 70% plus of the products or of the components in Massey and Valtra are like. And so that's taken a lot of cost out of the system. The farmers don't necessarily see that because the hood or the bonnet, the cab, the user interfaces all look and feel different to cater to that Fendt customer or, sorry, that Valtra customer versus that Massey customer. But once you get underneath that, the structure, very much like automotive, a lot of commonality.
So we've taken a lot of cost out of the system between Massey and Valtra that's really helped stabilize a lot of the margins of what you've seen in Europe. So we need to keep doing those things.
We know Europe's a competitive environment, but three strong brands there, keep the innovation going, and then we start to layer in the technology aspects of coming out of the PTx Trimble organization and the Precision Planting organization under PTx. We see good opportunities to continue the momentum in Europe. So a little bit of a focus there. South America and North America, I'd say, are more growth-centric. And that's where we look at our share in South America. We're in a good position, but we're under-indexed in the large ag there. And that's Cerrado region or that Mato Grosso.
We still see a huge opportunity for Fendt to cater to those large professional growers. They're doing two to three plantings per year. Again, you think about the topography in the Cerrado region. It's hilly. That Momentum planter is the best of the best.
And you couple that with a Fendt tractor. We see huge opportunity. Again, you look at the fuel savings of that product. If you're doing two to three plantings per year, that fuel efficiency of that Fendt tractor versus the competitors is meaningful for those large professional growers who have hundreds of thousands of acres or hectares that they're farming. So we see significant growth there. And North America, same side, it's a huge market, and our share in large ag is relatively low versus our share in other parts of the market.
So we see a huge opportunity to offer these professional farmers an alternative, and we want to be able to do that here in North America. So I'd say we're sort of in a growth mode in those two countries or those two regions and more sort of enhancements in the European region.
Makes sense. We have a little time left, but we should probably cover the ag cycle and where we stand there. So on your last conference call, you set some expectations by North America kind of down mid-single digits before the China soybean deal for 2026. We're talking about Europe up a little bit, South America somewhere in between. I guess starting with North America, kind of what gave you the confidence that North America would only be down mid-single digits before that soybean deal? And now that we've heard some other perspectives from other players in the industry, does anything change your view?
Yeah. Well, we'll go back and, when we looked at on the third quarter call when we gave our industry outlook, our data analytics models, we're sort of showing that mid-single-digit declines in North America. Since then, the harvest has come. We've sort of gotten the. We'll get the data here on the harvest in North America. Obviously, one of the large players in the industry came out with a much more negative view of large ag, given that they have a large share in this market that has a big influence. So we'll digest all of that in our updates when we give our 2026 outlook here, probably in February. We'll revisit that.
Likely, we'll change our outlook to be a little bit more negative than what we had thought, at least based on what their views are. But nothing specific yet.
But if you look at the industry as a whole, it's been down several years now. We're well below the mid-cycle margins in North America, and so the age of the fleet in North America never got young through the peak because of the supply chain challenges. So when we look at the age of the fleet here in North America, it's already old again. But net farm income for farmers, there's been some challenges for them last year, this year, and likely next year. So we've got to factor all that in and see if it makes our outlook for North America a little bit worse than what we had originally thought, but more to come on that.
And in relation to that, I mean, how has the order activity been? Anything that would sort of corroborate what they're thinking about and seeing as well?
Nothing significantly different from what we said on the third quarter call. Again, we're seeing the harvest come in. Yields were quite strong, but pricing for commodities has been still relatively weak, and so again, nothing significant positively or negatively. We're working to reduce our dealer inventories while we're trying to continue to focus on retail sales. We're cutting production more than retail, but we're also obviously working with the dealers around the country to spur as much retail activity between now and the end of the year as possible. As I said on the third quarter call, we will not get to our six-month target by the end of the year.
That will require us to do some underproduction in 2026.
Now, again, with the outlook from one of our competitors being even more negative than what we had thought, because our dealer inventories are based on the next 12-month sales, if that industry outlook comes down, that'll put more pressure on what our dealer months of supply look like. So it may force us to do a little bit more underproduction, but we'll work through that as we get prepared for our outlook here in February.
On that point, I mean, do you have a base case of how long it might take to get to your sort of targeted level of inventory?
Again, I think a lot is going to depend on the industry outlooks in 2026 and 2027, again, because we're looking at 12 months forward. Again, if I look at maybe some of the outlook that our competitor gave, their outlook, I think, would put the retail market at levels back in the early 1970s. So that's a pretty low level of inventory, a bit low level. That being said, as we produce our dealer inventories, trying to get to that six months, if you're modeling it at that level, the industry picks up, just say, 10%, that changes the number pretty quickly mathematically.
So we've got to manage all of those things coupled with our lead times for some of our products coming in from Europe, coupled with what we commit to our suppliers.
So we're sort of working through that machine right now on sort of what makes sense. But I think net farm income is going to be a big variable for farmers as we go into 2026. How are they looking for commodity prices, their input cost, and then ultimately the demand profile? We heard the agreement with China on soybeans, 25 million metric tons. At least there's some stabilities. We think about 2026, but we've got to see how the prices ultimately reflect in that and what is their input cost as well for next year.
How would you think about the start of a replacement cycle?
I think it's going to be dependent on farmer confidence, right? If we talk about farmers in North America right now, I think there's just a lot of uncertainty and a lot of hesitation. If commodity prices start to pick up and they see more predictability for their income, given the age of the fleet, if they think about the technology of the new equipment versus the older equipment, I think there's an inherent desire to upgrade. But if you're not profitable or your net farm income is fairly limited, that's giving you reasons to pause. So again, we think the upturn will come. I'm just not ready to predict whether it's going to be back half of 2026 or 2027 or a different date.
And what about Europe and South America? Europe seems to be fairly consensus from the companies that it'll be up next year. Are we still confident in that? And then South America, their competitor forecast was for sort of flat. Is that still in line with what you're thinking?
Yeah. Europe, both of us have talked about modest growth in Europe next year. We still feel okay with that. When you look at the Western European farmers, close to 50% of their income is coming from subsidies, from government subsidies. So you tend to see a little bit better order pattern there. You have better crop diversity from the farmers, and you also have a higher percentage of livestock and dairy in Europe, which tends to be a little bit countercyclical to arable farm or grain farming. And so they've been doing quite well. And so when we look at that, again, that industry usually is on a scale of mid-cycle.
We talk about ag going from 85-115 of mid-cycle. Europe tends to fluctuate in the 90-110 range. And so we feel pretty good that that market should be up sort of modestly next year.
With that being 60% of our revenue, that's a good story for us as we think about overall portfolio being the geographic weighting there. South America, I'd say a little bit more of a wild card for us. We've seen the mid and low horsepower was doing quite well at the start of this year. Citrus, coffee crops were doing quite well with the 50% tariff from the U.S. That put a little bit of an impact on those sectors. With that sort of subsiding or the recent rollback of those tariffs, we'll see how that picks up.
And with the stabilization of the trade agreement between U.S. and China, that was some overhang in South America, whether or not those farmers on the row crop side were willing to buy. So we'll see if that sort of helps deliver any improvement in South America.
But I'd sort of put a question mark on that one. We said we sort of expect it to be up modestly. So I think their outlook and our outlook are probably relatively similar right now.
Okay. Wanted to ask you about, and you made reference to it in the beginning, about the change in TAFE and your capital allocation. Just one clarification. The wording on the $300 million commencing that, does that mean this $300 million will extend beyond the fourth quarter, or it's you're commencing a $300 million buyback that will be completed in the fourth quarter?
Yeah. So as part of the agreement with TAFE, again, they own 16% of the company. As part of the agreement with them, they've agreed to participate in share repurchases in a pro-rata format. And so when you look at $300 million of an announcement, they have to remit to us around $50 million. Now, the terms of the agreement, they have the ability to win the sell-back. So what you would see is, as I said, commencing, so call it $250 million of that will be done in the form of an ASR here in the fourth quarter. So that'll get taken, in theory, out of the system this quarter.
As we wrap that up, we then have to go back to TAFE, present to them sort of what scenario they have an option to participate at that price, whether they want to remit a certain number of shares a certain period of time after that based on a market price. So we can't determine what they're going to sell in this quarter or whether they would sell it to us in the first quarter. They will submit or remit their shares to us. The timing of that $50 million directionally is sort of why we've caveated the commencement, because I can't predict whether I'll get that $50 million versus the $250 million, which is the ASR.
I see. Last lightning round question, price versus cost thoughts next year, any sort of framework to think about confidence, whether you can be price-cost positive or not?
Yeah, we don't know yet. I think what we've said on the call is we sort of look at more traditional industry pricing next year, and that's historically in the 1%-3% range. We haven't given official guidance on what we think we'll do next year. What I have said on the call, though, as you think about with the tariffs, the incremental cost for us related to the tariffs next year, I don't think that we will deliver the traditional incremental. Normally, we have a price-cost arbitrage of somewhere in the range of 50-100 basis points. I don't see that next year. I think we'll see in our outlook whether we're able to offset it on a dollar basis. So again, TBD on that.
But if we are able to offset it on a dollar basis, that would be somewhat margin-dilutive next year.
But we've got to sort of see, based on the industry, based on competitive dynamics, what our two major competitors are doing and what we think we can do based on what we've announced, and see how that sort of shapes up relative to the inflationary costs we normally deal with, coupled with the tariff costs here in the U.S., and sort of see how that nets out. But we'll give more clarity on that at our Q4 call.
Terrific. Well, congratulations on all the progress you guys have made on the strategy and best of luck with 2026.
Yeah, thank you. I'm excited.
Thanks so much. Thank you.