Good morning. This is Tami Zakaria. I'm the Head of Machinery, Engineering, and Construction Equity Research at J.P. Morgan. We are here today with Brad Arnold` SVP and GM of Precision AGCO, and Greg Peterson, Head of Investor Relations. For those new to the name, AGCO is a leading manufacturer and distributor of agricultural equipment and related replacement parts throughout the world. AGCO provides farmer-focused solutions to sustainably feed the world. Let me pass it on to Greg to tell us more. Given most people in the room likely aren't familiar with AGCO, can you start by giving us a bit of an intro and background on the company and maybe a quick state of the union for your most important markets?
Sure. Thanks, Tami, thanks for having us here at the conference. AGCO, in terms of last year's sales, is a $12.7 billion, as Tami said, ag equipment and agricultural solutions company. We're the largest pure play ag equipment company with a pretty diverse business internationally, primarily in Europe, North America, and South America. In terms of company background, we were founded in 1990, we're the product of over 30 acquisitions. Probably one of the most important was a company we bought in 2017 called Precision Planting, which arguably is the most successful ag tech company in the world. Brad's here to tell us a little more about that in a few minutes. AGCO's really shifted our focus over the last few years, for sure.
Focused pretty intently on large professional producers that have a very strong appetite for technology. The good news is a lot of that technology, the penetration rates are still very low. In terms of strategic priorities, we have two that we're focused on pretty intently. One is to outgrow our industry by 4%-5%, and the other is to improve our mid-cycle operating margins to 12%. Quickly on those growth strategies, we have three high-margin growth businesses that we're trying to grow aggressively. One is globalizing our Fendt premium technology brand, which has been an industry leader in Europe. We're bringing that here to North America and also to Brazil. We have our sights set on doubling the business over the next four to five years.
In terms of our margin improvement, a lot of that, the momentum's gonna come from our Fendt growth strategy as well as growing our Precision Ag Business and growing our Parts Business. We also have some cost-focused initiatives aimed at improving the cost structure of our Massey Ferguson Business as well as our Grain & Protein Business. Quickly, in terms of demand drivers for our industry, a lot of concerns around where we are in terms of our cycle. We are a cyclical business driven primarily by farm income and commodity prices. Farmers, yeah, obviously are aggressively in the market as their income improves. We're down from record levels last year in terms of commodity prices and farm income.
Commodity prices have pulled back this year, but so have things like inputs like diesel, fertilizer and seed costs. With that, farmers are still expected to be nicely healthy this year. A lot of demand globally for grain, things like population growth, changing diets towards more protein and the reopening of China all are expected to support relatively low levels of commodity prices and support I should say low levels of commodities and support commodity prices in the future. Tami, that maybe gives a brief background and overview. Happy to throw it back to you.
Absolutely. Thank you so much. Brad, to you, can you help us conceptualize what kind of savings, your existing Precision Ag solutions are generating for farmers, and can you give some examples? What's the ROI from a farmer's perspective if they want to buy a solution from you? What's the payback period?
Yeah, you bet. Well, first of all, Tami, thanks for again, allowing us to talk about our exciting business of Precision Ag within AGCO. I wanna first start by talking about our customer. For those that might not be familiar with agriculture, in my view, farmers are probably one of the most high-risk entrepreneurs, really in any industry. Many, many things that they do are outside of their control, on a daily basis in terms of all of the tasks that they perform around the crop cycle. Just to give you a little insight into what the opportunity is that exists, if you think about a single seed, a corn seed as an example, the genetic potential that's in the bag before the farmer does anything to it is well over 600 bushel per acre.
Yet in North America this year, which has dramatically increased this year over, say, 10 years ago, the average farmer will yield 180 bushel. Our opportunity to create value through better management of the inputs that farmers use every day, every year, is significant. Obviously, we can capture back some of that lost 400 and some bushel advantage. Some of the things that we've done that have created meaningful value, just to give you an example, one product that we sell through our retrofit channel, through Precision Planting, as a brand, as well as to OEM customers that we support, some of our large OEMs here in the U.S., is a product called DeltaForce.
DeltaForce is a product that goes on a planter and manages how much force is applied to a row unit so that we can keep a seed consistently spaced at depth in a way that's going to germinate well and maintain as much of that 600 bushel potential as possible. When we actively control it with that product, we can actually improve in trials all across the country, year-over-year, about a 10 bushel improvement. That system costs a farm around $50,000. A 10 bushel improvement on $5 corn, which we sit in about a $5 corn market today, that's a one-year payback for that system. Again, just an example of the targeted paybacks that we have for farmers. Most of our products range from 12 months to 24 months as a retrofit solution.
That's very helpful. I think last year, Precision Planting revenues were impacted by chip shortages, but recovered in the back half of the year. How are you thinking about growth of this business this year and, you know, in the medium term?
Yeah. Very good. I think probably the best way to answer that question, we used to be highly concentrated in our sales in the first quarter and into the first two months of the second quarter because it was centered around the planting season, and that's when our dealers were focused on getting installs done and most of our sales occurred. Last year with the chip shortage, we actually stopped our order board in August of 2021, didn't reopen it until June of 2022. We had a long period where our retrofit channel was not able to access product or access orders. We were still shipping product that we had on hand. That pushed our back half of the year to be much stronger than normal last year.
This year will probably follow a little bit more similar trend to that because farmer or dealers are still working through the inventory. Our goal is to, as we grow our business internationally, as well as we grow the maturity in our channel, we want our dealers installing product all year long, as well as being able to ship into the Southern Hemisphere a higher percentage of our product. I don't think we'll ever return to, you know, the position we were in 2021, where a significant amount of our sales were in Q1.
Got it. Thank you. That's very helpful. We've heard you talk about, your retrofit strategy a lot. I think that's one of your differentiators. Can you just shed some light on, why retrofit is the right way to go for Precision Ag within AGCO?
For sure. The benefits are on both sides. If we think about first the farmer, farmers are able to access new technology through a retrofit approach with a channel that's dedicated to do that and very competent at doing that, so that when you solved a single problem, they can access that technology on a planter or a sprayer or a combine that they already own. They don't have to buy a new piece of equipment to access that new feature that provides a better outcome for them. The retrofit strategy improves a farmer's operation with very little investment. For AGCO, and for Precision Planting specifically, we're able to develop a solution for a particular problem in a two to three -year timeframe, where it takes many NPI programs within a whole good environment.
We're talking about a five to seven-year development cycle. We may have an idea that we think is valuable, but it's gonna be seven years until we get it into the hands of a farmer. He or she to give us feedback that it was. With a retrofit approach, we get feedback in year three, that it's simple, reliable, that it solved the problem we thought was real, and that it provided an ROI. We can incorporate that proven solution into our whole good platforms within AGCO, so into our Momentum planter for Fendt or our Rogator sprayer as an example for Fendt as well. We also sell those through OEMs.
Again, this retrofit, first approach both benefits AGCO and our innovation speed, as well as the farmer and the investments that they need to access that technology.
Great color. I wanna come back to the OEM piece of it. Before that, I think you gave out some growth targets for precision ag revenues. I think you talked about $1 billion. Reaching over $1 billion by 2025. What kind of dealer network expansion do you need to do to achieve that in each of the three major regions?
Yeah. The retrofit channel is not something that's probably known by a lot of folks that might be here today or listening. It's a dealer network that really was created by Precision Planting, and it's amalgamated of a lot of different types of Ag businesses. Precision Ag specialists, for most Precision Ag specialists that we would have as a dealer for us is about 85% of our business or 85% of their business is ours. They have complementary products, retail channels, also input providers also, sell our products as well as seedsmen, crop consultants and those types. That's a hard channel to build. We built it over the course of 30 years.
It's, it's very different in their mindset, in their relationship to farmers than an OEM dealer. OEM dealers like to sell large piece of equipment, take in trades, and move those trades to the second buyer or third buyers of new equipment. The agronomic knowledge and capability that's required for a retrofit dealer is significantly different than selling new machines. We developed that in the U.S., and now we've moved, and it moved over the last four years down to South America and began to develop that region. Now we're over in Europe, about three years in, developing the European region. You know, globally, we're about 650 dealers, about 500 of those dealers being in North America. We think we need to be about 1,000 dealers globally before we are able to reach that $1 billion mark.
It's about more dealers as well as improving the capability of each dealer in each region.
Got it. Very helpful. For Precision Planting, I think you have relationships with OEMs. Update us on, you know, the breadth of OEM relationships you currently have. What's the growth outlook there?
Yeah. Not just within Precision Planting, but the three other businesses that I'm responsible for that we've acquired over the last 18 months, Headsight, which is a harvesting automation company. Appareo, which is kind of does automation across the crop cycle, as well as JCA, which is focused on autonomy. All four of those businesses have OEM relationships. This is a very unique approach in the industry. No other ag outside of perhaps Raven, does support other OEMs. Within Precision AGCO and those four businesses, we focus primarily on the retrofit market and then also on these OEMs. It's probably 25% of our business. We are very opportunistic in how we'll continue to grow that business.
When we were acquired by AGCO, I think we had around 12 customers, OEM customers globally. We're over 40 now. It's certainly something we've had success even within AGCO, bringing on competitive, you know, customers, to our Holger brands.
Before I move on to the next question, I do wanna highlight that we will have the last 10 minutes of the session open to the audience for questions, both for here in the room, and you can also submit questions via the webcast. We will get to your questions if you have any. The next question again to you, Brad. What is the parts and services opportunity associated with Precision Ag sales?
today, we don't really have a great way of measuring, the after-sales portion of a retrofit business because we sell through a dealer network, and so it's not easy for us to track a new piece of. A new system, essentially a new feature going on a, on a used planter today. We, we believe the useful life of most of our products are four to five years. Farmers sometimes will trade in between that timeframe. Repeat sales to the same customer, the same feature, or perhaps new features is significant, but it's not necessarily measurable for us.
Is it fair to say that your dealer network will be essential in sort of creating that sticky relationship where if there's any new features, updates, they would be able to provide it to the farmers?
Exactly. Yeah. There's two engines to our business. One is the retrofit channel, which I focused a lot on. The second is our commitment to innovation. That innovation engine, you know, in the past, would produce one to two new products a year. This year, we'll launch six new products. Those new products are most highly adopted by existing customers of a dealer Precision Planting products.
Got it. I will come back to the upcoming launches, but before that, let's talk about pricing, price realization. What has price realization been in the Precision Ag business in the last few years? What's the usual run rate for pricing for this segment? The reason I ask, I think for traditional machines, it's, you know, low single digit inflation type of pricing, price realization over time. It seems like there's a lot of value to be had from Precision Ag Solutions. What about pricing for that segment?
Interestingly, when you think about price realization, especially in the environment we've been in, where the industry's been capacity constrained, as well, we're in an inflationary environment, you know, we see ourselves as well as many competitors on GSI's raising prices dramatically. Our products start out value priced. In the example of DeltaForce I talked about earlier, we're value pricing that solution at 50%, so the margins are more like parts margins to start with, for that product. We have kept pace with the rest of our GSI business in terms of price realization over the last three or four years. It's so strongly priced to begin with. If we had to pull those back from elasticity perspective, it wouldn't be dramatic to our margins.
Got it. Going back to product launches, I think you mentioned six new launches this year. Can you update us on what those products would be? Not just this year, but beyond this year, what kind of new products are in the pipeline?
Yeah. Well, the name Precision Planting today is getting more and more ambiguous, even though it's very specific. We've actually done a lot of surveys with farmers because we've moved beyond the planter to the combine and seeder and now to the sprayer. So I'll talk about some new products on the sprayer. Farmers now are identifying the retrofit approach with our name versus we're specialists at planting. Again, part of that has been because we've brought some new technology to the sprayer industry over the last year and will over the next three or four years that give us a new platform to develop on, a new path for our dealers to be engaged with. The first was ReClaim. We launched that last year. It's a boom recirculation product.
We have a new nozzle coming out that's a PWM nozzle that will give us the ability to control the application of chemical through a sprayer. We're bringing out in 2024 a complementary vision system we call Vision Targeted Spraying that will allow us to do targeted spraying. We can see a weed, spray a weed, and bring dramatic reduction in herbicide use for farmers, saving upwards of 75% of their herbicide budget on certain passes.
Interesting. I think you've talked about the commercialization of fully autonomous crop care solutions by 2030 with retrofit solutions coming in by 2025. From our perspective, the outsiders, what are some of the KPIs to monitor the progress of all these initiatives?
Well, I think the things you all will be able to see and monitor is the acceptance of the first few use cases of autonomy. We'll be doing field demonstrations of autonomous grain cart, as you mentioned, earlier or later this year. In fact, many investors are invited to join our field day. You'll be able to see that in Nashville firsthand. Proving out that the capability is there, that the farmer's willingness to pay is there, on solutions that we actually commercialize is critical.
Behind the scenes, to fulfill the commitment to having a fully autonomous fleet by 2030, we're working, you know, in a more, a less visible way of creating the ethics necessary, meaning all of the automation required across every pass of the field, every tool that a farmer uses, and all the functions within those tools that have to be automated in order to actually remove the operator from the cab and perform the task at or better as an experienced operator. We've got a pretty significant program management process behind that.
Got it. Just to dig a little deeper, the autonomous grain carts and tillage equipment, I think you mentioned it's coming in 2024, right?
2025 is when.
2025.
W e hope to commercialize the retrofit grain cart.
Okay. That's the retrofit. First fit is probably a year after in 2026.
Within factory fit?
Yeah.
Yeah. A year or perhaps two years after.
Got it.
Yeah.
Are there any competing products right now that farmers are used to or getting acquainted to, or is it a novel technology that's gonna be coming out? The reason I ask that question, what is the competitive landscape in terms of these autonomous solutions that you're bringing out?
Yeah, for sure. Our competitors are launching products this year. One is commercialized this year, for an autonomous tillage pass. Other competitors are not full commercial yet, but are already demonstrating capability on autonomous grain carts, as well as autonomous sprayers.
Got it. Many would argue or even ask the question that maybe some of your bigger competitors, their tech stack could be better, and they're more poised to win the precision ag race. Tell us why that will not be the case, why AGCO could be, you know, the front runner?
Yeah. The focus on autonomy or removing the operator is the wrong place to put our focus. The tasks that farmers perform are difficult and require experience, care, a lot of observation during the task and a lot of interruption, literally. Our focus has been to add incremental value by automating all of the functions of the implements that the tractor or the power unit is pulling, so that when we're ready with the technology to actually remove the operator, we've added value every step of the way and sold those solutions as retrofit solutions and proven their value before we get to an end state of full autonomy. You know, again, the labor portion of a farmer's budget today is about 2%.
To think that we're actually going to have a significant savings or value proposition for full autonomy, again, is the wrong place to put our focus when I'm going after, our organization's going after that 400 bushel that we're still leaving on the table because the task isn't optimized.
Got it. That's very helpful. Tell us more about the Precision Ag monetization strategy. Some of your peers have talked about taking a SaaS subscription type revenue model similar to software. What are your views on what the right monetization strategy is for precision products and services?
Yeah. I think over time, we'll start to move to more SaaS type fees as well, you know, especially as we think about things like targeted spraying. Anything requiring machine learning and AI, those models only get better over time, and with more experience in the field. The ability to get solutions that aren't fully perfected out, have a one-time purchase or upfront purchase, and then have the farmer get the benefit of the improvements of that over time, really that's about the only monetization strategy that is fair for both sides. I do believe that'll become more important. We'll have our own recurring revenue model coming with our Radical Agronomic Platform. Again, another solution or set of tools that are coming for a new way of doing soil analysis.
We'll be selling those systems on a lease to a crop consultant, but we'll be monetizing on a per sample basis for every soil sample that that agronomist would do on behalf of their customers. We're excited about the impact that we'll have, as well as the benefit of having some more recurring revenue.
Got it. From a farmer's perspective, are they currently used to paying any subscription type fees to OEMs or across their crop care needs? If not, then do you think there's some education that needs to be done for them to feel comfortable with a SaaS model rather than buying something upfront?
Absolutely. Yeah. I think today farmers, you know, don't pay subscriptions in the way that perhaps we pay subscriptions as consumers in a significant way, but they do pay for correction signals for their guidance system. You know, the value pool that we're going after as equipment manufacturers is Precision AGCO technology companies, is the things that they do buy every year, inputs, chemical, fertilizer, seed, and we're trying to optimize that. We, we do believe a farmer's appetite to pay for a subscription model, you know, market approach is there if we prove the value of it.
Got it. I do wanna open it up to the audience if anyone has any questions. We have a mic at the back of the room, so if you could raise your hand, the mic would reach. Front.
Thank you. You talked about addressing some opportunities in the cost structure in Massey Ferguson in the grain business. Why were these selected as opposed to across the entire operation, and what's going on there that could offer some above-average opportunities?
Great question. Those are our two biggest opportunities, and I should have qualified it that way. We continue, and I'll talk about those in a sec, we continue to have productivity improvement initiatives in our factories in terms of helping with direct labor, automation, purchasing initiatives. We have really cost-focused initiatives that encompass just about an entire cost of goods sold, set of expenses. Specifically, Massey Ferguson, which is one of our global brands, it is sold in virtually every market, every ag market in the world and in many sizes, shapes. The reality is we make it in a number of factories. We have too many models and too many versions.
It's essentially because of the scale of the operation, if we simplify, reduce models and SKUs, there's a nice expense savings opportunity for that particular part of the business. That's number one. Our Grain Storage Business, a couple things there. We have done some bolt-on acquisitions over the years, and so there's some opportunities around restructuring, closing facilities, consolidating brands, which we've done. The other thing in that business, very, dependent or, steel is a big part of that business. There's been a huge fluctuation in steel cost, over the last four or five years in different markets, but, very competitive, industry. We haven't been able to recap or recover, I should say, as much of the steel inflation that we've seen.
There's opportunities for us in that business going forward in addition to the restructuring savings to benefit from better pricing associated with where steel is today and where it's going. Some nice margin opportunities in the Grain Storage Business.
Any other questions in the room? Also, as a reminder, those who are listening, to the webcast, you can also submit your questions, via the webcast.
Just a question on the choice of going after a retrofit or just what that implies. Does it mean you're going after a slightly different customer than what we may think of the larger firms who may buy, insure new equipment each year? Does that make a difference in terms of the adoption rate of new technology and the funding for new technology?
Yeah, great question. If you think about what retrofit is, it's not aftermarket. That you weren't implying that by your question, by the way, I'm just clarifying for everybody. Aftermarket is the, either the replacement of a part through parts and service wear life, or a dealer orders a whole good from the factory and then puts on product before it goes to hour one on the field for the farmer. That's how we define aftermarket. Retrofit is taking a new feature, new technology, putting it on any make of equipment, not just AGCO product, but Case, all of our competitive product globally, and as much as 30-year-old machines.
The effort that it takes from a channel perspective, which is part of your question, is a little harder 'cause you gotta educate somebody why they've gotta take something off that they thought worked well and put new technology on that creates a better outcome for them for a price. Our channel has gotten excellent at that. The second piece really of that is, yeah, I lost what. Maybe the last part of your question.
You answered some on the adoption rate on whether there's change there, but is there also a variance on the health of the overall customer and just their willingness to fund this year-over-year?
Yeah. What we found from most customers that are willing, and by the way, you know, there is an adoption curve on all technology. We feel like we've probably made it through in many of our products that are, you know, seven, eight years old. We're well past the midpoint on the adoption curve. But not all farmers are excited about retrofit. I'll use an example of MUD unit customers. These are multi-unit large customers that churn their equipment every year. They're not a target customer for us because they're gonna turn that equipment back to the dealership and probably don't want, you know, after a retrofit equipment on that machine as it goes back for the trade the following year. There are certainly customers that are more resistant to the retrofit approach.
I think we have two questions in the front.
Can you maybe talk about the decremental margins and how they might improve over time with, increased penetration and Precision Ag?
Sure. Both incremental and decremental margins historically for our business has been kind of mid-twenties, mid to upper twenties, depending on the region and the products that are moving up or down. You know, one of our strategic priorities is to outgrow the industry by 4%-5%. That should help as we grow the penetration of our Fendt business, grow our Precision Ag Business, and grow our Parts usiness. Those things should dampen cyclicality and, you know, dampen the downturn. Our, our goal is to, as I mentioned, have our margins, operating margins at mid-cycle at 12%. And with that also our trough margins at 7%.
If you go back to the last cycle, our peak was just over 8% and our trough was 4%, so roughly about 300 to 400 basis points of improvement. You know, I think the decrementals on the way down probably won't be that much different, though. It's probably, again, mid to upper 20s%, maybe, again, depending on what part of the business is declining. One of the principal focuses of the company over the last few years is to refocus on bigger, more professional farms, and with that a more. A richer mix of products, if you will, from a margin perspective. That'll benefit us in terms of incremental margins on the way up, but also probably also impact us in terms of decremental margins on the way down.
Can you speak to the impact of the interest rate environment across various parts of the business?
Right. If you look at the majority of our business, which is large ag, in almost every case, when a farmer buys a new tractor or new combine, he's gonna trade in an older unit, and he'll end up financing kind of the difference between the used equipment that he traded in and the price of the new equipment. The good news is for our industry is that the residual values on the used equipment are very high, in some cases, historically high. What that means is that the difference between what he's trading in and what he's financing is very manageable. We really haven't felt any impact yet at the high end of the business from the higher interest rates. Not so much, I can't say that so much for the smaller end of our business.
The small and mid-size tractors that we sell a lot of times to not traditional farmers, but for more things like landscaping, mowing, residential construction. Those buyers don't tend to trade in equipment when they buy new equipment. They tend to be more price-conscious, more kind of not impulse purchase, but more a shorter duration. Those are the purchases that we're seeing being impacted more at the lower end of our product product set. Just in terms of financing then, roughly 60-65% of our retail sales are financed. We have a captive finance company, AGCO Finance, that finances 50%. Only about 10% or 15% of our sales are financed by regional banks and outside of our finance company.
The good news is most of our equipment is bought in the Midwest, kind of rural parts of not just the U.S., but other markets. So far, the news from those areas is that there hasn't been real issues with those banks. The good news for our customers, no issues with financing at this point.
Can I just ask one quick question on that, which is, what's the percent that, for that small to mid-size equipment that's in landscaping companies for the overall business?
Could you repeat the question?
Right. The question was, what percent of the small tractor market is in landscaping businesses?
That's mostly a North America phenomenon. For us, North America is 25% of our sales. Those, the small tractor sales are probably, you know, 10%-15% of our North American business. Yeah, relatively small part of our global sales.
I think we're up on time with that. Thank you, Brad and Greg, for joining.
Thanks.
Thanks a lot.