Good day, and welcome to the AGCO Third Quarter 2024 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Greg Peterson, AGCO Head of Investor Relations. Please go ahead, sir.

Thanks, and good morning. Welcome to those of you joining us for AGCO's third quarter 2024 earnings call. We will refer to a slide presentation this morning that's posted on our website at www.agcocorp.com. The non-GAAP measures used in the slide presentation are reconciled to GAAP measures in the appendix of that presentation. We will make forward-looking statements this morning, including statements about our strategic plans and initiatives, as well as their financial impacts. We'll discuss demand, product development, and capital expenditure plans, and timing of those plans, and our expectations concerning the costs and benefits of those plans, and timing of those benefits. We'll also cover future revenue, crop production, farm income, production levels, price levels, margins, earnings, operating income, cash flow, engineering expense, tax rates, and other financial metrics. All of these are subject to risks that could cause actual results to differ materially from those suggested by the statements. These risks include, but are not limited to, adverse developments in the agricultural industry, supply chain disruption, inflation, weather, commodity prices, changes in product demand, the possible failure to develop new and improved products on time, including premium technology and smart farming solutions within budget, and with the expected performance and price benefits, difficulties in integrating the PTx Trimble business in a manner that produces the expected financial results. Reactions by customers and competitors to the transaction, including the rate at which PTx Trimble's largest OEM customer reduces purchases of PTx Trimble equipment and the rate of replacement by the joint venture of those sales. Introduction of new or improved products by our competitors and reduction in pricing by them. The war in the Ukraine, difficulties in integrating acquired businesses and in completing expansion and modernization plans on time and in a manner that produces the expected financial results and adverse changes in the financial and foreign exchange markets. Actual results could differ materially from those suggested by these statements. Further information concerning these and other risks is included in AGCO's filings with the Securities and Exchange Commission, including its Form 10-K for the year ended December 31st, 2023 and subsequent Form 10-Q filings. AGCO disclaims any obligation to update any forward-looking statements except as required by law. We will make a replay of this call available on our corporate website. On the call with me this morning is Eric Hansotia, our Chairman, President and Chief Executive Officer, and Damon Audia, Senior Vice President and Chief Financial Officer. With that, Eric, please go ahead.

Thanks, Greg, and good morning. I wanted to touch on a few highlights from AGCO's performance against the backdrop of the cyclical downturn we're seeing in the industry before I get into the results for the quarter. 2024 has brought a significant contraction in the Ag industry compared to the highly profitable years farmers saw from 2021 to 2023. The significant contraction is not uncharacteristic of prior downturns. What is different this time is how we are addressing it. We are focused on reducing inventory and cutting production faster than in prior downturns. We have been much more aggressive in reducing costs to better align our operations with the weak market environment. Despite these challenges, we remain focused on being the most farmer-focused company in the industry. Our three high margin growth levers, which include the Fendt, Full-line Globalization, Precision Ag, and parts are central to this commitment. Although this quarter was challenging in some ways, we are confident that the steps we are taking along with these growth engines will help us deliver higher trough margins than before and will increase the durability and resilience of AGCO's earnings through the cycle. The thoughtful and efficient growth of our North America Fendt distribution network through our farmer core model is progressing. We saw dealer consolidation in Ohio, Missouri, and Wisconsin in the quarter. These new locations can serve farmers on the farm where they want to do business with the mobile fleet approach to sales and service. In addition, through the farmer core approach, AGCO dealers have also expanded their presence in Louisiana and Georgia. We are now on track to improve Fendt market coverage to over 80% this year. The momentum for Fendt continues as dealers and farmers recognize the value of the Fendt full line of products. This…

Thank you, Eric. And good morning, everyone. Slide 8 provides an overview of regional net sales performance for the third quarter. Net sales were down approximately 26% in the quarter compared to the third quarter of 2023 when excluding the negative effect of currency translation and positive impact of acquisitions. By region, the Europe Middle East segment reported sales down roughly 21% in the quarter compared to the same period in 2023, excluding the impact of favorable currency translation and favorable impacts of acquisitions. Sales were down in nearly all countries with declines in France, Germany and Italy showing the largest reduction. The product segments showing the most significant declines were mid-range tractors, high horsepower tractors and hay equipment. Parts showed modest growth. South American net sales decreased approximately 44%, excluding the impact of unfavorable currency translation and favorable impact of acquisitions. The market continues to be very challenged and we continue to under produce relative to retail demand. Tractors, combines and implements all showed large reductions. In the quarter, there was significant negative mix year over year as the high horsepower segment of the tractor market underperformed the medium and low horsepower segments. The Brazilian market was down the most while Argentina was modestly down. Net sales in North American region decreased approximately 22% excluding the impact of unfavorable currency translation and favorable impacts of acquisitions. Lower farm income continues to pressure farmer purchasing behavior. High horsepower tractors and hay equipment saw the largest declines. Net sales in Asia Pacific Africa decreased 15% excluding favorable currency translation impacts and favorable impact of acquisitions due to weaker end market demands and lower production volumes. The most significant declines occurred in Africa, China and Australia. Finally, consolidated replacement parts sales were approximately 488 million for the third quarter, up 4% on…

[Operator Instructions] And our first question today comes from Jamie Cook with Truist. Please go ahead.

Hi. Good morning. I guess two questions. First, on the guide for 2024, you're maintaining your margin guide. Pricing is an incremental headwind relative to the previous guide. Your sales forecast is lower and so sort of implies margins in the fourth quarter have to reach 10% versus 5.5% in the third quarter. So just trying to understand the margin ramp there and what would be driving that. And then my second question, just on AGCO dealer inventories. I mean, it sounds like you're saying the market is getting weaker, your dealer inventories are still bloated yet but you haven't changed your retail sales forecast. So I'm just trying to understand what's AGCO-specific versus the industry? And like to what degree is there any way you could frame the production cuts in South America and North America in the first half of 2025? Thank you.

Sure. So Jamie, I'll go to your first question on the 10% outlook for the fourth quarter. Again, if I think about how I would look at the third quarter where you alluded to the 5.5%, I think there's a couple key differences here as we go into the fourth quarter. One is the production levels in Europe will be higher in the fourth quarter than they were in the third quarter, in fact, that they should be up at around 40% from Q4 versus Q3. We made the decision in the third quarter to really elongate some of the seasonal shutdown there, given the inventory, and we're still seeing fairly good demand in many parts of Europe. So we will see a little bit higher production in the fourth quarter in Europe specifically. Third quarter, we did do something strategically related to a large European dealer who was dealing with some financial challenges that was a little bit uncertain in the third quarter. For the most part, they have worked through that. We have much better clarity, and we expect to see a little bit of incremental volume related to that flowing from what would have been in Q3 flowing into Q4. So those would be a couple of things. In addition to that, you know that Q4 is always our seasonally strongest quarter that we'll see some improvements there. And then internally specific to AGCO, the cost actions that we've been implementing, we continue to see those pick up as we move month-to-month, and we start to take out more of the associates. And our warranty, again, we had a little bit of a spike here in the third quarter. We expect that to get more into the normalized rates here as we go into the fourth quarter.…

Our next question today comes from Kristen Owen with Oppenheimer. Please go ahead.

Hi. Good morning. Thank you for the question. A little bit of a follow-up on that. Just help us understand. I mean, you talked about some of the moving pieces in Europe around the production, around some dealer things. Can you help us understand what pricing looks like in Europe and how to square that circle with some of the market share gains that you've seen? And then I'll have a follow-up.

Yes. So Kristen, overall pricing in the quarter for Europe was modestly negative. I would tell you it's a little bit on the volume brands but even a little bit more in Fendt. If I break that down a little bit further, it's really focused on the transition that we're going through with the Fendt 700 Gen 6 and the Gen 7. You've heard us talk about introducing the new Gen 7 earlier this year. We are still producing the Gen 6. We'll transition through that in 2025 at some point in time. But as you would expect, as we still are offering dealers and farmers the opportunity to choose between a Gen 7 700 and the Gen 6, that Gen 6 is coming at a lower price point. And year-over-year, that's factoring into negative price in Europe. Again, I think when you look at our overall pricing being down at around 50 basis points year-over-year, I think it's important to understand the geographic mix. We're still seeing very good pricing here in North America. That has continued for the year and we expect that to continue. South America, we've been forecasting negative price now for a year. That's continuing to materialize. I would tell it's sort of in the low single digits this year as that market has continued to be weak. And then Europe is a little bit negative, as I said on my comments. And again, a lot of that has to do with this larger volume product in the Fendt 700 Gen 6 translating into the negative year-over-year price there in Europe.

Okay, that's really helpful. Thank you for that Damon. And then just generally speaking, on the lowered outlook for the full year, if I back out Grain & Protein fourth quarter of last year, that represents, let's call it, half the $500 million delta in the top line. Can you help us understand what that does for the bottom line? How much of a benefit is that to your year-over-year margin in the fourth quarter? Just a little bit more on the moving pieces of Grain & Protein in the revised guidance.

Yes. So I think your -- on the revenue outlook, Kristen, you're right. I would tell you what we saw in the third quarter, the miss in Grain & Protein and where we sit here in the fourth quarter, that's about $200 million. About $150 million of that, I would say, directionally would be in the fourth quarter specifically. So that's the revenue. Operating margin-wise right now, as we sit here at this 9% with the sale happening November 1, I tell you it really has a de minimis effect on the operating margin. EPS-wise, it's about $0.10 of our guide down in the EPS is related to the elimination of the Grain & Protein business here for the balance of the year.

And our next question today comes from Stephen Volkmann with Jefferies. Please go ahead.

Good morning, guys. So can we just start off with Trimble, Eric? And you mentioned that things were sort of weaker, I guess, as the channels sort of change there. Was a little weaker than I expected. What's your outlook there? I mean, could Trimble be up next year sort of irrespective of end markets as that channel shift sort of changes?

Yes, so it's an interesting situation in that, the activities that we're monitoring, many of them are on track in that we're signed up over 200 new dealers. We've converted our -- transformed how we're sourcing product or sourcing receivers on our own machines. We used to have two suppliers, majority of which was another supplier, not Trimble. We've converted that over to predominantly Trimble now. So those types of things are happening and on track, maybe even a little bit ahead of schedule. This big air pocket that we've talked about of the last-time buy from one of the top customer from Trimble is still feeding the market. So our -- even though we signed up all those dealers, they're really not ordering that much yet. We expect that to work its way through by the end of this year, and that's still on track with what we said last time. And then we can start seeing the activity come through from these dealers that we've signed up. Will next year be higher than this year? We're still working through our expectations for next year. The things we're putting in place, we feel good about. It depends on what the market does. The broad Ag indices are at their low points. You look at Purdue was at its low point and now bounced back today, came up a little bit. Well, that's just one data point. Will that be a trend? Don't know yet. The SIMA index in Europe is at its all-time low point. So we're certainly close to sentiment being at the very bottom. Now that's not meaning the markets at its very bottom but that's usually a good indicator of what the next few months look like. So we're trying to sort out where is that inflection point and what will happen with '25, we're not speaking to that big specifics yet. But what we're trying to focus on is what's in our control, driving those things in the channel and with the product to make sure that we're ready when the market is there.

And Steve, the one comment I would add and you probably are familiar, CNH, the OE business, we know that, that is coming down this year. We've talked about them moving away from the Trimble business. That's transitioning out in 2024, that's continuing. So that will be a year-over-year headwind. If you remember at the time of the acquisition, we announced that we would be moving, as Eric alluded to, moving Trimble as our base offering in our OE production that will help mitigate some of that. But when I give you the reported sales, remember, the CNH sales today is reported in that number. But if I'm transitioning that into an AGCO product, it may not -- it won't report as an external sale of the company. And so similar to Precision Planting, where you'll hear us give one number, we'll try to overlay sort of what's intercompany for this technology. Again, we see part of that being mitigated. But just in absolute terms, that will be a headwind on reported numbers year-over-year.

Got it. That's helpful. Thanks. And then as a follow-up, you've been having sort of a semi-public debate with your largest shareholder and some changes in that relationship, I think, relative to production and so forth. Is that taking a significant amount of your time? And any sort of update you can give from your perspective?

Yes. Just as a reminder, this is 1% of our sales and it's really only for a few markets. So the rest of the organization is focused on the core of our business and is marching forward trying to serve farmers and deliver on our Farmer-First strategy. There's a few of us that are trying to manage this in a professional way, and I think it's been handled that way well. We're looking for a smooth settlement to this overall situation. We put on the table some, we think, very generous offers to get it to resolve smoothly. The ball is really in TAFE's court now. But no, it's a small impact on the business. We're trying to keep it focused that way. And the organization is really focused on delivering Precision Ag solutions to production farmers all around the world. And we're going to have -- and we've got plenty of activity underway to replace that -- those tractor sales as well so we feel fine about that. The channel is served today. We've got inventory in the channel for those products. So dealers are served today. We've got backfill options that we're working and we have confidence in those. We've got open lines of communications with TAFE, offered a few very reasonable deals and generous deals. We're just hoping that they'll take those and we can resolve this.

And our next question today comes from Joel Jackson with BMO Capital Markets. Please go ahead.

Hi, good morning. Thanks for taking my question. I wanted to follow up on Europe a bit more. You did address some of this already a few minutes ago on a prior question. But like in trying to look through into early '25, which you've given just a little bit of outlook on that, trying to figure out how transient that step down in margins are in Europe in Q3. Again, you gave some color. But should we expect kind of a ramp back over a couple of quarters on margin in Europe? Or should we expect first half margins in Europe '25 to be a lot less than we saw in first half of '24 because it doesn't mean a lot for you guys? Thanks.

Joel, I think it's a little bit too early for us to -- we're not going to get into the outlook for 2025 yet. But I think if you step back at the more macro level, Europe from an industry standpoint tends to be the least volatile of all of the three major regions that we sell in. That continues to lend itself to better stability in our order patterns. You don't see as much variability like you do in North America, South America. We know year-over-year, where we've seen the SIMA index, which is Eric alluded to the Purdue barometer here, the SIMA index is at a historic low point right now. When you look at that index, it usually doesn't stay at that point for a long time. It usually hits there and then starts to recover. We're not ready to call industry bottom yet. But again, when we look at some of the indicators in the marketplace, we feel like we're hitting near the bottom from a sentiment standpoint. Our big challenge next year as we think about 2025 is going to be the overall industry. How does that play out, pricing and then what do we do to make sure that we're adjusting the dealer inventories to get back to that four months? Again, we said we were up about half a month here from the third -- from the second quarter to the third quarter, again, fairly manageable for us to work that down, especially with the fourth quarter being a strong sales month for us with farmer sentiment as a big point, and that will influence the other things. And as I mentioned on one of the prior questions, we do have a couple of products that we're transitioning out here with the Fendt 700 Gen 6. That will move down, which will hopefully, year-over-year, improve the pricing. But again, the market will really dictate sort of how 2025 shapes out in Europe for us.

But Joel, we do expect our fourth quarter margins in Europe to bounce back similar to what they look like in the first half of the year.

That's helpful. Thank you. And just another question. Trying to compare Slides 4 -- excuse me, Slide 11 from today's deck. So Slide 11, you've maintained it what it was a few months ago. You maintained all of your market outlook for tractors across the three regions that you show to maintain that. But on Slide 4, especially for tractors, the nine-month performance year-to-date contraction for tractors in North America and in Europe are worse versus six-month performance. South America, I think, is a bit better. But can you explain that a bit, reconcile that a bit how you've been able to keep the full year outlook the same but there's contractions on worse, and then you thought -- well, the contraction trends are worse through nine months versus six? Thanks.

So Joel, we're -- essentially, we've moved to kind of the top end of the range in terms of the markets going down year-over-year. There's a little bit of a disconnect in South America. And that our outlook is on wholesale as opposed to retail because that's where we have more visibility on and in terms of industry being reported. So South America looks a little bit different just because we're looking at wholesale versus retail.

And our next question today comes from Mig Dobre with RW Baird. Please go ahead.

Yes. Good morning everyone. So I'm trying to sort of put the pieces together here on dealer inventories and demand. I mean, if I heard you correctly, dealer inventories declined 6% sequentially in terms of units in Q3. But then you're also talking about having, on average, about an extra month of dealer inventory based on how you're thinking about forward demand. Given the fact that you haven't really changed your outlook for demand for 2024, are we sort of to infer here that what's baked in here is maybe like kind of a mid-teens decline in 2025? Is my math correct? And if so, can you give us some color by geography in terms of where you're experiencing more weakness, how we should be thinking roughly about '25?

Yes. So Mig, again, we're not going to give an outlook for 2025 just yet. We want to get through the fourth quarter, see how the retail demand plays out, work through our analytics for the full year here. But I think what we are alluding to, and Eric has said this in a couple of prior calls, when you look at our historical industry changes, we usually go through one very large transitional year, and that's what we're going through this year. We're moving down directionally around 15% from where we were last year to where we are this year. And then historically, the industry floats in that general vicinity. As we look at where we're sitting here today, we are expecting the market to be down next year. Again, we're not expecting large declines. Again, the industry historically doesn't do that, but we are expecting to see some weakness again next year, probably in most parts of the world. If I look at where the biggest challenges have been, South America continues to be the one that we're seeing the most industry challenge right now. And I think there's a couple of pieces here. You see us cutting the production again for four quarters now from Q4 last year through the third quarter of this year. We've been cutting production anywhere from 30% to 50%. We're planning another large production cut here in the fourth quarter of this year, really trying to take the production down. I think it's important that when you see these numbers even in South America, it's a little bit of the two parts to the story there. When you look at the numbers being down in South America, the high-horsepower segment of the market in the third quarter was down significantly more than…

Understood. Maybe just to follow up on that...

I'll just build on a little bit, Mig, and then take your follow-up. To put some numbers behind this, our last cycle in terms of AGCO's sales mix around the world, we had -- we went from a peak of 115 down to a trough of 85. At the peak, we were not supply constrained nor was the industry. This time, our peak only got up to 109 because everybody was supply constrained during COVID. So we believe then that the trough won't be as deep potentially nor as long potentially as the last trough was. As I said, the last trough was 80 to 85. In 2024, we've gone from about 105 to about 90. It's the big correction year that Damon talked about. So you compare that 90 to the previous trough that we think is probably as deep as it would get, which was 85. That kind of sizes what we're trying to assess of what '25 looks like. We expect that to float near somewhere between 2024's results and the previous trough. And we'll clarify that in more detail in December, but at least that gives you some bookends to frame it.

Helpful. Thank you for that. My follow-up is on your production slide, Slide 5, and the guidance there. I mean, considering the fact that you're dealing with excess inventory still, I'm wondering when we're not seeing more pressure on production in the fourth quarter. I mean, you're cutting production 25%, I understand that, year-over-year. But it certainly looks stable, if not up a little bit sequentially. And I'm wondering why we're not seeing more of this action being taken in the fourth quarter rather than 2025? Thank you.

Yes. So Mig, what I'd tell you, we are being extremely aggressive in many different parts of the market and many of the different product types again. When you look at our production hours, that includes more than just tractors, it would include combines, sprayers, planters. So we are significantly reducing production in many aspects. I think what you're seeing in that visual there is mainly Europe. As I mentioned, Europe, we extended the shutdowns in the third quarter to really sort of be better optimizing the cost structure. And then we're picking up a little bit here in the fourth quarter. And again, when you think about what we're seeing is there is still retail demand out there. And if you look at the dealer inventories, what's on the dealers' lots may not always be exactly what the farmers are looking at coming to order. And again, go back to my comment on South America, where the high-horsepower Ag market is really challenged right now. That's sitting on the dealers' lots. What these lower-horsepower segments are doing actually pretty well in South America. So we have orders and demand for those products. We're running the production to service that need. And again, similar in North America or in Europe, there may be product lines or retail demand that we're working to produce. We're not producing to put more onto the dealer lot. But we think about what we're producing is really more of a pass-through to the end farmer where we see the demand. So again, I realize that the numbers look different, but when you factor in what's happening in Europe sequentially or year-over-year versus what's happening in other parts like South America, we are rapidly reducing the production hours in most of our factories.

Our next question today comes from Tami Zakaria with J.P. Morgan. Please go ahead.

Good morning. Thank you so much. So I think I heard you say you expect North America pricing to continue to be strong. Can you help us understand, do you expect any incremental discounting needed to clear the channel? And what's really driving this expectation of pricing growth in North America? Is it mix or are you raising prices due to cost inflation? Anything to call out there? What underpins this expectation of positive pricing in North America against suboptimal demand backdrop?

Yes. Tami, we've had positive pricing in North America for the full year or year-to-date, I should say. I'd say it's really a couple of variables here. One is the year-over-year price increases with certain new products that we're getting. And I would say, as we think about the back half of this year, what we're seeing this quarter, fourth quarter is really being a lot more selective on discounting, especially in some of the lower horsepower segments of the market, the rural lifestyle. As you know, a lot of these tractors are financed. And so as interest rates are coming down, we're trying to take advantage of that where we can drive better discounting decisions, thus reducing the overall cost to AGCO. And that's helping improve sort of the sequential pricing in North America significantly as we move from Q2 into Q3 and now into Q4 and into 2025. But those are really the couple of big variables that are driving the pricing in North America.

Got it, that's helpful. And my second question is, can you remind what's your plan in terms of deleveraging the balance sheet? And should we expect more debt pay down in the coming quarters? I think you paid down $150 million with the proceeds. But any more plans of debt pay down in the next few quarters?

Yes. So we did pay down the -- we had a $500 million term loan in place as part of the funding for the Trimble joint venture. So that has been repaid with some of the proceeds from the Grain & Protein business. We have about $0.25 billion of debt that will mature, I think, in March, April time frame. Tami, I think as we sit here today, we would likely just pay that down with the balance of the Trimble proceeds, coupled with some free cash flow. Those will be the two big things. And then we'll look to see if there's anything else that may make sense. But that will happen, I think March, April time frame.

And our next question today comes from Jerry Revich with Goldman Sachs. Please go ahead.

This is Clay on for Jerry. Can you update us on your expectations for the planter business as we move into next year, given some of the early order conversations you're having?

Yes. I think overall, early order program is, given the market environment that we're seeing here in North America, I think the early order program has gone relatively well for planters and for sprayers. I think we're not as strong as we were last year this time, but we're out through the first half of 2024 with orders for planters and sprayers. So if you remember, Clay, our early order program sort of rolls from start of Q4, Q3 to Q3. So almost the full year booked right now but not quite on those particular products. But overall, pretty good.

Thanks. And as a quick follow-up, on dealer inventories, can you compare levels now on an absolute basis in North America versus pre COVID? And I'll be curious to hear about other regions as well.

Yes. Well, if we look at the pre-COVID levels, I think as before the massive decline, ideally, they would have been around in that five to six-month range for North America. We're sitting here obviously higher than that, but that's what we keep talking about reducing the production cuts as to get that dealer inventory right around that six-month mark here as soon as possible in early 2025.

And our final question today will come from Chad Dillard with Bernstein. Please go ahead. It looks like Chad's line has disconnected. This will conclude our question-and-answer session. I would like to turn the conference back over to Eric Hansotia for any closing remarks.

I'll close today by saying that in the short term, we are focused on reducing inventory and aggressively controlling costs to better align our operations with the current weak market environment. Our 9% operating profit is far above the previous trough, which was closer to 4% and even above the last peak margin that was close to 8%. But we're striving to do even better. Our org efficiency and restructuring activities that we've already implemented so far this year will deliver $100 million to $125 million of savings right on target that we projected when we took those actions. And despite all the current challenges, we remain focused on continued execution of our Farmer-First strategy. The strategic actions we've taken over the last nine months, big ones like forming the PTx Trimble joint venture, divesting our Grain & Protein business, and implementing our organizational efforts to take control -- take advantage of tools like automation and AI will enhance and accelerate the benefits of our Farmer-First strategy. Over the last few quarters, we've touched on many factors supporting our markets, including growing populations, changing diets, low stock-to-use levels, increased demand for biofuels and relatively healthy commodity prices. All these trends give us confidence in the long-term health of our industry. And while cycles are typical in the industry, how we react and weather to them, will illustrate how we are structurally changing AGCO to be higher performing regardless of market conditions. We look forward to seeing you at our upcoming analyst meeting on December 19. Thank you, and have a good day.

Thank you for joining the AGCO Third Quarter 2024 Earnings Call. The call has now concluded. Have a nice day.