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Good day. And welcome to the AGCO First Quarter 2023 Earnings Call. All participants will be in listen-mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. In consideration please limit yourself to one question and one follow-up. [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.

Thanks, Jason, and good morning. Welcome to those of you joining us for AGCO’s first quarter 2023 earnings call. We will refer to a slide presentation this morning that we posted on our website at www.agcocorp.com. The non-GAAP measures used in the slide presentation are reconciled to GAAP metrics in the appendix of that presentation. We will make forward-looking statements on the call this morning with respect to strategic plans, demand, product development and capital expenditure plans, production levels, engineering expense, exchange rate impacts, pricing, share repurchases, dividends, interest rates, future commodity prices, crop production, supply chain disruption, inflation, component delivery, sales, margins, earnings, cash flow, tax rates and other financial metrics. We wish to caution you that these statements are predictions and that actual events may differ materially. We refer you to the periodic reports that we file from time to time with the Securities and Exchange Commission, including the company’s Form 10-K for the year ended December 31, 2022. These documents discuss important factors that could cause the actual results to differ materially from those contained in our forward-looking statements. These factors include, but are not limited to, adverse developments in the agricultural industry, including those resulting from supply chain disruption, whether exchange rate volatility, commodity prices and changes in product demand. We disclaim any obligation to update any forward-looking statements, except as required by law. A replay of this call will be available later today on our corporation website. On the call with me this morning are 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. Good morning. It’s great to be with you. We started 2023 incredibly well from both an operational and a financial perspective. Slide three highlights the results of quarter one 2023. We posted a record first quarter in terms of sales, operating margin and earnings. The combined efforts of AGCO team has helped deliver first quarter sales growth of 24% with adjusted operating margins expanding by 260 basis points to 11.7%. This makes three consecutive quarters with operating margins above 10.5%, sustainable progress towards the mid-cycle 12% target. These results are a testament to the tremendous value we are adding to farmers as we revolutionize the crop cycle. This success is playing out with the backdrop of a continuing strong industry. AGCO’s precision ag sales were up 30% and IDEAL combine sales increased 70% in the first quarter compared to a year ago. Development is underway on target spring, autonomy and dozens of smart precision ag features. We are making solid progress towards our ambitious technology deployment goals we set in December. These results and forward-looking focus stem from our commitment of being the most farmer focused company in our industry. Our customer’s growing interest in AGCO’s precision ag solutions is supporting extended order boards. We expect healthy market conditions to continue and our improved financial outlook for 2023 reflects this optimism. We have increased our sales and earnings forecast and expect to generate significant cash flow this year. The strong performance supports our technology-related investments aimed at advancing our digital capabilities and growing our precision ag sales. We will also continue to return cash to our shareholders. Last week, we announced a special variable dividend of $5 per share, as well as a 21% increase in our regular dividend given the strength of our business and our confidence going forward. Slide four details industry unit retail sales by region for quarter one 2023. Supportive farm economics resulted in robust demand for large agricultural equipment, as farmers continue to replace aging machines. While dealer inventory of smaller equipment has increased versus 2022 levels, larger machinery is still below historical averages. North American industry retail sales were down approximately 3% for quarter one versus 2022. Smaller tractor sales declined from a high level in 2022, while increased sales of greater than 100-horsepower units helped to offset the decline. Industry retail tractor sales in Western Europe decreased approximately 3% in quarter one 2023 compared to 2022. Farmer sentiment has been negatively impacted by the war in Ukraine, as well as input cost inflation, but forecast for healthy farm income in Western Europe are expected to continue to support solid retail demand for equipment throughout 2023. In South America, industry retail sales decreased 3% during quarter one 2023. Positive farm economics, supportive exchange rates and continued expansion in planted acreage in Brazil are driving increased investments in high-tech farm equipment and resulting in an outlook of modest growth for the South American tractor industry in 2023 compared to strong levels last year. Across all regions, the combine industry was up significantly compared to quarter one of 2022, given the relatively low level in the first quarter last year due to significant supply chain constraints. We are very positive about the underlying ag fundamentals supporting strong industry demand in 2023. Tractor [ph] use levels remain at low levels, supporting elevated commodity prices. While there’s been some pullback in commodity prices over the last six months, they are still well ahead of historical averages. Equipment in the field is aged in increasing -- increasingly due for replacement. New dealer inventory of large ag equipment remains below targeted levels, while small ag dealer inventory’s up from last year. Input costs like fertilizer and fuel are down significantly from their peaks last year. While farm income may be down modestly in 2023 from record levels in 2022, we believe it will remain at very good levels in 2023 and be supportive for industry demand for 2023, assuming normal crop production, and at the same time, we don’t see that changing much for 2024. Our team did a great job maintaining focus on our strategy, while continuing to deal with supply chain challenges. While the supply chain has improved over the last couple of quarters, we continue to experience some component shortages that are affecting our production volumes. The encouraging news is that even with global supply bottlenecks and inflationary pressures, farmer economics remain healthy and global end market demand remains strong, especially in the large farm segment. AGCO’s quarter one 2023 factory production hours are shown on slide five. While some supply chain shortages linger, we grew our production in quarter one by approximately 8% versus 2022, we are planning on higher production levels in quarter two versus 2022 and we are planning for relatively flat production levels in the back half of this year versus 2022. Based on our industry and market share forecast for 2023, we are projecting a 3% to 5% increase in production hours for the year. As of the end of March 2023, demand for our farmer-focused products remains very strong and our order boards remained elevated across all regions. In Europe, tractors have order coverage through the end of the year with large ag orders up double digits and small ag orders down double digits compared to last year. In South America, we have order coverage through September of 2023, where we continue to limit our orders to around one quarter in advance to give ourselves more pricing flexibility. To give you an idea of the strength in this market, when we open the system to receive third quarter orders, the order board was filled effectively in one day. In North America, our orders for tractors, combines and sprayers extended into 2024 as the demand in big farm market continues to be extremely strong. As we outlined last quarter, orders remained below last year’s levels as we have elected to limit order intake to improve our on-time delivery rates. Normalizing for the new order intake rules, large ag orders are up and small ag orders are down. This next slide highlights our three growth vectors to outpace the industry by 4% to 5% per year. Our Fendt global full-line business, our global parts and services and our precision ag product offerings. All three provides significant growth potential at higher margins with less variability during cyclical downturns. This morning, I want to focus on our efforts on our Fendt initiative. We continue to grow the business along two paths. First, we are expanding the Fendt product line beyond tractors to now include key products like sprayers, planters and combines. Second, we are taking this full line of Fendt products global. As you can see in our results, interest continues to grow for our premium Fendt product line both North and South America. In the first quarter, our Fendt-branded sales in those markets increased by 139% and 94%, respectively. Our Fendt and Challenger sales in North and South America are expected to double over the next four years to six years. As part of our Fendt globalization efforts, we are launching the Fendt 200 Vario in the North America market. This segment leading tractor has been successful in the European market for many years and now we are bringing it to North America where it launched in February at the 2023 World Ag Expo. The tractor will serve customers with vineyards, orchards and other high value specialty crops. The lightweight and maneuverability combined with the high performance of the machine, enable premium pricing and high margins. At the World Ag Expo, dealers and potential customers were impressed by the Cat space, front 3-point features and variety of width offered. We expect the Fendt 200 Vario to continue to provide our farmers with exceptional results they have come to expect as part of the Fendt experience. With the introduction of the 200 to North American market this year, the globalization of our Fendt tractor product line is nearly complete. We have brought through the market models ranging all the way from the largest 1000 series down to the 200 series. Our technology rich products are enabling more sustainable farming practices and outcomes for our customers. We are also in a much stronger position from a sustainability perspective. slide seven shows a couple of highlights from our 2022 sustainability report, which was issued in March. We are delivering on our sustainability commitments from industry-leading innovation to improved sustainable outcomes for our farmers to decarbonizing our products and operations to offering our talented diverse employees a safer, more engaging workplace. I am proud of the progress we are making, which includes achieving our Scope 1 and 2 targets three years ahead of schedule by reducing the emissions intensity of our manufacturing operations. Other impressive achievements include; our renewable electricity usage is now 63% of our total; our renewable energy usage is already at 36% of our total; improvement in health and safety metrics like reducing our incident rate by 14%, helped in part by increasing the number of sites that are ISO certified; and taking employee feedback from our Voices’ survey to help make AGCO a great place to work. With that, I will now hand over the call to Damon who will provide more information about our first quarter results.

Thank you, Eric, and good morning, everyone. I will start on slide eight with an overview of AGCO’s regional net sales performance for the first quarter. Net sales were up approximately 30% in the quarter compared to the first quarter of 2022 when excluding the negative effect of currency translation. Pricing in the quarter, which was over 11%, contributed to higher sales, along with strong growth in high horsepower tractors, combines application equipment and precision ag products. By region, the Europe/Middle East segment reported an increase in net sales of approximately 30%, excluding the negative effects of currency translation compared to the prior year. The improvement was driven by increased sales of high horsepower tractors, utility tractors and Fuse precision ag products along with favorable pricing actions. Strong growth in Turkey, Germany and United Kingdom accounted for most of the increase. In South America, net sales in the first quarter grew approximately 42% year-over-year excluding the negative effects of currency translation driven by continued strong sales growth in Brazil, partially offset by lower sales in Argentina. Higher sales of tractors, combines and application equipment, as well as favorable pricing effects drove most of the increase. Net sales in North America increased approximately 32% excluding the unfavorable impact of currency translation compared to the first quarter of 2022. The growth resulted primarily from increased sales of high horsepower tractors, application equipment and combines, along with the positive effects of pricing to more than offset inflationary cost pressures. On a constant currency basis, net sales in our Asia/Pacific/Africa segment decreased about 4%. Delayed shipments from our European factories last quarter resulted in lower sales in most of the markets, partially offset by sales growth in Australia and China. Finally, consolidated replacement part sales were approximately $456 million for the first quarter, up about 2% year-over-year. Unfavorable currency effects were approximately 5% during the first quarter. Turning to slide nine. The first quarter adjusted operating margins improved by approximately 260 basis points versus 2022. Margins in the quarter benefited from higher sales and production, a richer mix and positive net pricing compared to the first quarter of 2022. Price increases of over 11% more than offset significant material and freight cost inflation on a dollar basis and were also positive on a margin basis. For the full year, we are still projecting approximately 8% pricing. By region, the Europe/Middle East segment reported an increase of approximately $77 million in operating income compared to the first quarter of 2022 and margins improved approximately 250 basis points. Higher sales, product mix and strong pricing contributed to the improvement. North American operating margin for the first quarter increased approximately $47 million year-over-year. Operating income benefited from higher sales and production, positive net pricing and a favorable mix. Operating margins in South America reached nearly 20% in the first quarter and operating income improved over $53 million versus the same period in 2022. The South American results reflect the benefit of higher sales and production and a favorable sales mix. The continued strength in Brazil has resulted in strong price resiliency in the quarter, helping deliver robust results once again. Finally, in our Asia/Pacific/Africa segment operating income declined approximately $16 million in the first quarter, primarily due to lower sales and production. With the margin expansion in the last two years in our North American, South American and Asia/Pacific/Africa regions from our strategy execution and disciplined pricing, we expect AGCO’s margin profile will be more balanced across the globe in the years ahead. Slide 10 summarizes our precision ag business. As you can see, we are focused on expanding our addressable market from just traditional agricultural machinery spend, which today is in the low- to mid-teens. With our precision ag portfolio, our sights are set around 70% of all non-land areas. We believe that the investments in precision ag positions us well as it will play a major role in achieving the global sustainability targets that are being established, while simultaneously help our farmers improve their profitability. We recorded $199 million in precision ag revenue in Q1 of 2023, approximately a 30% increase from 2022. Our current run rate puts us solidly on track to hit the $1 billion sales target by 2025 that we announced during our December 2022 Investor Day. Slide 11 details our free cash flow for 2023 and 2022. As a reminder, free cash flow represents cash used in or provided by operating activities less capital expenditures and free cash flow conversion is defined as free cash flow divided by adjusted net income. In the first quarter, AGCO used $682 million of cash in 2023, 6% more than 2022. Remember, it’s typical that we seasonally build inventory in the first quarter for the spring selling season. The year-over-year change is related to approximately $60 million increase in capital expenditures coupled with a modest increase in working capital that more than offset increased earnings. For 2023, we expect our raw material and work-in-process inventory to remain somewhat elevated given supply chain challenges, but we expect to be a modest source of cash versus a use in 2022. We expect our free cash flow conversion to range from 75% to 100% of adjusted net income, a significant increase from 2022. We remain focused on direct returns to investors during 2023, with a regular quarterly dividend that we recently increased 21% to $0.29 per share last week and the declaration of a special variable dividend of $5 per share. Future returns of cash to shareholders will be based on cash flow generation, our investment needs, which include capital expenditures and acquisition opportunities, as well as our market outlook. Slide 12 highlights our 2023 retail market forecast for our three major regions. Globally, driven by elevated commodity prices, we expect healthy farm economics to support another year of strong end market demand. For North America, we expect similar demand compared to the healthy levels in 2022. We expect continued growth in the high horsepower row crop equipment segment to be offset by softer demand for smaller equipment after several years of robust growth. Increasing interest rates are expected to continue to slow the smaller equipment segment of the market. In South America, we expect industry sales to be flat to up 5%, moderated by supply chain constraints. This region remains one of the stronger end markets, especially in Brazil, where the farm footprint is increasing and we expect another year of healthy farmer profitability, which we expect to drive demand for large ag equipment beyond 2023. Shifting to Western Europe, the industry is forecast to be relatively flat compared to 2022. Farm fundamentals in the region are generally healthy, with grain price continuing to outpace input inflation. Meanwhile, supply chain constraints over the last two years are extending equipment replacements. Slide 13 highlights a few key assumptions underlying our 2023 outlook. In addition to focusing on meeting the robust end market demand, we will also make significant investments in the development of new solutions to support our farmer first strategy. Although we see strong market demand, AGCO’s results will still be dependent on our supply chain performance in 2023. Our sales plan includes market share gains, along with price increases of approximately 8%, aimed at offsetting material cost inflation. We currently expect currency translation to positively impact sales by about 1%. Engineering expenses are expected to increase by approximately 20% compared to 2022. The increase is targeted at investments in smart farming and precision ag products. Operating margins are expected to improve to around 10.9%, driven by higher sales and production, favorable pricing net of materials and improved factory productivity, partially offset by increased investments in our engineering and digital initiatives, as well as inflationary cost pressures. With increasing interest rates and higher sales forecasted, we expect other expenses primarily related to the sales of accounts receivables to increase approximately $50 million year-over-year, with the majority of that in the first half of 2023. We are targeting an effective tax rate in the range of 27% to 28% for 2023. Turning to slide 14. We have raised our sales and earnings per share targets from what we highlighted in our fourth quarter call, we currently expect net sales to be in the range of $14.5 billion, earnings per share should be approximately $14.40 in 2023, we continue to target CapEx of $375 million, and as I mentioned earlier, free cash flow conversion should be in the range of 75% to 100% of adjusted net income, consistent with our long-term target. With that, I will turn the call back to Greg for Q&A.

[Operator Instructions] Our first question comes from Stanley Elliott from Stifel. Please go ahead.

Hey. Good morning, guys. Thank you for taking the question. Could you talk a little bit, I guess, kind of -- I guess, start off with the grain and protein business. How has that been tracking relative to expectations and just curious with that -- there? Thanks.

Yeah. Sure, Stanley. So I’d tell you, grain and protein, after a couple of challenging years, the team worked really hard to do a fair amount of restructuring to really consolidate the factories, improve the overall cost position of the business. Last year, Stanley, they were challenged with steel prices. Obviously, escalating in the first half of the year, they were probably the most adversely affected by the cyber event that we experienced. And then the challenges that they saw in China, really on the protein side of the business, they really sort of, I would say, masked the underlying improvement that we were seeing in their operations. And so as we started the first quarter here, I would tell you, grain and protein had a good first quarter. You saw in the appendix sales of $256 million. Operating income was, call it, mid-single digits, so improving year-over-year. And I think what we are seeing is the sort of a year as steel prices have moderated relative to last year. As you know, Q2 is a strong quarter season, especially here in the U.S. for them. So we are hopeful to see the improved performance sort of continuing to raise that margin and we have expectations for a significant improvement in grain and protein in 2023 versus 2022.

Great. And I apologize, I had to hop on a little bit late. But can you talk about kind of where you think we are in the cycle, more so for South America and then in North America, and then how you are kind of managing the business and expectations there?

Farmer fundamentals are extremely strong. Our order boards are higher now on all large ag all around the world than they were a year ago, dealer inventory is low, used prices are high. So we see a very strong market all the way through the year and we don’t see what would change that significantly in 2024. We are not forecasting 2024 yet, but we still feel we have got a strong market in front of us. There’s some more macro tailwinds that are going to play out. A few years back, we had to in North America the big ethanol demand contributor, where it started consuming a large portion of the corn crop. But we see that a similar thing happening with vegetable oil going forward where soy and canola will be demanded to convert that vegetable oil into renewable fuels and other things. The renewable diesel capacity has doubled in just in this year, in the last, say, 12 months. And by the end of the decade, we see it going up 4x globally and 9x in the U.S. So that’s another demand driver. And then maybe the last one, I would say, in terms of macro themes is, you are seeing all around the world countries announcing that they are placing a higher priority on food security. So they are, I will call it, hoarding or storing more food, more grain locally. Well, that means even if you look at the global ending stocks have been declining for the last six years in a row, they have gone from 650 million tons to 580 from 2017 to now. But under that is even a more dramatic shift in that those are in the wrong locations. They are being hoarded by certain countries. So not enough grain, machinery still tight and more demand coming, we feel like this market has got a lot of strength to it.

Our next question comes from John Joyner from BMO Capital Markets. Please go ahead.

Good morning. Thank you for taking my question. So I guess when looking at your outlook for operating margins for the year, you are basically assuming that profitability will moderate for the rest of the year, which I guess is contrary to what I would have assumed with some better volume leverage and supply chains improving and such. So why would margins ease for the remainder of the year, I mean, is it greater planned investments or something else or is it just a little bit of conservatism?

Yeah. I think -- John, I think, it’s a couple of things. One is we do have material cost increasing. If you think about the other thing is pricing in the first half or the first quarter of the year was our strongest part of the year. As we have talked about, South America, again, outperforming even our expectations, we do expect that to moderate. And then the third component is our engineering. We said engineering was going to be up around $100 million year-over-year. So you will see that continuing to flow through here in the back half of the year. Those are really the three big drivers leading to the sort of the 10.9% outlook that we have now for the full year.

Okay. I will take it as being conservative. But then my next question, when looking at the age of the machinery fleet in South America, I mean, I believe farmers there typically use equipment longer than North American or European farmers, and probably, beyond the kind of assumed life span of the equipment. So what do you think is driving the higher age of large ag machinery there, particularly when grower economics are currently so strong.

Yeah. So, John, you are right in the sense that equipment is used much more intensively in South America. So the actual useful life though tends to be shorter and we see equipment replace generally faster, especially on the big farms in Mato Grosso and the sugarcane mills that also are big consumers. That hasn’t changed. And the used market isn’t quite as developed in South America. It’s more especially on these big farms that are in more rural regions. It’s -- they tend to use until the wheels fall off. They have their own maintenance shops in a lot of cases. So we haven’t really seen those dynamics change. Used equipment values, to the extent there are used equipment on market, they are still very high. And even our new equipment inventory in our dealers, while they are up a little bit, still down from where we would like them to be. And if you remember last year this time, inventory levels were almost -- dealer inventory levels were almost nonexistent. So Brazil continues to be a very strong market.

The next question comes from Dillon Cumming from Morgan Stanley. Please go ahead.

Great. Good morning, guys. Thanks for the question. Just wanted to ask first on the kind of production dynamics for the rest of the year. You were obviously guiding to flat in the back half. I guess is there still a layer of growth that’s being constrained on that front with regards to supply chain, labor, et cetera, such that as we look kind of beyond this year you could potentially take that up a bit more as we go forward?

Yeah. I think, Dillon, for us, as we look at the second quarter, you see the big increase. If we look at the back half of the year, as we have said, we do expect some continuation of supply chain challenges. I think the other one is we will watch, as we look at the dealer inventory levels, as Eric just talked about, the market demands. We continue to see the demand as robust it is right now, I think, like you saw last year, there may be opportunities to squeeze out a little bit more incremental production. But at least right now, we do have preventative maintenance that you would normally see in the third quarter and a little bit in the fourth quarter, some of that, we have deferred given the demand that we have seen in the last year and so we do have to do that at some point in time. But again, right now our forecast is sort of aligning with our revenue outlook and sort of the overall market demand that we see for the balance of the year and into early 2024.

Okay. Great. Thanks, Damon. And then just one kind of broader question, I know it’s kind of early days just with regards to kind of tighter financing conditions. First of all, if you heard the feedback from the dealer channel, I heard that from many customers. I know you have got the JV with Rabobank, that probably gives you a bit of flexibility, but just any concerns out there on the customer side with regards to tighter financing?

No. I think as we pull between AGCO Finance, DLL and our joint venture partners along with other customers, we really have not seen anything affecting the financing. Now we are seeing, as we have talked in the past, Dillon, that small ag is declining due to rising interest rates, but risk or things of that nature, we are really not seeing any challenges on collectibility or loans being made to the farmers. Again, a lot of these are made by regional, more ag-centric banks that usually have a little bit more of a conservative lending policy. So we haven’t seen anything affecting that policy, but more just that small ag coming down due to GDP and overall interest rate increases.

Our next question comes from Mig Dobre from R.W. Baird. Please go ahead.

Thank you. Just to follow-up on that last question, not so much a credit availability issue, but just the outright cost to finance equipment has gone up obviously with interest rates and at least some of the things that we have heard in our conversations with dealers is that there -- many of them are kind of hoping for more manufacturer support. So I am kind of curious, do you think that this is an issue and do you have any tools available to be able to manage that dynamic?

We do our AGCO Finance. I guess a couple of points I would make. One is, especially for these large farms, all of them are or most of them are usually bringing a trade-in as they think about upgrading their equipment. And if you look at the trade-in values of used equipment, it’s still staying at a relatively high level right now. And so the net delta of what these farmers are financing right now is still relatively small. And then when you think about the interest rates, AGCO Finance tries to stay very competitive in the marketplace and opportunities to incent the farmers to use AGCO Finance versus other alternative forms of financing. On the small ag, I know some of -- there are areas where we are doing zero percent financing for a period of time on the small ag side of the house in order to encourage those small ag customers to make the purchase. And so, I would tell you, the team is constantly assessing the market, understanding what the interest rate is, what the overall cost of the tractor maybe or the combine with each of the farmer and trying to put it in an attractive way that allows him or her to get what they need. So, but I think we are looking at that and constantly monitoring the situation.

Understood. Then my follow-up, back to South America, I mean, this segment has performed, at least on the margin side, considerably better than I personally would have guessed. I am sort of curious if you can level set our expectations here going forward, particularly as we think about the second half of the year on both how you think about revenue, but also maybe more importantly, how you think about margin? Thank you.

Yeah. I think when we think about the South American market, it is our strongest market that we have relative to the mid-cycle. We continue -- if you look at our outlook, we expect that market to stay strong for the balance of the year, what we have said is up sort of zero percent to maybe 5%. So we still expect very strong market condition which will drive topline growth. When we think about the margins for South America, this quarter, again, I would tell you, it outperformed even our expectations. The price resiliency that we are seeing in the market has continued to be strong. Now what I would tell you is there’s two pieces here. We do expect that to decline in the back half or in the second quarter and for the balance of the year really for two reasons. One is the material cost inflation, we know that’s continuing to increase, a lot of the product for our large horsepower tractors are input or shipped in from Europe. So there’s an elongated supply chain there. So we see that coming in. And then there’s also what I will call more of the traditional dealer incentives that we would provide for volume orientated. Given the strength of the markets over the last couple of quarters, we haven’t been giving those traditional dealer incentives out. At some point in time, we do expect that to wane and that would fall into the pricing dynamics and so if you look at our outlook for the balance of the year, we are now in that 16% to 17% range really based on those two primary factors. But like we have said before, the team has done a really good job in staying disciplined on price, looking at the market and taking advantage if they see the strength to not provide any more incentives than we need to. And as Eric alluded to in his opening comments, when we opened the order book for Q3, we filled that up within effectively one day. So very strong market fundamentals, great product portfolio down there, all of that driving a richer mix and ultimately the high margins. But, again, we are sensitive to the market dynamics that, that may come down a little bit here in the balance of the year.

Our next question comes from Seth Weber from Wells Fargo Securities. Please go ahead.

Hey, guys. Good morning. One, I guess, another margin question. I was actually pretty surprised by the strength in Europe -- the margin strength in Europe, 14%-ish was pretty flat from the fourth quarter even though revenue came down a bunch. Are Europe -- is it just pricing or is there something else that has kind of structurally changed in Europe that we should start to think about Europe margins now kind of in that low-teen range going forward? Thanks.

Yeah. So, Seth, a couple of things for Europe. Again, another really strong quarter for them. To your point, strong -- pricing was very strong, more than offsetting inflation. On top of that, we saw a really rich mix, great volume growth, Fendt, Valtra and Massey, all three major brands had significant growth year-over-year, a lot of this for the higher horsepower or the richer mix. I think the other thing in Europe is, again, very strong production year-over-year. Production was up double digits, so you are getting some of that incremental absorption and that was helping drive the improved profitability. As I said on my comments earlier, as we sort of see the profitability with the richer mix, we are seeing a better balanced portfolio around the world. Again, Europe, we expect to see continued strong margins here for the balance of the year.

Got it. Got it. Thanks. And then just maybe on the free cash flow guide, maintained for the year. It’s a pretty big leap from the first quarter to hit your full year target. I guess just your level of confidence in hitting the free cash flow number and what the levers are, what the big drivers to that are going to be, because it sounded like, I think, I wrote down like working -- some of the inventory is going to be still high. I think you said your WIP inventory at raws is going to be up, so just trying to think through what’s going to get you there for the full year? Thanks.

Yeah. So, Seth, I guess, my comments were more that we are up relative to our historical standards. The supply chain inefficiencies that we are still dealing with are creating some inefficiencies in the factories. We are getting more units out, but we are not running at an optimal level again. So for us we don’t see that necessarily being eliminated through the course of the year. We are hoping that it gets better. We still see a path to deliver on our full year targets of inventory. First quarter is a normal seasonal build as we get ready for that spring selling season and then we will work through that here in the back half of the year. So we do see line of sight to improve. If we go back to where we were last year, we had a very strong second half where we had to work through that inventory. We delivered on our cash flow outlook for 2022. We are hopefully going to be more balanced than it all coming in the fourth quarter this year. But as we look at that inventory build, that seasonality and line of sight for the back half of the year, we still feel confident in delivering that 75% to 100% of adjusted net income in cash flows.

Our next question comes from Jamie Cook from Credit Suisse. Please go ahead.

Good morning and congrats on a nice quarter. Just, obviously, you have a very strong order book and visibility into 2023. But in the event that things deteriorate in 2024, can you talk about how you think about decrementals or why margins will be structurally higher just some -- just given some of the self-help and precision ag margin stickiness? And then my second question, as supply chain eases and customers and dealers get more comfortable with your ability to produce, how do you think your order trends set up for 2024? Do you think dealers and customers are still going to rush to order or do you think you would see a slowdown in order pace? Thank you.

Jamie, maybe I will touch on the margins and then I will let Eric maybe touch on the order trends for 2024. I think, Jamie, for us on the margin side, if you think about our three big growth engines. We have talked about the parts business growing high-single digits, high margin. We said that usually grows every year, somewhat agnostic of the cycle. With our increased focus on that, especially improving our fill rates in areas like South America, continued strong performance in North America and Europe, we see that continuing somewhat regardless of where the cycle is. Precision ag, again, if anything, we see that continuing to grow. If you look at our outlook, we reaffirm that $1 billion target. That’s around a 15% CAGR over the -- over between today and 2025, we were up 30%. And again, 90%-plus of farmers invest in retrofit or some sort of repairs in the course of a year. We see that continuing to grow. Again, agnostic of where the whole good cycle is. So both of that is we should see continuing to improve both richer mix. And then you think about the Fendt market share expansion, right? Not necessarily the OE or the general economy, but just the growth in share as we go to areas like South America and North America, we still see white space opportunities to bring on new dealers to penetrate those markets and so we see those two -- those opportunities on Fendt continuing to play out even though if the cycle was to weaken. So we look at those and we have talked about outpacing the market 4% to 5%. We talked about that at our December Investor Day. Those three big growth engines are going to help us do that. That should help dampen the increment or the decrementals on the downside. Hard question for me to answer is given the speed, right? If the markets were to come down slowly, we are being very cautious on our dealer inventory levels. We are managing against this value creation line that we talked about, knowing where our costs have to be. So if things come down in a slow fashion, we are able to adjust our production, adjust our cost structure, I think, you will see better incrementals. If we were to see a shock to the system that made us react quickly, that takes time and may take a couple of quarters to work through the system. But I tell you, we are watching the downside. We are trying to make sure we stay as variable as possible and you are seeing that on the upside with the margins, but hopefully, you will see it with improved profitability on the downside and what we have talked about is the confidence level in improving that trough margin. We took that up at the December Investor Day and what we told you is by 2026, if we are doing 12% mid-cycle, we would expect to see 9% at the equivalent level of 2016. And if I just sort of fast forward that to where we were last year, that would have put our trough margin at around 7%. So a lot higher than where we were in 2016 which was closer to 4%. So we feel good, but again, a little bit will depend on the timing and the speed at which the cycle declines. Eric, do you want to touch on the order trends?

Sure. And then the second half, you can say, well, second half of your question, what’s going to happen with the ag economy. You have been around, so I am not thinking anything you don’t know. But it doesn’t move with GDP. It moves with is there enough grain in the world. And with the ending stocks being down six years in a row, more demand coming for grains, either for -- wheat consumption is going up, but also vegetable oil consumption is going up for fuel usage. And so, we don’t expect demand to come down sharply by any means. If it does -- if the demand does moderate, which is the heart of your question, we still see dealers being undersupplied with used inventory. So there will be I think a shift. Right now, our order book is so highly retail-oriented. It’s got a lot of customer names on it. I think in the midterm when the market does cool a bit, we will see a bit more of a trend to historical norms where there’s some dealer orders -- more dealer orders mixed in with customer orders, back to a normal ordering pattern and I expect that would take a whole year to normalize.

Great. Thank you.

The next question comes from Kristen Owen from Oppenheimer. Please go ahead.

Great. Thank you for taking my question. A lot we could follow up on that last response. So maybe if we can start on just unpacking the $199 million of precision ag revenue in Q1. I think you mentioned both Fuse and Precision Planting results in the quarter. You talked about that being a little bit more evenly spread throughout the quarter or throughout the year. So just wondering if availability improved and that was maybe higher than you expected or if there’s any change in that outlook for the full year on the precision ag revenue?

No. I think we are still very confident on the precision ag revenue, Kristen. I’d put us probably in the range of $800 million to $850 million for the full year. Year-over-year, if you remember, the 30% sales increase, there was chip availability issues last year this time that was really affecting the precision ag side of the house quite a bit. I think, so as you look at that was the big sort of the year-over-year change. That improved as we sort of went through the balance of the year. But we still feel very confident with our outlook I’d say somewhere in that $800 million to $850 million range for the full year for the precision ag business.

And this summer, we will be finishing up go online this fall. We are putting in a very large new distribution center, 500,000 square feet that will give us more capacity, more efficiency to handle the global orders, not only for Precision Planting, but we have got this constellation of companies that we have purchased over the last year and a half and we will be leveraging that new logistics center to be able to support the demand for those as well because they are all growing.

Yeah. That’s super helpful. Thank you. And then if I could just ask you to maybe unpack some of the margin performance for the year. Just help us understand, on a production line rate basis, how that is performing relative to maybe 2019 or pre-COVID levels and how we should think about the margin performance throughout the year benefiting from either the better throughput like we saw this quarter versus lower material inflation versus just magnitude of price.

Right. So good question and kind of a complicated question. But if you go back pre-COVID, I would say that and compare our current run rates, they are not as good or as efficient as we were in 2019, because we are still having to deal with not as many, but still some manufacturer’s shortages and rescheduling and overtime, so that leads to inefficiency. The good news is that year-over-year we are definitely improved. In fact, so much so that we have actually, and I think Eric talked about it earlier, we have scheduled kind of normal seasonal maintenance, especially in Europe in the third quarter. So that’s a real positive sign that some of the efficiency that we would expect to improve has improved. But there’s still -- I would say, if you look at our production schedule for the back half of the year, there’s still -- we have layered in some continued supply chain difficulty. So the good news is if things continue to improve, there could be some upside to that production in the back half. Thanks.

Thank you.

The next question comes from Jerry Revich from Goldman Sachs. Please go ahead.

Yes. Hi. Good morning and congratulations on the strong results here. I am wondering if you could just talk about margins heading into the second quarter. So normal seasonality is you folks tend to be up 2 points to 3 points margins 2Q versus 1Q and I see your production is up significantly in the deck. So anything that would keep that normal seasonal cadence from playing out this year 2Q versus 1Q? thanks.

No. I don’t think. Again, Jerry, I think, as we look at Q2, that is one of our stronger selling season or selling quarters. So we would expect to see the sort of a continuous improvement. Again, I would caveat, again, as we look at the sequential change from Q1 to Q2, I alluded to the South American margins, the retail incentives, again, we are not optimistic that that’s going to stay. So I do think that if you look at it sequentially, although we will see stronger revenue, you are going to likely see some margin contraction as material cost increase in South America, potentially some of those retail pricing discounts decline. But, overall, I think, everything else would follow more of your traditional pattern.

Super. Thank you. And can I just shift gears and ask you to talk about where new equipment inventory stand for you folks in North America and South America. I know with the Fendt rollout you folks are probably in a different position than the industry, but the industry data shows new equipment inventories building over the past, call it, two quarter to three in North and South America, can you talk about where you stand? Thanks.

Yeah. More of that is in the small ag. The inventory is all growing in small ag. The large ag is still below what we would say is our healthy target and what the dealers would say is their healthy target. They would love more inventory for sure and so that has not fundamentally changed at all. We don’t think it will change much during the course of the year. Small ag is up and it’s probably at or maybe a hair higher than our target as we are going into the selling season. So the dealers will work through that, but it’s tied with this overall small ag market cooling off.

The next question comes from Tami

Hi. Good morning. Thanks…

Good morning.

…for taking my question. So I wanted to quickly touch on, and I am sorry if you already answered this, but in terms of incomplete red tag unit, I think at end of the fourth quarter, you had some, are they all cleared by now or do you still expect some delivery in 2Q and later on in the year?

Yeah. So, Tami, you are right, we made a significant reduction in the, I will call it, the semi-finished units at the end of the year. Not uncharacteristic though. As we go into the first quarter here, we build up inventory getting ready for that spring selling season. So if I look at the absolute numbers of semi-finished or I think you call them red tag units, that number is up relative to the fourth quarter as expected, but if I compare it to where we were last year this time, where we were dealing with a lot more supply chain disruptions, I’d tell you the units of these red tag units is about half of where they would be. So it’s in a much more appropriate level given the timing of the year. So we are making -- again supply chain is not perfect yet, but operational performance is getting better and that number of red tag units are sort of in line with what we expect going into the second quarter here.

Got it. Thank you so much. And then, just quickly, I wanted to clarify the sales guidance raise. I think you raised it by $500 million, FX is probably half of that and then you are maintaining your price realization goal of 8%. So is it fair to assume that the $250 million of revenue guide raise, that’s entirely volume driven, and if so, is this more your supply chain getting better or you are also seeing better-than-expected demand?

Yeah. Tami, your numbers are spot on, and I would tell you that $250 million is a combination of richer mix that we are seeing and then a little bit more volume as well, but I would tell you more on the mix side.

Our last question comes from Chad Dillard from Bernstein. Please go ahead.

Hi. Good morning, guys. Thanks for fitting me in. So I just wanted to go back to the large dealer inventories. I just want to understand like where do you expect to be at the end of 2023 and within your guidance, the raise, do you embed any opportunity for restocking?

Yeah. I think, Chad, I think, as Eric has alluded on the call, large ag inventories are still well below what we would consider more of the normalized level. We don’t see that really changing here in the balance of fiscal 2023. So we are not embedding any sort of a dealer restocking on the large ag side this year. That would still be opportunity beyond, likely into 2024, depending on the cycle here in the commodity prices, but again, around the world, all of these large ag inventory levels are below the normal level. And I think you can see that as well, if you look at the residual values of used equipment, even those are still very low. The number of used equipment on the dealer’s lots are very low, residual buyers are staying high. All of those are sort of early indicators or indicators that the market is staying relatively strong. Farmers still see good crop prices, good income and driving the demand for the new equipment here for the balance of the year.

Got it. And then you replied about sales incentives helping South America. I was hoping you could kind of broaden out that question and to just overall AGCO. You guys have an 8% price increase for the year. I guess like how much of that is list price versus more sales incentives, and I guess, more of a temporary increase?

Yeah. Most of that is list prices and the vast majority of that was put in place in the latter part of last year. So if I think about that 8%, a lot of that is carryover pricing and so when you see that will start to over -- that will start to lap itself in the back half of the year. We do have a little bit of incremental pricing planned in 2023. That will be subject to the market conditions, new model years coming out, but most of that is list pricing. I think what you are hearing me talk about is the improvement in South America was the unexpected. We plan for these volume incentives and if the team sees the ability to not do that, they are going to hold that back and that’s the positive upside that we saw in the quarter. But think about most or almost all of that 8% is list.

This concludes our question-and-answer session. I would like to turn the conference back over to Eric Hansotia for any closing remarks.

Very good. I’d just like to close by saying thank you very much for your participation and support of AGCO. We are really proud of how we started 2023. It was a record quarter in many ways and it’s setting us on a trajectory to deliver another record year at AGCO. The key to our success is the continued execution of our farmer-first strategy. Our focus is on growing our margin-rich businesses like Fendt, parts and service, and our precision ag smart machine business that Damon talked about earlier. We have been investing heavily in the last few years, and in 2023, we are making even bigger investments to continue the development of these farmer-focused solutions that are solving critical farmer problems, with many of them delivering very short paybacks. We are using our precision ag tools to really engage strongly on sustainability, putting more and more of our technology efforts there, capturing a lot more data, helping our farmers make the transition to not only more productive farming, but more sustainable farming. Lastly, the large ag markets are very strong globally. We touched on that a lot today. Farm fundamentals are healthy and supporting farmer’s investments. We have touched on many of the factors supporting our markets, including growing populations, changing diets, lower stocks to used levels and healthy commodity prices. There’s a couple of new trends that I mentioned earlier. The first is given the increasing geopolitical tensions, you are hearing more and more countries talk about potentially increasing their safety stocks of grain for food security. This potentially significant increase in demand isn’t being factored in yet to the supply/demand picture but would only add to the existing challenges. In addition, the growing demand for oilseed groups, especially biodiesel, which will be critical for many industries like aviation, construction and ag, could have similar impacts as the ethanol production has had on the consumption of corn. All these trends give us confidence that our industry could stay strong for some time. So we are excited about 2023 and beyond. We are convinced that the best days of AGCO are still in front of us. We look forward to seeing many of you at our technology event on June 28th and 29th in Nashville. Thank you and have a great day.