Good morning. My name is Sia, and I will be the conference operator today. At this time, I would like to welcome everyone to the AGCO 2021 Second Quarter Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise.

After the speakers remarks there will be a question-and-answer session [Operator Instructions] Thank you. At this time, I would like to turn the conference over to Greg Peterson, AGCO's Head of Investor Relations. Please go ahead, sir..

Thanks, Sia, and good morning to those of you joining us for AGCO's second quarter earnings call. This morning, we will refer to a slide presentation that's posted to 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.

This morning, we'll also make forward-looking statements, including demand, product development and capital expenditure plans, and timing of those plans, and our expectations with respect to the costs and benefits of those plans, and timing of those benefits.

We'll also discuss production levels, engineering expense, exchange rate impacts, pricing, share repurchases, dividend rates, and future retail revenue, margins, earnings, cash flow, tax rates and other financial metrics. We do 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, 2020. 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 COVID-19, including plant closings, workforce availability, supply chain disruption and product demand, also, weather, 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 corporate website. On the call with us this morning, we have Eric Hansotia, our Chairman, President and Chief Executive Officer; and Andy Beck, our Chief Financial Officer.

And with that, Eric, please go ahead..

Thank you, Greg, and good morning. We appreciate everyone joining us on the call today. We've come a long way over the last year, responding to the global pandemic and addressing the needs of all of our key stakeholders during the COVID crisis.

I think it's helpful to remember where we were in that journey during the last quarter – or the second quarter of last year in order to provide some context to our current results. Last year, we experienced extended second quarter shutdowns in our European and South American factories, which negatively impacted our sales and earnings.

Over the last three quarters, global economies have started to reopen and demand in our end markets has rebounded to very high levels. AGCO's results for the second quarter of 2021 reflect robust market recovery as well as strong execution by the AGCO team. We delivered sales and earnings growth despite significant ongoing supply chain challenges.

Let's start on Slide 3, where you can see the net sales grew 43%, compared to the second quarter of 2020. Adjusted operating income increased nearly 150%, driven by a 420 basis point increase in our adjusted operating margins, with improvement achieved in all regions.

Favorable pricing helped to offset raw material and component cost inflation in the second quarter. And we expect to see a more significant impact of higher material costs during the remainder of the year.

The supply chain challenges we discussed in our last call are still a major factor as capacity constraints and COVID disruptions continue to impact timely receipt of components for production. Underlining these farmer fundamentals remain very strong, and our order boards continue to be significantly above last year.

Based on improved market forecasts across all regions, our strong second quarter results, we increased our financial targets for the full year of 2021.

Our investments in smart farming, precision ag and digital solutions are paying off, as we are seeing excellent demand for our technology-rich even tractors, our precision planting solutions and other aftermarket products.

Our healthy balance sheet supports our technology-related investments, as well as funds the return of cash to our stockholders, as evidenced by the variable special dividend the company paid on June 1. Slide 4 details industry unit retail sales by region for the first half of 2021.

The reopening of economies has increased the demand for grain, putting pressure on global grain inventories, which remain at low levels. Agricultural commodity prices have fluctuated over the past quarter, but continue to support favorable farm economics, resulting in increased demand for machinery.

These improved conditions are expected to generate industry growth across all major equipment markets in 2021. In North America, industry retail tractor sales increased about 22% in the first half of 2021 compared to the same period in 2020, with industry retail sales of large ag equipment growing by approximately 24%.

Roll crop farmers are taking advantage of improved commodity prices and projected healthy income levels to upgrade their equipment.

Industry retail sales in Western Europe also increased in the first half of 2021 versus supply constrained levels a year ago, with growth across all major markets, higher wheat, dairy and livestock prices combined with healthy levels of crop production are generating positive farmer economics and farmer sentiment.

In South America, industry sales increased during the first 6 months of 2021, driven by improved demand in Brazil, as well as recovery in the smaller export markets. A healthy first crop, as well as favorable exchange rates are supporting positive economic conditions for farmers who continue to replace an aged fleet.

AGCO's 2021 factory production hours are shown on Slide 5. Our suppliers have been impacted by COVID-related disruptions as well as capacity constraints due to surging industrial demand. Despite the great work by our purchasing team, we continue to experience supplier bottlenecks and delays in all of our regions.

We expect significant challenges in the quarters ahead to meet the current strong levels of end market demand. Since last quarter, we increased our production plan to meet additional end market demand. Despite this increase, our new production plan does not represent the top of our capacity.

If we see further increases in end market demand in the second half of the year, subject to our supply chain ability to respond, we would still have room to further increase our production.

Total company production was up approximately 40% for the second quarter versus the same period in 2020, with the largest increases in our European and South American factories, which were shut down for portions of the second quarter of 2020. We are projecting a 15% to 20% increase in full year 2021 production compared to last year.

You remember that our production ramped up significantly in the back half of 2020. So our growth in the second half of 2021 will not be as large as what we have experienced in the first half. Turning our attention to AGCO's order board.

As of the end of June, our order board for tractors and combines was significantly higher in North America, Europe and South America compared to a year ago. I'll now hand over the call to Andy Beck, who will provide you more information about our second quarter results..

Thanks, Eric, and good morning to everyone. I'll start on Slide 6, which looks at AGCO's regional net sales performance for the second quarter and first half of 2021. AGCO's net sales were up about 35% compared to the second quarter of 2020, excluding the positive impact of currency translation.

Strong end market demand and favorable pricing drove the increases across all regions. The Europe/Middle East segment reported an increase in net sales of approximately 34%, excluding the positive impact of currency, compared to the production-constrained second quarter of 2020. The largest increases occurred in France, Turkey and the United Kingdom.

Net sales in North America increased approximately 29%, excluding the favorable impact of currency, compared to the levels experienced in the second quarter of 2020. Increased sales of tractors, precision planting products produced most of the increase.

AGCO's second quarter net sales in South America grew approximately 53%, compared to the second quarter 2020, excluding positive currency translation impacts. The most significant growth was in Brazil, which was up over 65%, excluding currency impacts. Combines, midsized tractors, and grain and protein showed the strongest growth.

Net sales in our Asia Pacific/Africa segment increased about 40% in the second quarter of 2021 on a constant currency basis compared to 2020. Recovery in Africa, along with strong growth in China and Australia were the drivers of the growth. Consolidated replacement part sales were up – were approximately $480 million for the second quarter of 2021.

Part sales were up about 12%, compared to the same period of 2020, excluding currency impacts. In addition, our sales of precision ag products were up approximately 37% for the first half of 2021, compared to the first half of 2020, reflecting strong acceptance of our smart farming solutions. Slide 7 examines AGCO's sales and margin performance.

AGCO's adjusted operating margins improved by approximately 420 basis points in the second quarter of 2021 compared to the same period in 2020. Margins were supported by higher levels of net sales and production as well as positive net pricing in the quarter.

Our second quarter pricing of approximately 4.5% was adequate to cover inflationary cost increases. For the remainder of the year, we expect material cost inflation to intensify, with continued pricing required to maintain margins.

The Europe/Middle East segment reported an increase of approximately $110 million in operating income compared to the second quarter of 2020, resulting primarily from higher net sales and production, partially offset by higher engineering expenses.

North American operating income increased approximately $39 million and operating margins reached 14.1% in the quarter. Higher sales and improved product mix contributed to the stronger results.

Operating margins in our South America region reached 8.3% in the second quarter and operating income improved nearly $18 million from the same period in 2020. The significant increases in end market demand and a better sales mix supported the growth.

In our Asia/Pacific/Africa segment, operating margins expanded to 11.5% in the second quarter reflecting improved sales and production. Slide 8 details grain and protein sales by region and by product. Sales increased about 24%, excluding currency in the first quarter of 2021 compared to 2020.

Globally, grain equipment sales increased approximately 23%, with our South America and European regions showing the largest increases. Protein production sales grew approximately 24% in 2021, with the strongest growth in Asia/Pacific/Africa and South American regions.

Grain equipment demand has been stronger, supported by improved grain prices and profitability of farms. However, demand has been muted by significant price increases by manufacturers to cover surging steel costs. The protein production equipment market remains lower due to labor issues and higher input costs such as grain.

Protein prices are improved, so profitability is recovering. The protein production segment was significantly impacted by the pandemic, particularly in North America, where protein processing capacity continues to be challenged.

In China, protein producers are beginning to recover from the Asian swine fever outbreak and have started to rebuild their production facilities. We are expecting a recovery in grain and protein sales in 2021 following weak sales in 2020, which were heavily impacted by the pandemic.

Slide 9 addresses AGCO's free cash flow for the first 6 months of 2021, which represents cash used in operating activities less capital expenditures. Our seasonal requirements for working capital are greater in the first half of the year and resulted in negative free cash flow in both the first 6 months of 2021 and 2020.

AGCO's strong cash flow generation last year allowed us to repay the $276 million term loan facility that was taken out to provide liquidity in the prior year. AGCO's capital allocation priorities include investment in our precision ag offerings and digital capabilities, as well as opportunistically adding bolt-on investments.

In terms of return on cash to shareholders, we will continue our regular quarterly dividend payments, share repurchases and an annual variable special dividend to return cash to shareholders. In the first quarter, we increased our quarterly dividend by 25% and paid the first variable special dividend in the second quarter.

We currently expect to repurchase shares opportunistically during the second half of 2021. Future returns of cash to shareholders will be based on cash flow generation, our investment needs, which includes capital expenditures and acquisition opportunities, as well as our market outlook.

Other details for the quarter include losses on sales of receivables associated with our receivable financing facilities, which are included in other expense net, were approximately $5.1 million during the second quarter compared to $4.3 million in the same period of 2020. Turning to our full year forecast.

Our 2021 outlook for the 3 major regional markets is captured on Slide 10. We increased our market forecast for all regions and expect higher retail industry demand globally compared to 2020. In North America, higher commodity prices and improved farmer sentiment is expected to result in increased 2021 sales.

Replacement demand for an aged fleet of larger equipment is expected to drive most of the increase. Demand for smaller equipment is expected to be more stable after several years of increasing demand. We project North American industry unit tractor sales to be up approximately 20% in 2021, compared to 2020.

European Union farm economics are expected to remain supportive in 2021. Higher commodity prices are expected to support healthy demand from the arable farming segment. Milk prices remain above the 10-year average, and economics are positive for dairy producers.

Western Europe industry demand is expected to remain strong and grow approximately 10% in 2021. Elevated commodity prices and favorable exchange rates are expected to support additional growth in South America during 2021, as farmers continue to replace aged equipment.

In total, industry demand in South America is expected to improve approximately 15% from 2020 levels. Turning to Slide 11, we highlight the assumptions underlying our 2021 outlook. Our priorities continue to be maintaining a safe working environment for our employees and providing proactive support to our customers and dealers.

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. Our 2021 forecast assumes improved global industry demand, with no additional impact from the pandemic.

Our sales plan includes market share improvement and price increases of approximately 4.5%, aimed at offsetting higher material cost inflation during 2021. At current exchange rates, we expect currency translation to positively impact sales by about 3%.

Engineering expenses are expected to increase by $50 million to $60 million on a constant exchange rate basis, compared to 2020. The increase is targeted at investments in smart farming and precision ag products as well as to continue the rollout of our platform designs.

Operating margins are expected to be up approximately 20 – 200 basis points from 2020 levels, driven by higher sales and production, favorable pricing net of material costs and productivity initiatives, partially offset by increased investments in smart products and our digital initiatives.

We are targeting an investment – an effective tax rate ranging from 27% to 29% for 2021. Slide 12 lists our view of selected 2021 financial goals. We continue to operate in uncertain conditions, and this outlook does not consider any further business disruptions caused by the COVID outbreak.

We are projecting sales to be in the $11.3 billion to $11.5 billion range, with 2021 earnings per share targeted at approximately $9.50. We expect capital expenditures to be approximately $300 million and free cash flow to be in the $450 million to $500 million range.

For the third quarter, our current estimate is that earnings per share will be in the range of approximately 100 -- $1.70 to $1.80 per share.

This estimate is modestly below the third quarter of last year, which was unusually strong as our European and Brazilian production facilities worked to catch up lost production from the second quarter 2020 shutdowns. We also plan increased engineering expenses in the third quarter to facilitate new product introductions scheduled in 2021.

While our order backlog supports our outlook, the timing between quarters of our sales is difficult to forecast due to supply chain challenges that we anticipate will continue during the rest of 2021. the Q3 estimate is highly dependent on component availability from suppliers and production levels throughout the quarter.

We currently expect our fourth quarter 2021 results to be significantly improved over our 2020 performance. With that, I'll turn the call back over to Greg..

Thank you, Andy. And we're ready now, operator, to take questions. [Operator Instructions] Thanks. And we're ready to take questions..

[Operator Instructions] The first question will come from Stephen Volkmann with Jefferies..

Thanks. Good morning guys. Thanks for taking my question. Maybe just to start off on some of the supplier issues that you mentioned.

I guess I'm curious, do you feel like supplier issues limited or reduced what you accomplished in the second quarter? Did you have some sort of finished product waiting for parts at the end of the quarter? And then sort of longer term, it sounds like you expect a pretty big improvement in the fourth quarter. So maybe just a little color around that..

Stephen, this is Eric. Yes. The answer to all your questions is yes. We've had challenges all through the year, and those continued right on through the end of the quarter two. And in reality, they're going to -- we expect them to continue for the rest of this year.

Those show up as having extra raw material and extra machines that are mostly built waiting for one part or the other. So, we closed out the quarter with a tremendously high order board, high -- probably highest in the company's history.

Teams are working really hard to build through that order board, but we still got a lot of machines built that are not ready to invoice yet. And we expect that situation, that's why Andy made the comments he did. We expect that situation to continue on for some time yet..

Okay.

But obviously, the fourth quarter looks like a pretty big quarter based on your guidance, and I guess you're assuming things normalize then?.

I wouldn't say normalized, but we think we'll get a little bit of relief. We believe that perhaps the worst of it is behind us, but we're not out of the overall topic yet. And we expect quarter 3 to still to be quite challenging. We're aiming for quarter 4 to be a little bit less so, but not smooth sailing yet..

All right. Thank you..

The next question will come from Jamie Cook with Credit Suisse. Please go ahead. .

Hi, good morning. Nice quarter. I guess, Eric, you noted how great the order book is. I'm just wondering how much of your order book today is for 2022? And assuming you have orders for 2022, how do you approach pricing just given the challenging dynamics related to material cost rate, supply chain type stuff? Thank you. .

Thanks, Jamie. Not much of the order bank yet is for 2022. There is some, but most of it is still for 2020. When you think about the size of the order bank, it's largely filling up most of the rest of 2021, with a few products sprinkling into 2022.

Our order banks, I'll just talk about, like say for example, South America, we only open up windows at a time say, a 2-month, maybe 3-month window at a time. And we'll take orders for that period at a given pricing position and then close the window. So that allows us to manage the situation with inflation being highly volatile.

That's our -- most intense market relative to inflation. We can match the pricing situation with the cost inflation situation and make sure that those – the timing is lined up with those. And so that's what we're doing. Early order programs are set that way. So, we're making sure that we're putting pricing in place in advance.

And so far, year-to-date, that's proven to be the case. We've been ahead of the costs with all of our pricing actions year-to-date..

Okay. And then just as a follow-up, Eric. There's a lot of debate around where you are in the cycle and concerns that the farm equipment market sort of bit peaked.

So given your experience level, can you help us understand where you think the farm equipment cycle is by region sort of relative to peak or mid-cycle, however you want to define it? And then I'll get back in queue. Thank you..

Yes. The farming cycle overall, we would say, is very strong right now. No question about that. Is it at peak? We don't have it marked at peak yet. We have it above mid-cycle. And we went into the year forecasting early, late last year, we were forecasting this year was going to be a little bit below mid-cycle. We've guided above mid-cycle now.

And – but we still think that there's room for this to play out for some time yet because of a number of factors. There's low grain inventories. There's high commodity prices. And there's still replacement demand that's unmet yet from many years of farmers holding off on purchases during the lean years.

So, when you combine all that, good current conditions a lot of pent-up demand. We think that there's a fairly strong market in front of us for a period..

Great. Thank you very much..

You’re welcome..

The next question will come from Ann Duignan with JPMorgan. Please go ahead. .

Yeah, hi Beck. Just on the back of that last question and your response. I mean I think the one piece of the puzzle that you did not speak to is that input costs have risen faster for farmers than ever before. And so, it is quite likely that their net incomes will have peaked this year.

So could you take that into consideration as you talk through -- you talked about the farm cycle, but I think you were really talking about the equipment cycle. If you could just talk about farmer incomes in North America and the squeeze on -- from the input costs that they're seeing, and what that might do to your outlook..

Yes. And this happens every time. This is a very typical behavior. So, it's not unusual this cycle. In each cycle, there's a period where there's been constrained purchasing. And so, commodity prices are low, costs are low. There's not room in the marketplace.

Then there's – especially with this when there's a surge in demand and all the input suppliers are racing to try and catch up with that demand. We're seeing steel prices up 2.5x in North America, 1.7x in Europe. And so those kinds of pressures are because of the ramp-up. Our farmers are feeling that, too.

And to some extent, especially like in grain bean purchases, that's slowing down their purchase behavior. And so we think that that's another reason why there's a good chance that this market strength may actually stabilize for some time because it's cooling off now. We think that that steel price is not going to stay at those elevated prices.

And I think that allows for more room downstream for farmers to get back in and buy perhaps next year or the year after..

Yeah. I'm not talking about steel prices and prices for our commodities. I'm talking about seed prices, fertilizer costs, freight cost, fuel cost, whatever it is from a farmer's P&L perspective.

Could you…?.

Yeah, I think it's all the same though. I think they're all behaving the same. There's a massive run up right now. And so there's a high price inflation. But -- and so I think that will -- so farmers are paying more for fertilizer, more for seed, more for machinery. They're paying a lot more for everything.

And to some extent, rental prices are going to go up. So that will cool down their buying behavior. But those prices likely are going to also moderate. So that's why I use the steel example just because it's closer to home, but it's this -- I think it's going to be the same thing for fertilizer as well.

Those are cool demand in the short-term, which should spread that demand out over the mid-term..

Okay. I’ll leave at there in the interest of time. Thank you..

You’re welcome..

The next question will come from Kristen Owen with Oppenheimer. Please go ahead..

Thanks for taking my question. I wanted to talk a little bit about mix in North America.

Can you give us a sense of the traction of the expansion there? And any indication for how that's impacted your market share?.

Do you want to take the?.

Yeah, sure. Overall, we are seeing really strong growth in our high-horsepower equipment in North America, and most of that is driven by the improvement in our net sales in North America. So we're right on track with that. We're -- our sales of high horsepower equipment, I think, are up over 40% in the first half of this year.

And I think that's a big contributor to that. So the acceptance of the fit product has been good. We continue to develop our distribution, and so that's all leading to some of the stronger results you're seeing in North America..

Great. And my follow-up is somewhat related on the precision ag numbers that you provided, up 37% in the first half. Can you give us a sense of what that was in 2Q and maybe parse it out between precision planting and the rest of the precision ag portfolio? Thank you..

Sorry, I don't have it by quarter. We just had the first half numbers. The precision planting aspect of that precision planting is up about 40% in the first half. And so the other OEM aspects of precision ag that we were developing revenue on is a little below that 37%, so kind of in the low 30s..

Kristen, that 30% -- or 37% was pretty consistent across the first half. So it's been strong in the whole first half. And as Eric mentioned, our order boards are strong for the back half of the year as well..

And maybe I'll just build on that. The precision planting story is playing out exactly like we told you we are aiming for. So we've got multiple growth levers there. One is to continue to grow the planting business. Second one is to grow outside of planting into other technologies around the crop cycle. And the third one is to grow globally.

If you take a look at the quarter two for Precision Planting, South America sales were up over 100%. European sales are up over 200%. So the strategy in each of those dimensions is happening as we targeted. The team is doing a really great job and the customers are very excited about the solutions coming out of that business..

Appreciate the color. Thank you so much..

You’re welcome..

The next question is from Larry De Maria with William Blair. Please go ahead..

Thanks. Good morning, everybody. First, I'll – to follow up on that question.

Can you just maybe level set us on the rough dollar term size and margins in that business in the precision planning broadly or Precision Ag broadly because we try to see the impact of what that is on your overall margins?.

Precision Ag margins? Yes. I would categorize those as aftermarket type margins. So they're typically double what –- just like our parts business, typically double what we get from a normal OEM machinery sale..

Okay. Thanks.

And if for the full year, a couple of hundred million dollars for Q3?.

More than that..

Yes. So our revenues were about $400 million last year. And you can see what growth rate we're running right now.

We'd probably expect that growth rate to come down a little in the second half because Precision Planting is really a first half business and not as important in the second half, but we'll still see pretty significant sales in the full year..

Okay. Thank you. And if I could ask my real question. The -- obviously, to maintain this positive industry pricing, you're going to require some discipline from OEMs not to overproduce into next year.

Kind of what's your overarching philosophy as we think about production next year? You gave a good color around South America, how you open the windows and actual maintain some discipline.

But how are you thinking about production into next year? Any possibility of moving early order programs, getting names attached to orders to be maintain this relatively lean inventory and positive pricing?.

Yes, Larry, what we – our focus is not to just focus on the order board, which is, as Eric described, extremely high right now, but really look at what the retail demand and retail sell-through is going to be, and that's going to dictate our production levels and things like that.

And I think if we continue to monitor the retail, sales and produce to retail, then that will be the right approach and keep our dealer inventories and our company inventories obviously in line.

Right now, our dealer inventories are well below where we were a year ago, the production constraints and issues there and the strong retail market is basically forcing our inventories lower, and we plan for some of that during 2020, but they're even lower now in 2021, really because of the strong retail demand.

So as we go through the back half of the year, our plan is that our dealer inventories at the end of the year will be fairly level with last year but given the strong retail demand I would expect its likely less than some other markets that are inventory levels are still be lower than the prior year..

Okay. Thank you..

The next question will come from Nicole DeBlase with Deutsche Bank. Please go ahead..

Yes, good morning, guys..

Good morning….

Maybe just starting with price cost. I appreciate that it was positive in the first half.

Is your expectation that you can remain ahead of inflation in the second half? And I guess like should inflation remain an issue? Is there appetite for further price increases?.

Yes. So, our plan for the year is to continue to maintain and add pricing where needed to offset the material costs. That's a big challenge because of how severe some of these cost increases are. And in some cases, we're not able to do that, like in -- sometimes, in our grain and protein business, we're getting squeezed there.

But overall, we believe that we will have pricing that offsets all this material costs. Our net pricing, which is the pricing over material cost, is expected to be about 50 basis points for the full year..

Okay, got it. Andy, that's really helpful. And then just a follow-up on South America margins. I mean the traction there was once again really impressive this quarter.

So, I guess how are you thinking about the second half for South America margins since that's a pretty important variable to overall margin?.

Yes. Our South American margins, as you say, has been really way ahead of schedule in terms of the improvement that we look for, just the significant volume and production increases year-over-year really help trigger that along with some strong mix in the first half.

As we go into the -- in the third and fourth quarter, we're looking at our margins being relatively flat in the third quarter and then a little bit down in the fourth quarter. Despite the fact that our sales will continue to be higher, we're seeing some increased expense levels in engineering and other areas.

And also, the mix is not as strong in the second half of the year. We're seeing growth in some of the lower horsepower equipment, and that's giving us a little weaker mix. But overall, the profitability levels in the second half will be better than what we had in the second half of last year..

Got it. Thanks Andy. I'll pass it on..

The next question will come from Ross Gilardi with Bank of America. Please go ahead..

Good morning guys..

Hi Ross..

I just had a question about Raven.

I mean how big of a supplier are they to you? And does the business going into a competitor's hands worry at all and potentially to cause you to go captive on whatever you're buying from them?.

internal development, partnerships and then acquisitions where they make sense. And so we've got a very active group looking at the landscape of precision ag companies and finding where we can partner or acquire for technology and the landscape. And so, I think, that will be something that we'll talk about more over the next few quarters..

That's super helpful, Eric. Thank you.

I mean just in terms of your priorities for cash flow, where do you think a larger precision ag related acquisition that improves your competitive position ranks in the overall pecking order versus returning more of your free cash flow?.

Well, when you look at -- from an investor standpoint, from an internal standpoint, it's a high priority. From a meaningful impact to an investor, it's a low impact, because the companies are relatively small size that are out there. So we think it's an important ingredient.

A small group of people can make a big impact, like you see with precision planting, relatively small-sized acquisition relative to the overall company of AGCO, but look at the impact they're making. So it's a big impact internally.

Relative to cash flow consumption from an investor and how it would eat into returning cash and other forms, it's, I think, a smaller impact..

Thanks, very much..

You’re welcome..

The next question will come from Jerry Revich with Goldman Sachs. Please go ahead..

Yes. Hi. Good morning, everyone. I'm wondering if you could just comment on how you see for your dealers their used equipment inventory balances heading into year-end.

Just so we can a sense for potential length of cycle, where do you view inventories for used equipment today versus long-cycle averages? And if you could comment by region to the extent you have visibility, that would be helpful..

Yes, I don't have the specific numbers in front of me, Jerry. But overall, the market strength that we're seeing extends into the used market as well. So good solid demand there. Our used inventories are below where they were a year ago. Very lean. And used prices are up. And I think that's most important in North America and Europe.

It's not as big of a used market in South America. But overall, that sector of the market is going well. And as you know, it's a really important part to monitor and -- but it's moving right along with what we're seeing with the new equipment..

Sure. One of the ways we kind of monitor that, we look at the equipment -- returned equipment in our finance company. And our inventory of used equipment that's been returned is extremely low. And normally, there's some costs associated with reselling that. And so, that's usually a cost of doing business for a finance company.

This year, we're actually making a profit on reselling that used equipment. So, really a good sign that not only is the used equipment inventory in a really good place that's supporting prices, but that's driving prices up. So that helps us as we sell our -- or price our new equipment. So very supportive..

Okay. And then as we look at the exit rate for earnings in the fourth quarter, obviously, a pretty robust number.

Anything that we should think of as we model out what 2022 looks like relative to normal seasonality? Is there anything extraordinarily positive in this quarter's numbers, or is that the type of seasonally adjusted run rate we should be thinking about the business center in '22?.

Overall, we're seeing margin expansion of probably close to 300 basis points in the fourth quarter. That's mainly driven, as I pointed out, South America, we're not going to see that, but mainly driven North America and Europe. If we think back to a year ago, we were working on reducing dealer inventories in both of those regions.

And so, we're going to see some sizable growth, particularly in North America revenue in the fourth quarter. And our margins should be higher overall because of higher production levels and a strong mix of sales in the fourth quarter, more high horsepower equipment sales. So overall, it should be a good solid quarter in the fourth quarter..

Thanks..

The next question is from Adam Elman with Cleveland Research. Please go ahead. .

Hey guys, good morning. I was wondering if we could chat about the GSI business a little bit more. Could you remind us what the sales outlook is for this year? I think you mentioned that customers are starting to get a little sticker shock and the bookings have slowed down.

Could you maybe just update us on what the second half looks like? And any thoughts on the next year? And then with steel prices up so much, can you remind us what the margin profile of that business is looking like now and here in the near – the medium term?.

Sure. The Grand protein business really had a weak year last year. Really, there was – protein sector was shut down, a lot of issues. And so we do see a nice recovery in revenue. Our year-to-date revenue is up, as we've already mentioned, a little about 20%, and we expect that for the full year.

And from a margin standpoint, we entered into the year expecting margin improvement. Now it looks like margins are going to be relatively flat and that's really driven by my previous comments about the material costs and our ability to keep up with pricing to offset that longer project-oriented type deals.

And that there's a longer lead time between when we get the order and finish the project. So, a little bit of a squeeze there, so that will give us some opportunity moving into 2022 in terms of grain and protein margins..

Okay. Got you. And then earlier in the call, Eric, I think you mentioned that there could be some more upside to revenues this year, if component availability would improve.

I guess, could you help us understand where we're standing today if supply availability was free? How much growth in the current footprint, we have without pretty significant CapEx?.

Yes. We – the capacity in our factories is not yet a problem. It's really all in the supply chain today. We're getting closer in a couple of factories. But fundamentally, the big picture is getting the components to flow into the factories.

And so, this year, for sure, we don't expect a running out of factory capacity unless you say you burned up enough production days because you had to shut down or lose a shift here or there. You run out of capacity that way. So it's really -- the story is about component flow.

And for the next couple of years, we don't see a major capacity capital requirement. We've been steadily feeding these factories with improvements in automation. That continues to work through the bottlenecks. We put in a new paint system and some automation in our Selati factory recently and some warehouse automation in several of our factories.

Those continue to work through piece by piece, the areas that are sticky. And so we're staying out ahead of it with our factories. Big issue is the supply chain..

Great. Thanks..

The next question is from Joel Tiss with BMO. Please go ahead..

Hey guys.

How are you doing?.

Hi, Joel..

Hi, Joel..

I wonder if we could zero in on the parts business for a minute. It sounds like it's doing really well. Some of it may be easy comps.

But is it coming from you capturing more of the installed base of equipment that's out there, or is it the deal is performing better, or just a little sense of what's underneath that success there?.

Well, I think we're making improvements on a few different fronts. Dealer absorption is up. That's the measure of how much of their overall overhead is offset by parts and service sales.

And so we want them to continue to move up towards 100% where they're covering their entire overhead with parts and service sales, and they're moving in that direction. So dealer performance has improved. Our parts fill rate has stayed very strong through the pandemic and is in market-leading conditions.

In many of our markets, we're the best in the industry. And so I think we continue to build confidence in the marketplace with our farmers, and to some extent, with our dealers. And so there's a bit of a shift there. But we still have a lot of untapped potential. We haven't leveraged our full potential from our connected machines.

Our connected machine fleet will be up. By the end of this year, we'll have four times more connected machines than we did just in 2019. And being able to use that to move more proactively into driving the service parts revenue is still an untapped potential.

So I think there's several areas, both at the customer level and at the dealer level, that are improving, but we still got a lot of runway in front of us..

And then as we go through all these kind of challenging times, are there other business units or pieces of businesses or product lines that seem like maybe they're a little more commoditized or it's harder to get the pricing through or whatever you're looking at that might not really be the best use of capital, or that's too small to worry about?.

We're pretty much across all of our businesses getting the price increases to stick right now. Granted, some of this inflation is very high, but we've been able to stay ahead of it with pricing. So we don't see any segments that are no-fly zones for being able to manage it the way Andy talked about..

Okay. Thank you..

Welcome..

The next question is from Chad Dillard with Bernstein. Please go ahead..

Hi, good morning guys..

Hey, good morning Chad..

Hi Chad..

So a question for you on your price realization guidance. You're guiding to 4.5% versus probably more like your baseline, which is around 2%. So 250 basis points delta. Can you just talk about how much of that comes from lower sales incentives versus mix versus core price increases? I'm just trying to understand just like how sustainable this is.

And then similar to some of the things you're seeing on the GSI side, how much further can you push before there's demand destruction?.

The pricing that we're getting comes from different sources. Some of it is the invoice price that we sell the equipment to the dealer, but it’s also adjustments to our discount program. So a lot of our -- most of our products have discounts that are after what the -- below the invoice price so we net – the net price is below the invoice price.

And we give discounts in terms of multi-unit programs, volume bonuses, there’s all sorts of different programs to incent dealers. And so we’ve been able to restrict or reduce those promotional programs during the year in order to get some more pricing in place. That's enabled us to get pricing without going and changing the list price on the unit.

Now when we get into later this year and we get into our -- we'll have model year repricing, we can reset a lot of those model prices and then kind of give ourselves room again in terms of our price levels. So, overall, I think we have different approaches and different levers to enact this price increase that we need.

So we still think we have the ability to price as needed. Obviously, I think the more issue is timing, because we have such a strong order board and with the material cost kind of coming in and a lag here, it's whether we get squeezed or have some kind of mismatch between the timing of new pricing and the timing of the cost coming in.

So far, as Greg pointed out and Eric pointed out, we're running ahead of schedule in terms of pricing versus cost, but we do see more of the cost increases coming in the second half of the year. And that's one of the things that we'll really be monitoring very closely..

Got it. That's helpful. And then just a second question. This deals with the price versus cost, so I guess the net price. When do you see that peaking? And I know it assume that -- and I guess assuming that commodity prices stay where they are today.

How far out before the worse is behind you? And then I think you mentioned on the inventory side, dealer inventory side that you may be exiting, I guess, flat versus 2020 levels.

And again, kind of assuming that supply chain challenges abate, would you want to add inventory to your channel right now?.

In terms of pricing, cost price, I think probably the biggest challenge will be the third quarter. I would expect to start to -- assuming we don't see another surge in commodity prices, it start to kind of get more balanced here in the fourth quarter. So that would be my expectation from that standpoint.

In terms of dealer inventory levels, our target was to really just maintain our dealer inventory levels. And as I pointed out already, there's probably a bigger risk that they come -- they stay down just because of how strong the retail demand is. We don't have any desire to increase our dealer inventory levels.

We want to keep them at the right level, which we had kind of said as where they were at the end of last year. But with the higher demand, certainly, our month supply of dealer inventories coming down, but the absolute amount, we're expecting to be fairly consistent year-over-year..

Great. Thank you..

The final question is from Steven Fisher with UBS. Please go ahead..

Great. Thanks. Good morning guys. I know you said you have some additional capacity. I guess I'm curious how you're thinking about the potential outcome of this growing season to meaningfully change the demand side.

Are you hearing things that kind of give you some sense of where that's leading, or are dealers or farmers telling you that if the drought isn't too bad, there will be some additional orders.

So, what are you hearing from the field there?.

Well, demand continues to come in strong in almost all of our segments. There's -- there are weather events. The Western half of the US and Canada is under severe drought and heat. That's a problem for those farmers. In South America, there's some severe droughts, and now they're getting freeze and snow where they almost never have gotten it before.

So, there's weather events happening there, but you don't want to talk about the weather all the time. So, -- but that's -- those are real impacts to the farmers. The safety issue is that in North America, many farmers buy crop insurance.

And so when there's weather events globally, that generally restricts the yield of grain produced and keeps inventories low. So, prices stay high.

And then those farmers that were impacted the most often -- at least in North America, not so much in South America and Europe, but in North America, the insurance keeps them -- at least their nose above water. So, overall, we see a pretty strong market staying into the next cropping cycle because of just the yield forecast coming out.

And that's why we have confidence that the demand is going to continue strong. We've got order bank strong now, but our order rate adding to that order bank continues to stay strong..

Got it. And then just a technology question. I'm curious which areas of technology you feel the most need or desire to kind of expand into beyond Precision Planting? As you mentioned earlier, it sounds like you're satisfied for now with the Raven status quo on spring.

Where else? And what other kinds of technologies do you feel motivated to expand?.

Yes, a couple of categories. One would be -- the first one is making what we call smart machines, automating the function on the machine such that it can adjust on-the-go for the operator. As an example, just to tell you what we mean by that, like our smart firmer sensor on the planter.

It senses soil conditions as you go and can allow then the planter to make real-time adjustments. It takes 2.3 million measurements per acre. And so it can make on-the-go adjustments, like 8,000 adjustments per acre. A farmer would never do that. They would never adjust that frequently.

So, that's the type of application we're looking for in planters, harvesting, whether it's hay or green and sprayers. Making the machine be able to sense its environment, make on-the-go real-time adjustments to optimize its performance. That's category number one. That's where the big focus that we have.

That's -- it stays right in our vision, is to really focus there. And then number two, there's a lot relative to sustainability, whether that's the alternative fuels of electrification or hydrogen or other things, but then also helping with farmers and soil carbon sequestration and capturing carbon out of the air into the soil.

We think that there's a lot of technology and just farming practice evolution. So, we've shifted our field trials to be that -- they all used to be Precision Ag in the past, now the Precision Ag plus sustainability. So, those would be the two broad categories that have several ingredients in each one of them..

That’s very helpful. Thanks so much..

You’re welcome..

And at this time, I would like to turn the conference back over to management for any closing comments..

Thank you. We appreciate everyone's participation this morning and your interest in AGCO and encourage you to follow up with us if you have additional questions. Thanks. And have a great day, everyone..

Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect..