AGCO delivered a resilient third quarter of 2025 in a downcycle, with net sales of $2.5 billion (down ~5% YoY but up ~6% excluding divested Grain & Protein) and adjusted operating margin expanding 200 bps to 7.5%. A 20% ex-currency surge in Europe/EAME (margins near 16%) offset a 32% decline and negative margins in North America, where the company cut production ~50% to destock dealer inventory from nine to eight months. Management refined full-year guidance to ~$9.8B in sales, ~$5.00 adjusted EPS, ~7.5% margin, and lower capex of ~$300M, while flagging a softer 0-1% pricing outlook amid competition in South America and Europe. Capital-return capacity expanded materially via the ~$230M after-tax TAFE exit funding a first-ever $1B buyback ($300M in Q4). AGCO believes the industry is at the trough, sees 2026 as roughly flat, and points to strategic shifts (PTx precision ag, Project Reimagine, FarmerCore) as drivers of structurally higher through-cycle margins.
Thanks, Gary, and good morning. Welcome to those of you joining us for AGCO's third quarter 2025 earnings call. We will refer to a slide presentation this morning that's posted on our website at www.agcocorp.com. The non-GAAP measures used in the slide presentation are reconciled to GAAP metrics in the appendix of the presentation. We will make forward-looking statements this morning, including statements about our strategic plans and initiatives, as well as our financial impacts, demand, product development, and capital expenditure plans, and timing of those plans, and our expectations concerning the costs and benefits of those plans and timing of those benefits. We'll also cover future revenue, crop production, farm income, production levels, price levels, margins, earnings, operating income, cash flow, engineering expense, tax rates, and other financial metrics.
All of these forward-looking statements are subject to risks that could cause actual results to differ materially from those suggested by the statements. These risks are further described in the safe harbor included on slide two in the accompanying presentation. Actual results could differ materially from those suggested in these statements. Further information concerning these and other risks is included in AGCO's filings with the SEC, including its Form 10-K for the year ended December 31st, 2024, and subsequent Form 10-Q filings. AGCO disclaims any obligation to update any forward-looking statements except as required by law. We'll make a replay of this call available on our corporate website later today. On the call with me this morning is Eric Hansotia, our Chairman, President, and Chief Executive Officer, and Damon Audia, our Senior Vice President and Chief Financial Officer. With that, Eric, please go ahead.
Thanks, Greg, and good morning to everyone joining the call today. We delivered a strong third-quarter performance, underscoring the effectiveness of our strategic execution and the resilience of our global team. While macro conditions continue to be volatile, we benefited from a more favorable regional mix and stayed laser-focused on what we can control. Our disciplined approach to production and cost management continues to position us well in this environment. Thank you to the entire AGCO team for their continued focus in these two areas. We remained agile in the face of a complex and evolving landscape, and our people have been instrumental in helping us navigate this uncertainty, maintaining our momentum, and continuing to put farmers first. Net sales were $2.5 billion, down approximately 5% year-over-year, or up nearly 6% when excluding divested Grain & Protein business last year.
Strong growth in EAME led the quarter, which continues to be our largest, most stable, and most profitable region. Near-record global crop production in 2025 is leading to elevated grain inventories and putting pressure on commodity prices. While farm income is being supported by increased government assistance in the U.S., crop margins are still tight, and farmers around the globe remain cautious on capital spend. During this industry downturn, we are staying focused on executing our strategy, supporting our dealers and customers, and investing in technologies that will drive long-term growth. We also continue to look for every opportunity to limit the impact of tariffs on our farmers. We are closely monitoring evolving tariff policies and government support programs around the world while continuing to engage with suppliers and adjust our supply chain. We continue to assess and implement price increases where appropriate and feasible.
For the quarter, consolidated operating margins were 6.1% on a reported basis and 7.5% on an adjusted basis. Our results reflect strong execution by our teams. We maintain solid margins through disciplined operational performance, a favorable regional mix, and continued progress on our restructuring initiatives. This consistency underscores the effectiveness of our strategy and our commitment to delivering long-term value. Notably, we achieved these margins despite another quarter of significant production cuts in North America as part of our ongoing efforts to destock the dealer channel. When comparing third quarter of 2025 to the same period last year, production was down nearly 50% in North America. Production levels are actually down nearly 70% from 2023. In addition to making further progress on reducing dealer inventories, we've also decreased company inventories.
This continued discipline is reflected in our working capital improvements and free cash flow generation during the nine months of the year, which was approximately $453 million up compared to the same period in 2024. Slide four provides an overview of industry unit retail sales by region for the first nine months of 2025. The global farm equipment market continues to face significant headwinds. Brazil remains slightly up compared to the third quarter of 2024, driven primarily by demand for smaller and mid-sized tractors coupled with favorable trade dynamics. Despite record soybean harvests and potential trade benefits, demand for larger equipment has yet to show meaningful improvement. High financing costs and political uncertainty are expected to continue, constraining demand in 2025, but the early signs of recovery point to a modest increase in 2026.
In North America, tractor sales declined 10% in the first nine months of 2025 compared to the same period in 2024, with the steepest drops occurring in the high-horsepower categories. Driving this behavior is the significantly lower grain export demand, global trade uncertainty, and continued high input costs. We expect these pressures to persist, particularly with the demand for larger equipment. Recent announcements of government support are expected to support net farm income, which may help unlock future equipment investments. There are also potential upsides if further progress can be made on top of the trade agreement that was announced earlier this week between the U.S. and China. For Western Europe, tractor sales were down 8% during the first nine months of 2025 compared to the same period one year ago. The industry experienced double-digit percentage decreases across most markets.
Demand and mix are expected to remain soft through the remainder of the year as lower income levels weigh on arable farmers and correspondingly large tractors. As AGCO's largest and most strategically important region, Europe continues to deliver stable demand that is less cyclical than other markets, with strong and consistent operating margins. Its performance provides valuable balance to our global portfolio, helping us to offset fluctuations in other markets, including those influenced by evolving U.S. trade dynamics. We remain confident in the region's ability to support our long-term growth, especially as precision ag grows there. Combine sales continue to decline across all three regions, with North America experiencing the largest year-over-year drop at 29%. Amid industry-wide pressures, AGCO is performing more resiliently than in previous downturns and remains well-positioned for the long-term growth.
Looking ahead to 2026, current commodity prices and fundamental uncertainties continue to impact the global ag industry outlook. Positive market factors, including livestock and dairy prices, the replacement cycle, and government payments, are being offset by geopolitical tension, tariff impacts, and difficult farm economics, which include elevated borrowing costs and rising input costs. Given the combination of all of these factors, there is increasing likelihood of markets being relatively flat in 2026, with North America and large ag down and Europe and South America modestly up. This view confirms our assessment that the global industry is at the trough. Slide five outlines AGCO's factory production hours. To ensure year-over-year comparability, we've excluded Grain & Protein production hours from the 2024 baseline.
Third-quarter production hours were up approximately 6% year-over-year, driven by a favorable comparison in Europe, where quarter three 2024 was impacted by the prolonged factory shutdowns as well as increased output in South America. In contrast, North America production was down over 50% again this quarter, reflecting our continued focus on reducing dealer inventories in response to soft market demand. Production levels are actually down nearly 70% from 2023. Looking ahead, we now expect full year 2025 production to be down approximately 15% versus 2024, a slight revision from our prior estimate of down 15%-20%, primarily due to stronger quarter three output in EAME. Right-sizing inventory in North America remains a top priority, while Europe and South America will continue to see production effectively aligned with retail demand. Looking at regional inventory breakdown, in Europe, dealer inventory is now just over three months, slightly below our target.
Fendt is below this average, while Massey Ferguson and Valtra are just above. Europe's near-target inventory levels are encouraging, particularly given our strong exposure to the region. In South America, dealer inventory ticked up to around four months, slightly above our three-month target and quarter two levels, given the decline in demand for low and medium-horsepower tractors. The increase in inventory reflects mainly a more cautious industry outlook, given the demand changes in quarter three, which led us to adjust our forward sales expectations. In North America, we continue to make meaningful progress, reducing dealer inventory from nine to eight months. While still above our target, the reduction reflects the success of our disciplined production cuts, with units being reduced almost 13% in the quarter. Our three high-margin growth drivers, globalizing and expanding our Fendt product line, growing precision ag, and increasing our parts business, remain central to our strategy.
To unlock the full potential of these growth levers and transform AGCO into a higher-performing company throughout the cycles, there are five major strategic shifts we've just made in the past two years that position us for significant earnings growth. Let's start with a significant update regarding our resolution with TAFE. We recently announced the sale of our ownership interest in TAFE, generating approximately $230 million in after-tax proceeds. For the first time under my leadership, we now plan to move forward with a $1 billion share repurchase program, reflecting our confidence in the business and our commitment to shareholder returns. We plan to begin purchasing $300 million of shares in the fourth quarter.
Turning to other key elements that are meaningfully reshaping our company, the creation of our PTx business is the most critical to helping us achieve our vision to be the trusted partner for industry-leading smart farming solutions. By combining Precision Planting, the ag assets of Trimble, and six additional tech acquisitions over the last five years, plus doubling our engineering budget, we've built a $900 million platform with a path to $2 billion in precision ag revenues as synergies and scale take hold. As we strengthened our high-margin, high-growth portfolio, we exited the lower-growth, lower-margin business of Grain & Protein, which lacked alignment with our core machine and technology products, as well as our distribution strategy. Project Reimagine is a company-wide restructuring effort focused on automating, standardizing, simplifying, centralizing, and in some cases, outsourcing work.
With over 700 active projects, we are driving efficiency, lower costs, and most importantly, improving the outcomes for our dealers, farmers, and employees enabled by AI. This initiative is expected to reduce our cost base by $175 million-$200 million. Finally, FarmerCore is unique in our industry and is transforming our go-to-market strategy. We're taking service and support right to the farmers, online and on the farm, by investing in digital tools and enabling dealers to shift from brick-and-mortar to mobile service models. This is about servicing the farmer, not just the product. We're making meaningful progress in North and South America with expansion to other markets planned in the future. Together, these five strategic shifts are shaping the AGCO [we've envisioned]: more focused, more agile, and better positioned to deliver sustainable high-margin growth.
Thank you, Eric. And good morning. Slide eight summarizes our regional net sales performance for the third quarter and year to date. Net sales for the quarter increased approximately 1% year-over-year, excluding the positive impact of currency translation. For comparability, we've also excluded the $251 million of sales associated with the divested Grain & Protein business in Q3 of 2024. Breaking net sales down by region, Europe, Middle East posted a 20% increase compared to the same period in 2024, excluding the impact of favorable currency effects. This reflects a recovery in the production levels and corresponding sales following extended plant downtime last year. Growth was strongest in the high-horsepower and mid-range tractors. South America declined close to 10%, excluding favorable currency impact.
Weaker industry demand drove most of the decrease, with lower sales across most product categories. North America was down 32%, excluding unfavorable currency effects. The decline was driven by continued market softness and our focused underproduction to reduce dealer inventories. The largest decreases occurred in high-horsepower tractors, sprayers, and combine. Asia-Pacific Africa declined 5%, excluding unfavorable currency translation impacts. Lower demand across the Asian markets was partially offset by stronger performance in Australia and Africa. Finally, consolidated replacement parts were $498 million in the third quarter, up 2% year-over-year on a reported basis and down approximately 2% when excluding the favorable currency translation. Turning to slide nine. Third-quarter adjusted operating margin was 7.5%, 200 basis points higher than the prior year. The industry backdrop remains challenging, with continued pressure from factory underabsorption and elevated discounting.
The margin improvement was primarily driven by strong performance in our Europe, Middle East segment, where higher sales and production volume supported improved operating leverage. By region, Europe, Middle East income from operations increased around $163 million, with operating margins approaching 16%. The improvement reflects the significantly higher volumes and sales compared to Q3 of 2024, which was impacted by the extended plant shutdowns. North American operating income declined approximately $56 million year-over-year, with margins remaining negative again this quarter. Lower sales and significantly reduced production hours were the key drivers, coupled with the significantly weaker industry. South America operating income declined $23 million, with margins down to around 6%, primarily due to lower volumes. Asia-Pacific Africa posted a slight increase in operating income of $1 million, driven by lower manufacturing costs, partially offset by lower sales volume. Slide 10 shows our year-to-date free cash flow performance.
As a reminder, free cash flow is defined as cash provided by or used in operating activities less capital expenditures. Free cash flow conversion is calculated as free cash flow divided by adjusted net income. Through September, we generated $65 million of free cash flow, an improvement of around $450 million versus last year's net outflow of $387 million for the same period. This was driven by stronger working capital performance and roughly $120 million in lower capital expenditures year-over-year. We continue to expect full-year free cash flow to be within our targeted range of 75%-100% of adjusted net income. Our capital allocation priorities remain unchanged: reinvest in the business, potential bolt-on acquisitions, maintain investment-grade credit ratings, and return capital to shareholders.
As Eric mentioned, following the TAFE resolution and the board approval of our new $1 billion share repurchase program, we expect to begin repurchasing $300 million of shares in the fourth quarter. We also recently declared our regular quarterly dividend of $0.29 per share. We remain focused on deploying capital effectively to drive long-term shareholder value, and we're encouraged by the increased flexibility to return capital through the preferred investor method of share repurchases. Slide 11 highlights our current 2025 market outlook across our three major regions. Our outlooks remain relatively unchanged since the second quarter call, other than a modest adjustment to our North American large ag forecast. In North America, we continue to expect significantly lower industry demand in 2025. While net farm income has improved, supported by government programs and record-high cattle prices, sentiment remains challenged by wheat, corn, and soybean prices.
Investment confidence is declining, and interest rate cuts haven't yet provided meaningful relief. We're maintaining our outlook for the small tractor segment to be down approximately 5%, and now expect large ag to be down around 30% versus our prior range of down 25%-30%. In Western Europe, we continue to expect the industry demand to decline 5%-10%. The market remains soft but relatively stable. Wheat prices are below historical averages, and geopolitical uncertainty continues to weigh on sentiment. In South America, record soybean exports, partly driven by U.S. tariff barriers, have supported trade flows. However, margins are under pressure from higher input costs and elevated interest rates in Brazil are dampening demand, especially for large ag. Under these conditions, we still expect Brazil to be flat to up 5% for the year. Slide 12 outlines the key assumptions supporting our full-year 2025 outlook.
We continue to expect global industry demand to be around 85% of mid-cycle levels. Our sales outlook remains unchanged despite a slightly softer pricing outlook now in the 0%-1% range, which is down from approximately 1% in Q2, given the increase in competitive pricing in certain regions. We continue to anticipate a favorable currency impact of roughly 2%. Our guidance reflects current tariffs across our global footprint, along with mitigation efforts through cost actions and pricing. That said, the potential for additional U.S. tariffs or retaliatory measures fosters continued uncertainty. We're monitoring developments closely and will adjust our outlook if needed. Engineering expense is expected to remain effectively flat year-over-year. We still expect our adjusted operating margin to be approximately 7.5%, reflecting structural improvements in cost initiatives, positioning us roughly 350 basis points above our last trough in 2016.
Lastly, we revised our effective tax rate to 33%-35%, modestly better than our prior estimate of approximately 35%. Turning to slide 13 for our current 2025 outlook. We continue to expect full-year net sales of approximately $9.8 billion, consistent with our prior outlook. This reflects the modest changes in demand trends across key markets. We've refined our earnings per share forecast to approximately $5. Reflecting strong execution across our global operations, this assumes no material changes to existing trade measures. Capital expenditures are now expected to be around $300 million. While this represents a decrease from the prior estimate of $350 million, we remain focused on supporting strategic initiatives and maintaining flexibility in response to shifting demand trends. We continue to target free cash flow conversion of 75%-100% of adjusted net income, supported by disciplined working capital management and improved inventory efficiency.
As Eric noted, we're pleased with our performance for the third quarter in what remains a challenging and evolving year. Our teams have executed well, grown share, and continued to reduce dealer inventories while supporting farmers' needs. With this updated outlook, we believe our results further demonstrate the structural improvements in AGCO's profitability. Even in a down cycle, we're delivering stronger margins and more consistent earnings, a reflection of our transformed business model. With that, I'll turn the call over to the operator to begin the Q&A.