AGCO CORP /DE Q1 2026 earnings call

Thanks, good morning. Welcome to those of you joining us for AGCO's first quarter 2026 earnings call. We will refer to a slide presentation this morning that's posted on our website at www.agcocorp.com. The non-GAAP measures used in the slide presentation are reconciled to GAAP measures in the appendix of the presentation. We'll make forward-looking statements this morning, including statements about our strategic plans and initiatives as well as their financial impacts. We'll address 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 and 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 2 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, 2025, and subsequent Form 10-Q filings. AGCO disclaims any obligation to update any forward-looking statements except as required by law. We will make a replay of this call available on our corporate website later today. On the call with me this morning is Eric Hansotia, our Chairman, President, and Chief Executive Officer, as well as Damon Audia, Senior Vice President and Chief Financial Officer. With that, Eric, please go ahead.

Thank you, Greg. Good morning, everyone. AGCO delivered very solid results in the first quarter, reflecting effective execution against our strategy and the growing impact of the actions we've taken over the recent years to streamline our cost structure. Net sales are approximately $2.3 billion, up 14% year-over-year, driven primarily by stronger performance in EME compared to the challenging prior year period. With differing industry conditions across regions, the year-over-year improvement highlights our ability to perform consistently and deliver solid results across varied demand environments. Operating income increased more than 60% year-over-year to $80.7 million, with reported operating margin expanding 100 basis points to 3.4%.

On an adjusted basis, operating margin improved 50 basis points to 4.6%, driven by better volume leverage and ongoing benefits from business optimization initiatives, partially offset by higher cost inputs, including tariffs. These results underscore the pragmatic, focused manner in which we are operating the business. Over the past 2 years, we have taken deliberate actions to simplify and focus our operations and sharpen execution, including a leaner cost structure, more disciplined production planning, and improved channel alignment. The performance delivered this quarter supports the increased durability and resilience of our earnings model. While near-term demand remains uneven across regions, we continue to believe the business is operating around the trough of the cycle, with inventories normalizing and underlying conditions beginning to set the stage for the next phase of recovery.

Adjusted operating income increased nearly 30%, adjusted EPS more than doubled year-over-year to $0.94, highlighting the operating leverage inherent in the business from lower cycle levels as well as a lower adjusted tax rate in the quarter. We also continue to emphasize structured working capital management and inventory alignment. Dealer inventories improved in the first quarter, positioning us in a more balanced position to support customers while maintaining better operational stability through the remainder of the year. We are encouraged by the progress delivered this quarter and remain fully focused on executing our plans to drive sustainable margin enhancement, cash generation, and long-term value creation. Slide 4 details industry unit retail sales by region for the first quarter. While fleet ages continue to increase, farmer purchasing activity reflects a measured and thoughtful approach shaped by the current macro environment.

Trade policy dynamics, higher interest rates and input costs, tighter credit conditions, and currency volatility are influencing buying decisions globally, particularly for larger equipment. In North America, overall industry tractor volumes trended lower relative to the prior year, with the most pronounced weakness in higher horsepower tractors. Farmers continue to defend more capital-intensive purchases amid current farmer economics, evolving grain export demand, and elevated input costs. In Western Europe, industry tractor sales increased compared to softer prior year period, with growth across most of Western European markets. Combine demand, however, remained cautious as farmers weigh financing conditions and capital allocation decisions. In Brazil, industry retail demand moderated across both tractors and combines with larger equipment most affected by higher interest rates, credit availability, and currency effects. Demand for smaller and mid-size equipment remained relatively more resilient.

Against the evolving macro backdrop, farmer purchasing decisions remain deliberate, with customers balancing operational requirements alongside financing costs and broader economic conditions. Investment activity continues to prioritize solutions that deliver clear productivity gains and cost benefits, including precision agriculture and technology upgrades, while larger equipment replacement decisions are sequenced thoughtfully. This environment continues to support disciplined production planning and inventory alignment across the industry. AGCO's factory production hours are shown on slide 5. First quarter production hours increased 15% year-over-year, reflecting a low level of production in the first quarter of 2025. The year-over-year increase was driven primarily by Europe, where production levels rebounded from a particularly reduced first-quarter 2025 base.

Importantly, 1st quarter 2026 production was aligned with our operating plan and reflected intentional timing and product mix rather than a change in underlying demand trends. Full year 2026 production hours are still planned to be broadly flat to modestly lower than 2025. We are executing a deliberate and measured step-down in production as the year progresses. This approach reflects our continued focus on inventory optimization in North America and Latin America, active support of dealer destocking, and close alignment of output with end market demand. Turning to regional inventories. In Europe, dealer inventory months of supply improved modestly to just under 4 months, aligned with our target. This reflects effective execution across the channel, with Fendt operating below the regional average and Massey Ferguson, Valtra modestly above.

This well-balanced position provides operational flexibility across product categories and supports continued focus on margin quality and mix optimization in our largest and most profitable region. In Latin America, dealer inventories moved to 4 months of supply from 5 months at year-end, continuing progress toward our 3-month target. Dealer inventory units declined approximately 10% during the quarter, reflecting disciplined coordination of shipments and production with a slightly softer industry outlook. In North America, dealer inventories closed the quarter at approximately 7 months of supply, consistent with our year-end levels and slightly above our 6-month target. Large ag units decreased sequentially, but were offset by the normal increase in the low horsepower segment this quarter in anticipation of the spring retail selling season. Production continues to be managed intentionally with a clear priority on channel health and long-term stability.

Slide 6 highlights our strategy to outpace the market and drive margin improvement to our adjusted operating margin target of 14%-15% at mid-cycle over time. What is increasingly evident is that AGCO is delivering stronger and more resilient financial outcomes across a range of demand conditions compared to prior cycles. The structural actions implemented over recent years are translating into more durable margins, improved earning stability, and higher quality cash generation, demonstrating the effectiveness of our evolved operating model. Our three growth levers, high-margin products, technology-driven differentiation, and a growing higher-value aftermarket business, continue to provide meaningful support in the current environment. Each lever contributes distinct value, and together they reinforce a business model that is less reliant on unit volumes and more centered on value creation.

This foundation underpins our ability to consistently deliver mid-cycle adjusted operating margins in the 14%-15% range over time. It reflects a structurally improved AGCO, more focused on higher value revenue streams, more disciplined on costs and investment, and increasingly driven by technology solutions and services. Importantly, this operating model also supports strong cash generation with free cash flow conversions of approximately 75%-100% through the cycle. That financial flexibility enables continued investment in innovation and business advancement while supporting capital returns to shareholders, as evidenced by our recent increased dividend and share repurchase announcements. Taken together, these elements highlight why AGCO is operating today from a more favorable and resilient position, and why our business is well-positioned to deliver consistent performance across future market cycles.

Turning to slide 7, we are seeing a series of tangible strategy wins as we execute against our farmers' first priorities. These actions demonstrate how we are building a durable competitive advantage by combining engineering leadership with increasingly advanced digital and AI-enabled capabilities. Our approach reflects a focus on prioritizing growth while also delivering efficiency as we apply AI where it delivers measurable value for farmers and strengthens business performance through better decisions and execution. AI is increasingly becoming a significant enabler in that roadmap and across the organization to support long-term value creation and differentiation. AI solutions on the farm and in our products are designed to help farmers to achieve more with fewer inputs such as land, labor, fuel, and chemicals. Solutions including SymphonyVision use intelligent cameras intended to optimize precision application in real time, improving effectiveness and helping to reduce waste.

At our PTx Winter Conference, we introduced AI-enabled innovations, including SymphonyVision | Duo and ArrowTube to advance real-time precision application and automated seed placement. These innovations reinforce our position in high-value technology-enabled solutions. We use AI in customer support and service to connect machine data, customer needs, and AGCO expertise to reduce downtime and strengthen long-term customer relationships. It is transforming how we work with thousands of parts leads generated for dealers and tools like AGCO Sales Assistant to more closely connect dealers and farmers. Third, AI inside AGCO is improving efficiency, quality, cost, and speed. Use cases range from AI-powered financial forecasting to AI-driven market analytics that automate used equipment price analysis and free up experts to focus on more value-driven actions. These capabilities are being deployed in a structured and purposeful manner to support margin expansion and growth.

We are seeing strong and growing demand from our employees to leverage and deploy innovative AI solutions to better support our dealers and farmers. We view this momentum, along with our Project Reimagine run rate cost savings as a clear opportunity to drive measurable efficiency gains and productivity improvements across the organization over time. In short, we are taking an enterprise view with AI using human-in-the-loop oversight and aligning with evolving regulatory frameworks to support trusted, responsible, and scalable usage. On slide 8, we also continue to see strong external validation of our innovation and technology leadership. Our Outrun mixed fleet retrofit technology earned the prestigious Davidson Prize for the second consecutive year, this time for autonomous tillage, reflecting our step-by-step progress toward our ambition for full farm autonomy by 2030.

Thank you, Eric. Good morning, everyone. Slide 9 provides an overview of regional net sales performance for the first quarter. Net sales increased approximately 5% in the first quarter compared to the prior year period, excluding the favorable impact of currency translation. By region, the Europe Middle East segment delivered a 9% increase in net sales on a constant currency basis. Higher sales resulted from increased unit volumes compared to the first quarter of 2025, which included dealer inventory destocking. Sales growth in Germany and the U.K. was partially offset by lower activity in Turkey and France. The increase was driven by strong growth in high horsepower tractor sales. North American net sales also increased 9% excluding currency impacts. Higher unit sales compared to the prior year, together with positive share growth, supported the increase.

The most significant gains were in high horsepower tractors, hay equipment, and sprayers, highlighting continued customer investment in productivity-enhancing solutions. Net sales in Latin America were 30% lower on a constant currency basis, reflecting very measured purchasing activity across virtually all product categories as the environment in Brazil and Argentina remained challenging in the quarter. Asia Pacific Africa net sales increased more than 20% excluding currency impacts, driven by higher sales in Australia and South Africa, partially offset by lower sales across most Asian markets. Consolidated replacement part sales were approximately $447 million in the first quarter, increasing 3% year-over-year on a reported basis and down nearly 6% excluding favorable currency translation.

Results reflected wet weather in Europe early in the quarter that limited parts consumption, and in North America, where dealers remained focused on inventory optimization amid continued cautious farmer sentiment. Turning to slide 10. Adjusted operating margin was 4.6% in the first quarter, an improvement of 50 basis points year-over-year. This reflects strong execution in the Europe, Middle East region once again, combined with continued operational and cost discipline across the broader organization. By region, Europe Middle East income from operations increased by over $104 million compared to the first quarter of 2025, with operating margins exceeding 16%. These strong results were driven by sales growth, a richer mix, and increased production compared to the prior period. North America income from operations reflected an approximately $27 million year-over-year reduction, with operating margins remaining below breakeven.

Results heavily reflect the year-over-year impact of tariff-related costs along with factory under-absorption associated with our disciplined approach to reduced production levels. Latin America operating income decreased roughly $47 million year-over-year, with results below breakeven, driven by several factors, including significantly lower sales volume and negative pricing. Asia-Pacific Africa operating income increased about $7 million in the first quarter, supported by higher sales and increased production during the quarter. Slide 11 outlines our first quarter cash performance and full-year estimated free cash flow. Free cash flow represents cash used in or provided by operating activities, less purchases of property, plant, and equipment. Free cash flow conversion is defined as free cash flow divided by adjusted net income. We used $455 million of cash in the first quarter of 2026, reflecting the normal seasonal inventory build consistent with our operating cadence.

The prior year quarter reflected unusually low production levels, mainly in Europe, that limited inventory investment and reduced cash usage. Our 2026 production schedule reflects a return to our typical seasonal patterns, resulting in higher inventory investment and cash usage early in the year. This profile is fully aligned with our plan and remains consistent with achieving free cash flow in the targeted range of 75%-100% of adjusted net income for the full year. Our approach to capital allocation remains disciplined and consistent, prioritizing reinvestment in the business, maintaining an investment-grade balance sheet, pursuing targeted acquisitions that accelerate technology adoption, and returning capital to shareholders. This framework continues to guide both our decision-making and the sequencing of capital deployment.

As part of this approach, today, we announced that we are evolving our long-standing AGCO Finance U.S. and Canadian joint ventures to better align with increasing regulatory and compliance requirements while enhancing capital efficiency. On April thirtieth, the company executed various agreements with wholly owned subsidiaries of Rabobank to sell AGCO's 49% equity interest in its U.S. and Canadian joint ventures for approximately $190 million while establishing new financing framework agreements that are intended to strengthen the strategic and commercial benefits of these partnerships. AGCO Finance remains the predominant financing partner for AGCO and our customers. This structural evolution strengthens AGCO's farmer-first strategy by ensuring continued access to competitive finance offerings. These actions optimize regulatory capital deployment, strengthen our commitment to providing competitive financing solutions to our farmers and dealers, and bolster our financial flexibility.

The proceeds from these transactions are incremental to free cash flow and are being used to support capital returns to shareholders. Building on both our record free cash flow generation in 2025 and these proceeds, AGCO has increased our capacity to return capital to shareholders. We continue to execute share repurchases under our $1 billion authorization. Following the initial $300 million announcement in October last year, we are initiating an additional $350 million in repurchases during the second quarter of 2026. In addition, the board of directors also approved an increase in our regular quarterly dividend to $0.30 per share, up from $0.29. At this rate, annualized dividends would total $1.20 per common share. Collectively, these actions demonstrate a continued focus on disciplined capital deployment, balancing enhancing near-term shareholder returns with long-term financial flexibility.

Turning to slide 12, which summarizes our 2026 market outlook across our three major regions. Global agricultural markets entered 2026 reflecting conservative purchasing behavior shaped by high borrowing costs, extended margin compression, and evolving policy and trade dynamics. Recently, geopolitical developments have contributed to higher fertilizer and fuel costs, reinforcing cautious behaviors across the industry. Current conditions point to a gradual and uneven recovery rather than a near-term rebound. We are maintaining our forecast for North America and Western Europe and adjusting our Latin American forecast from flat to down modestly in 2026. In North America, farm income dynamics and increased input costs continue to shape demand, particularly for large equipment. Dealer activity continues to focus on managing used inventories and limiting new commitments, which is weighing on large tractors and combine purchases.

Higher fertilizer and diesel costs tied to recent geopolitical developments have added to grower caution heading into the planting season, further limiting discretionary capital spending. Smaller equipment continues to demonstrate relatively stable demand compared to large ag, supported by livestock and hay-related demand. While performance has improved year-over-year, early year activity has been more modest than anticipated amid recent macro events, reinforcing our views that upside remains limited for the remainder of the year. Overall, we expect the North American large ag equipment market to be down around 15% below 2025 levels, with the small ag segment modestly higher. In Western Europe, near-term demand has demonstrated select areas of strength. At the same time, confidence remains fragile. Farmer profitability challenges, increased input costs, evolving regulatory uncertainty and prudent capital spending behavior continue to weigh on sentiment.

Recent geopolitical developments, including the development in the Middle East, have added to this environment, particularly around energy costs, despite near-term demand strengths. Subsidy frameworks and relatively favorable interest rate dynamics continue to provide a stabilizing foundation for the region. Taken together, we still expect Western Europe to be up modestly in 2026. In Brazil and broader Latin American region, interest rates and tighter credit conditions continue to influence purchasing patterns, particularly for large machinery. Increasing input costs and financing dynamics are guiding investment decisions, contributing to equipment demand variability. Brazilian retail tractor volumes in 2026 are now projected modestly below 2025 levels, but with long-term fundamentals remaining relatively constructive. Overall, the agricultural equipment cycle in 2026 reflects discipline, selective purchasing and delayed replacement activity.

As financing conditions normalize, input cost pressures moderate and grain prices improve, the aging fleet and structural foundation supporting recovery remain in place, with regional timing varying by market and segment. Slide 13 highlights the key elements underlying our full year 2026 outlook. Global industry demand in 2026 is now positioned in line with prior year levels, operating at approximately 86% of mid-cycle demand, consistent with the stabilization phase of the cycle. Our sales plan reflects continued market share gains, pricing in the range of 2%-3% and roughly a 3% foreign currency benefit. While pricing helps moderate the impact of material inflation and tariff-related costs, the incremental increases in these pressures from events in the first quarter will now more than offset pricing actions, resulting in margin dilution and lower profitability in 2026.

Inventory management remains a priority in 2026, particularly in North America and Latin America, supporting our ongoing dealer inventory alignment and a balanced demand-driven go-to-market approach. Our outlook reflects the current tariff environment and our established mitigation actions, including cost initiatives and pricing. Since the fourth quarter earnings call, the tariff environment has evolved with the Supreme Court ruling related to IEEPA tariffs, as well as new guidance on the calculation methodology related to Section 232 tariffs. We now expect tariff costs of approximately $135 million in 2026, which is around $90 million increase from 2025 and $25 million higher than our previous estimate. These estimates could change as things evolve during the year. Our adjusted operating margin and earnings per share outlook do not assume any refunds related to the IEEPA tariff.