AGCO CORP /DE Q2 2026 earnings call

Thanks. Good morning. Welcome to those of you joining us for AGCO's second 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 that 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 also discuss demand, product development, and capital expenditure plans, and timing of those plans, and our expectations concerning the costs and benefits of those plans and timing of those benefits. We'll also cover future revenue, crop production, farm income, production levels, price levels, margins, earnings, operating income, cash flow, engineering expense, tax rates, and other financial metrics.

All of these 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, 2025, and subsequent Form 10-Q filings. AGCO disclaims any obligations 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, and Damon Audia, Senior Vice President and Chief Financial Officer. With that, Eric, please go ahead.

Thank you, Greg. Good morning, everyone. Thank you for joining us. AGCO's second quarter results reflect our continued focus on delivering products and technologies that make farmers more productive and profitable while driving efficiencies across our business, and also improve AGCO's profitability through the cycle. While sales in Europe and Latin America progressed below our expectations and farmers were increasingly cautious amid current market dynamics, we acted decisively to align production with retail demand, manage dealer inventory, and maintain strong discipline on operating expenses and working capital. Net sales for the quarter were approximately $2.6 billion, 1% lower year-over-year. Our teams executed well and maintained consistent performance throughout the quarter, gaining market share in key regions. This is reflected in our adjusted earnings per share of $1.43, an increase of $0.08 over the prior year.

Operating income was $140.7 million for the quarter, a decrease of 14% year-over-year, with reported operating margins decreasing by 80 basis points to 5.4%. On an adjusted basis, operating margin decreased 170 basis points to 6.6%, driven primarily by lower sales and production volumes and higher input costs, including tariffs. Those were partially offset by solid pricing, the benefit of certain IEEPA tariff refunds recognized during the period, and ongoing benefits from our business optimization initiatives. Our results demonstrate the resilience of our operating model in a dynamic environment as we managed moderating demand, higher input costs, and regional variability while continuing to deliver consistent results and maintain a strong financial position. Conditions in the broader industry remain complex. Weather continues to play a significant role as elevated temperatures and drought conditions persist across parts of Europe, along with ongoing weather variability in North and South America.

These factors are influencing crop development, yield expectations, and ultimately farmers' decision-making. At the same time, financing costs remain elevated and trade policy developments are adding another layer of complexity. While commodity prices have improved recently, farmers around the world have a heightened focus on maximizing net farm income. This environment is increasing demand for solutions that help manage costs, improve efficiency, and protect yields. That focus aligns well with AGCO's portfolio, particularly our precision agricultural solutions, which help farmers boost productivity and often deliver payback in one to two years for our retrofit customers. In this environment, our priorities are clear: to stay centered on being the most farmer-focused company in the industry, delivering high-quality innovations to solve farmers' toughest problems. Also, to maintain discipline across the business to preserve operational flexibility and adjust production and cost levers as conditions evolve.

Over the past several quarters, we have taken meaningful steps to simplify operations, improve efficiency, and strengthen execution. Those actions are helping us manage through the current environment and sustain a solid level of performance, even as volumes fluctuate at the trough of the cycle. We're also continuing to invest in areas that matter most to our customers, particularly smart farming and digital solutions that help improve productivity and reduce input costs, that I'll talk more about in a moment. Slide four provides an overview of industry unit retail sales by region on a year-to-date basis through June. Across many markets, demand remained measured, reflecting affordability considerations, elevated input costs, and a focus on near-term revenue returns. Farmers have experienced double-digit increases on inputs like fuel and fertilizer prices.

These elevated input costs continue to pressure farmer economics and are contributing to a cautious approach toward fertilizer and equipment purchasing decisions. It is unlikely that farmers will see meaningful relief on these input costs in the near term, which will likely result in many farmers staying conservative on their spending and applying less fertilizer, and that increases my optimism for 2027. In North America, industry demand remains soft year-over-year, with continued weakness in higher horsepower equipment as farmers defer larger capital purchases. We're also seeing softer demand in lower horsepower segments, reflecting rural lifestyle customers focused on affordability in the current environment. In Western Europe, industry conditions were mixed as input costs, demand, and capital allocation considerations influenced equipment purchases. Tractor demand showed relative stability year-to-date compared to prior year levels, but weakened during the second quarter.

Combine demand remained more cautious as farmers consider financing conditions and capital allocation priorities. In Brazil, industry demand remained under pressure. Higher production costs and interest rates, tighter credit availability, and currency dynamics continue to impact demand with the greatest effect seen in larger equipment categories. Demand for smaller and mid-range equipment has been more resilient compared to larger equipment categories. Across all regions, we continue to see farmers taking a disciplined and selective approach to equipment investment, prioritizing solutions that deliver clear productivity and efficiency benefits. This environment reinforces the importance of aligning production with retail demand and maintaining flexibility in how we operate the business. While we face several near-term challenges, a number of factors could create a more supportive backdrop for commodity prices and farm economics over time.

Elevated input costs, reduced fertilizer application, and drought conditions in parts of the world are pressuring crop production, this is before the potential effects of the Super El Niño. At the same time, there continue to be increased discussions on accelerating demand drivers such as expanded ethanol with year-round E15 in the U.S. and renewable diesel and sustainable aviation fuel usage in the U.S., Brazil, and Europe. All of these could support demand for key crops. Combined with aging equipment fleets and the ongoing need for productivity gains, these dynamics reinforce our confidence in the fundamentals of agriculture. As the geopolitical environment stabilizes and input costs eventually moderate, we would expect farm economics to improve, and farmers will be better positioned to invest in fleet replacement and productivity-enhancing technologies. AGCO's factory production hours are shown on slide five.

On a year-to-date basis through June, production hours were up approximately 6% compared to the prior year, reflecting a significant increase in the first quarter off a low production base in early 2025, effectively in Europe. In the second quarter, production hours were slightly lower year-over-year as we deliberately moderated output to align with our operating plan and current retail demand. Full-year 2026 production hours are now expected to be slightly lower versus 2025. As the year has progressed, we have taken a more measured approach to production, including modest reductions in the second half to better align output with the end market demand, particularly in Latin America and Western Europe. This reflects our continued focus on matching production to demand and maintaining disciplined cost control in our cost structure. Turning to regional inventories.

Dealer inventory management remained a positive contributor to execution during the quarter as we saw lower dealer inventory levels in all three major regions. In Europe, dealer inventory months of supply were around three and a half months compared to just under four months in the first quarter, remaining well aligned with our four-month target range. Inventory levels across our brands continue to reflect disciplined channel management and healthy market positioning, providing flexibility to support customer demand while maintaining a focus on margin quality and mix optimization in our largest and most profitable region. In Latin America, dealer inventories moved to approximately three and a half months of supply, down from four months at the end of the first quarter. Units were down approximately 5% as dealers continued to work through aged inventory, especially non-tractor products.

The reduction reflects continued progress toward our three month target level despite our current industry outlook in the region. In North America, dealer inventories improved modestly to just below seven months of supply, moving closer to our six month target. Units were down around 7% in the quarter as we continue to rightsize dealer inventory levels. Reductions were led by the large agriculture segment, reflecting continued execution of our production and shipment plans designed to support channel health and align field inventories with retail demand. Overall, we are pleased with the progress we are making with our dealers around the world, which increases our confidence of producing in line with retail demand next year. Slide six reinforces how we're executing against our strategy to drive higher quality growth and expand margins over time toward our 14%-15% mid-cycle target. That strategy has not changed with fluctuating market conditions.

It continues to guide where we invest, how we innovate, and how we create value for farmers and shareholders through the cycle. In the current environment, what is most important is how our three high-margin growth levers are performing. High-margin products continue to support mix. Our technology portfolio is driving differentiated values for customers, and our aftermarket business is providing a more stable and recurring revenue stream. Together, these three levers are helping to offset softer industry demand and reinforcing a business model that is less dependent on volume and more anchored in value and customer outcomes. You can see this playing out in our performance, where disciplined execution and a more balanced revenue mix are supporting margins and cash generation relative to the last cycle, despite a more tempered demand backdrop.

This gives us confidence that structural improvements that we've made position us well to navigate the cycle while continuing to invest in the business and deliver consistent long-term returns. Turning to slide seven. Beyond the quarter's financial results, we continue to convert our Farmer-First strategy into tangible wins, from premium brand experiences to precision ag expansion and scaling AI. In our machinery brands, Fendt continued its strong momentum. The Fendt 800 series, equipped with an AGCO Power CORE75, set an absolute new record in its class for fuel efficiency in the independent DLG PowerMix efficiency test. With rising operating costs, especially diesel fuel, every liter of fuel saved counts, and Fendt continues to set the bar high across the industry on fuel efficiency. We also celebrated the 50,000th Fendt 900 Vario, a flagship high-horsepower tractor that matters not only in Europe but across the world.

Thank you, Eric, and good morning, everyone. Slide eight provides an overview of regional net sales performance in the second quarter and first half of 2026. On a constant currency basis, the second quarter net sales were 4% lower year-over-year. For the first six months of the year, net sales increased approximately 6% on a reported basis and were essentially flat, excluding the benefit of foreign currency translation. By region, net sales in the Europe Middle East region were approximately 5% lower during the second quarter of 2026 compared to the same period in 2025 on a constant currency basis. Most European markets remained restrained during the quarter, while good performance in Germany and the U.K. helped offset a portion of the decline in countries like France. North American net sales increased approximately 20% over the second quarter of 2025, excluding currency impacts.

The increase was driven primarily by stronger unit volumes led by high-horsepower tractors and Hay tools and market share gains on many products. Net sales in Latin America were 25% lower compared to the second quarter of 2025 on a constant currency basis. Industry demand remained challenged across the region, resulting in lower sales across all major product categories. However, pricing was effectively flat year-over-year in a quarter, which was encouraging. Asia-Pacific-Africa net sales were more than 6% lower, excluding favorable currency impacts. Higher sales in Australia helped offset lower sales across several Asian and African markets. Consolidated replacement parts sales were $516 million in the quarter, up about 3% on a reported basis and essentially flat excluding favorable currency translation. Parts demand remained stable during the quarter as farmers continue to prioritize maintenance of existing equipment fleets amid a disciplined spending environment.

Activity levels varied by region, while overall demand remained consistent with our expectations and reflected the ongoing importance of aftermarket support across our installed base. Turning to slide nine. Adjusted operating margin was 6.6% in the second quarter, 170 basis points lower than the prior year. This primarily reflects the current demand environment in Latin America, which continued to impact volumes and absorption. By region, Europe Middle East operating income was essentially unchanged from the prior year despite lower sales and increased engineering investment. Cost optimization and positive pricing contributed to the stable operating margins year-over-year. North America operating results were generally in line with the prior year, including a benefit of approximately $22 million from certain IEEPA tariff refunds. Results continue to reflect tariff-related costs as well as factory absorption associated with our demand-aligned production approach.

Latin America operating income was approximately $49 million lower year-over-year, with the region continuing to progress towards breakeven. Lower sales volumes and higher engineering expense were the primary drivers of the change. Asia-Pacific Africa operating income was approximately flat compared to the second quarter of 2025. Turning to Slide 10. Year-to-date free cash flow use was approximately $347 million compared to positive free cash flow of $63 million in the first half of 2025. As discussed earlier, production levels were higher in the first half of 2026 than the prior period. As a result, inventory investment and working capital requirements were also higher, contributing to the year-over-year change in free cash flow.

While cash usage was higher through the first six months, the results remain consistent with our expectations and support our full-year target of generating free cash flow equal to approximately 75%-100% of adjusted net income. Our capital allocation priorities remain unchanged. We'll continue to invest in the business, maintain an investment-grade balance sheet, pursue targeted technology acquisitions, and return excess capital to shareholders. Consistent with that approach, we repurchased approximately $345 million of AGCO shares during the quarter, which include $293 million associated with the April $350 million share repurchase announcement and $52 million in shares from TOPI associated with the repurchase announcement from 2025. In addition, we recently declared our regular quarterly dividend of $0.30 per share. Slide 11 summarizes our updated 2026 industry outlook across our major markets.

Overall, agricultural equipment demand remains below historical mid-cycle levels as farmers continue to evaluate equipment purchases against uneven crop economics, elevated ownership costs, and broader macroeconomic dynamics. We continue to see healthy long-term fundamentals supported by aging equipment fleets and the need for productivity-enhancing technology as well as increased discussions related to renewable fuels. In North America, we continue to expect large agricultural equipment to be down approximately 15% below 2025 levels. We now expect the small ag spec segment to be down 0%-5% compared to 2025, reflecting a more measured outlook from the rural lifestyle customers as higher financing costs and broader economic uncertainty weigh on discretionary equipment purchases. We continue to work with our dealers as well to ensure that they remain focused on managing their inventory levels. In Western Europe, we are updating our outlook from modest growth to approximately flat year-over-year.

While certain markets continue to perform well, overall demand has moderated relative to our expectations entering the year. Higher input costs, hot and dry weather, and ongoing policy and regulatory developments have resulted in a more measured demand environment. In Brazil, we are updating our forecast from 5% below 2025 levels to 5%-10% lower. Industry demand has remained more cautious than expected, reflecting continued influence from financing costs, tighter credit availability, and ongoing farmer profitability considerations. Brazil's government just recently activated its subsidized loan program last week, but the late start has further pressured the industry outlook. Despite near-term conditions, we continue to view Brazil as one of the world's most attractive long-term agricultural markets, supported by expanding crop production, rising global food demand, and favorable long-term fundamentals.

While these market revisions are relatively modest, we have updated our full-year financial expectations, which are summarized on the next slide. While global industry demand remains at a low level, operating at around 85% of mid-cycle demand, we continue to expect AGCO to outperform underlying markets through market share gains and the strength of our portfolio. Our outlook now assumes pricing realization of 2%-2.5%, updated from 2%-3%. Favorable currency translation of 2%, revised from positive 3%, and continued market share gains in key regions. Our pricing outlook has moderated modestly since the beginning of the year, reflecting the current industry environment, especially in Latin America and Europe, Middle East. Inventory management remains a top priority, particularly in North America and Latin America, as we continue aligning production with retail demand and dealer inventory requirements.

Our outlook reflects the current tariff environment and the mitigation actions we have implemented through pricing, sourcing, and cost initiatives. Based on current policies and recent developments related to IEEPA, Section 301, Section 232, and Section 122 tariffs, we now expect gross tariff-related costs of approximately $115 million in 2026. We recorded $22 million of certain IEEPA tariff refunds in the second quarter, reducing our net tariff impact to $95 million for the year. This represents an increase of $50 million compared to last year and does not assume any potential benefits related to future IEEPA refunds. These estimates are aligned with current policy and trade conditions, which we may update as conditions evolve during the year. Engineering investment remains a strategic priority, with spending expected to be approximately 5% of sales.

Production hours are now expected to be slightly lower than 2025 levels as we continue to align our output with retail demand and support dealer inventory objectives through the balance of the year. Operational efficiency initiatives are expected to deliver $60 million-$70 million of benefits in 2026, reinforcing ongoing transformation progress. Together, these assumptions support an adjusted operating margin of approximately 7.5% for 2026, reflecting our updated volumes and pricing inputs, partially offset by operational efficiencies and continued cost discipline. We continue to expect our full-year effective tax rate to be between 31% and 33%. Moving to slide 13. Based on our updated market outlook, we now expect full-year net sales to be between $10.1 billion and $10.2 billion.

This reflects current lower demand expectations in Western Europe, Brazil, and North American small ag, along with more modest contributions from pricing and foreign currency translation than previously planned, primarily within the Europe and Middle East segment. Adjusted earnings per share are now expected to be in the range of $5.50-$5.75 per share. The revised outlook reflects our updated volume assumptions, partially offset by focused cost management, current tariff policies, operational efficiencies initiatives, and share repurchase activity completed during the year. Given the current industry environment, capital expenditures are now expected to be in the range of $300 million-$325 million, driven by project timing and execution efficiencies while maintaining our current commitments to strategic growth initiatives and manufacturing capabilities. We continue to target free cash flow conversion of 75%-100% of adjusted net income, supported by disciplined working capital management and inventory control.

Third quarter net sales are targeted between $2.3 billion and $2.4 billion. The third quarter earnings per share are targeted between $0.85 and $0.90, reflecting the alignment of production and demand, especially in Latin America and Europe, Middle East. Cost execution and timing efficiencies as well. The third quarter EPS target excludes any impact from potential additional IEEPA tariff refunds. The sale of our equity interest in the AGCO Finance U.S. and Canadian joint ventures generated a $20 million benefit in other income expense during the second quarter. As mentioned last quarter, this benefit represents the upfront recognition of earnings that otherwise would have been recognized through equity in earnings of unconsolidated affiliates, which we expect to be lower in the back half of the year. Before opening the call for questions, I'd like to remind everyone of two events.