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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by and welcome to the AGCO 2020 First Quarter Earnings Release Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]
I would now like to hand the conference over to our speaker today, Mr. Greg Peterson, Head of Investor Relations. Please go ahead, sir.
Thanks, Amy and Good morning. Welcome to those of you joining us for AGCO’s first quarter 2020 earnings call. We will refer to a slide presentation this morning that we’ve posted to our website at www.agcocorp.com. In that presentation, the non-GAAP measures that are used are reconciled to GAAP metric measures in the appendix.
We’ll also be making forward-looking statements this morning, including, demand, product development and capital expenditure plans and timing of those plans, acquisition expansion, modernization and our expectations with respect to the costs and benefits of those plans and timing of those benefits, production level share repurchases, dividend rates, future revenue and price levels, earnings, cash flow, tax rates and other financial metrics will also be discussed.
And we wish to caution you that these statements are predictions and that actual events may differ materially. We refer you to the periodic reports that we file from time to time with the Securities and Exchange Commission, including the company’s Form 10-K for the year ended December 31st, 2019. This document discusses important factors that could cause actual results to differ materially from those contained in our forward-looking statements.
These risks include, but are not limited to, adverse developments in agricultural industry, including those resulting from COVID-19, including plant closings, workforce availability, supply chains, reliance and product demand, whether 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 on our corporate website later today.
On the call with me this morning are Martin Richenhagen, our Chairman, President and Chief Executive Officer; Eric Hansotia, our Chief Operating Officer; and Andy Beck, our Chief Financial Officer.
And with that, Martin, please go ahead.
Thank you very much, Greg and good morning, everybody. We appreciate your interest in AGCO and your participation in the call today. I want to start this morning by providing some thoughts on the current environment before we discuss our first quarter results.
In the midst of the COVID-19 pandemic, the health and safety of our employees and the communities in which we operate is our first priority. We have introduced a robust safety protocol for our frontline workers who include, employee keeping our plants and parts warehouses in operation to support our customers. These practices include stringent, cleaning, staggering shifts and reorganizing how we work to increase social distancing.
In addition, our support teams are working from home whenever possible. Across the communities where we operate, we are assisting with relief efforts who, company and employee-led actions as well for our AGCO Agricultural Foundation, all their funds go into this direction this year.
Eric Hansotia will provide more information on this work. We are also deeply committed to meeting our customer needs. Our teams are working hard, leveraging both our internal capabilities as well as the resources of our dealer partners and suppliers to support our customers under these unprecedented and unique circumstances.
For nearly 30 years AGCO has faced and overcome many challenges. As in the past, our employees are rising to the occasion. They are very motivated and committed. I appreciate their commitment to help AGCO to do our path to support the global food supply chain, while keeping our factories and coworkers safe.
On Slide 4, we are facing a very dynamic environment, requiring rigorous and coordinated business planning to manage our manufacturing, supply chain and aftermarket operations to effectively serve our dealers and customers as well as to maintain a productive workforce, as we will review with you in more detail our manufacturing operations have already been significantly impacted by the crisis. Our supply chain and production teams have done a great job securing parts to allow us to restart production in our factories, and we will take great effort to keep them running under uncertain conditions.
In addition, our sales marketing and service teams are finding innovative ways to connect with dealers and customers as we continue to promote our products and support our equipment in the field. Given the substantial uncertainty facing us, we have implemented actions to reduce costs substantially and conserve cash.
We entered this period from a position of financial strength and we’ve bolstered that position with another $520 million of new debt capacity that we added in early April. Our goal is to emerge from this crisis stronger, leaner and well prepared to succeed with our strategy.
With this backdrop, Slide 3 looks at our financial results for the first quarter. Our first quarter results demonstrated strong execution. Is this Slide 3 or that Slide 4?
Slide 4.
It’s Slide 4. So you can see – we have a quality problem in reporting, now that’s a joke. So we’ll talk about Slide 4. Our first quarter results demonstrated strong execution as we overcame COVID-19 related production disruptions in China and Europe to expand operating margins compared to the first quarter of last year.
Strong performance in our North American region highlighted our results driven by improved product availability and an increase in the retail demand of our products. Our Europe Middle East region results remain solid, but we’re already impacted by some production interruptions late in March, despite a very strong order board.
This is 4 now.
So the mistake was not in the wording, it was on the chart. So now we talk about Slide 4, these so to say. Slide 4 details industry unit retail sales by region for the first quarter of 2020. North American industry retail sales decreased in the first three months of 2020 compared to the same period in 2019.
Sales of both low and high horsepower tractors softened during the quarter. Industry retail sales in Western Europe decreased modestly only in the first three months of 2020. Market demand was weak in – or weakest in Spain and Italy, but was mitigated by both in Germany. Industry retail sales in South America decreased during the first three months of 2020 with a decline in all markets outside of Brazil.
Looking forward, the effects of the pandemic and other key factors on future equipment demand are difficult to assess at this moment. Unlike other industries, the work of our farmers has not slowed down and farmer equipment is being used intensively. Demand for agricultural equipment will be influenced by farm income, which is a function of commodity prices, crop yields and government support.
Currently the consumption of grain for food, fuel and animal feed has been negatively impacted by the economic constraints caused by the pandemic. As a result, grain inventories are expected to increase this year and soft commodity prices have trended significantly lower in the first quarter.
In addition, protein processing has been severely constrained, with which pressured protein producers. Regionally, North America equipment demand is being heavily driven by an ageing fleet balanced against increasing concerns about falling commodity prices and a weak dairy and livestock complex.
In Western Europe, stronger wheat prices are serving to offset concerns regarding another season of dry weather, by the way, we just had plenty of grain this week. The weather conditions, while dairy prices are declining. Currently, equipment demand remains solid in key markets such as France and Germany, while the demand is significantly lower in other markets like Italy and Spain.
In South America, the weakening Brazilian currency is serving to help the margins of global crop producers. However, farmer buying sentiment is weakening due to the economic and political environment. Outside Brazil, the markets are significantly lower due to the political, social and economic situation in those countries.
Also, the level of retail demand is difficult to predict, the markets we serve are relatively resilient. And we are aggressively supporting retail activity in our global markets.
I will now turn the call over to our CEO, Eric Hansotia, who will provide you more information about the COVID-19 impacts on our business and does a great job in managing our teams through this situation. Eric?
Thank you, Martin and good morning. You know, since the beginning of the crisis, we have focused on addressing the needs of all of our key stakeholders, mainly our employees, our dealers, our customers, our suppliers, our shareholders and our communities. We have developed comprehensive plans associated with running our operations and supporting customers.
We have stepped up communication efforts to keep the AGCO team informed about the latest developments and the current view of the path forward. The management team is leading by example, putting employees’ safety first, modeling excellent teamwork, making fast decisions and demonstrating proactive care for all other stakeholders.
First and foremost, we have established protocols for all of our facilities focused on employee health and safety. On the next slide I will cover how we are supporting our communities as well. We have also prioritized the support of our dealers and our customers.
As Martin said, we are proud of the way our employees are going above and beyond to keep farmers and dealers operating through these difficult circumstances. Innovative approaches to connecting with dealers and customers through digital tools has been a positive byproduct that we can leverage when we return to normal.
In terms of business continuity, our focus has been on the supply chain, manufacturing and parts distribution operations. Keeping our factories running with component availability is the most important factor in minimizing the impact of the crisis to our customers and our businesses.
As for liquidity, we’re on a solid footing, following the additional debt capacity secured in April. We’re also actively managing costs and cash by reducing expenses and CapEx, particularly in our operations that have been shutdown. We have prioritized our most important processes and products that we’ll continue to fund them as we look to protect AGCO’s long-term health.
Slide 6 highlights some of the areas we’re helping to support our communities. We’re repurposing our spare manufacturing capacity to produce personal protective equipment for AGCO employees and for frontline workers in our communities.
Specifically, we’re addressing critical PPE shortages like masks, shields, hospital beds, respiration equipment and ventilators. Our company and our employees are also providing financial and logistical help for hospitals and other support organizations.
And finally, the AGCO Agricultural Foundation is allocating its 2020 budget to support local and global efforts to help minimize the impact of the coronavirus on our vulnerable communities. The foundation funds are assisting with food security for the prevention or relief of hunger and local community development based on the most critical nutrition and health needs during this challenging time.
On Slide 7, we detail our production status across our four operating regions. So far, production has been significantly reduced or suspended in most of the company’s Asian, European and South America facilities, largely due to material shortages in the supply chain. As we talk with you this morning, after being closed for the month of April, all of our major facilities in Asia and Europe are now operational, with the exception of the Valtra plant in Suolahti, Finland.
The Suolahti plant reopened in late April, but was forced to close again due to shortage of components from our casting suppliers that was damaged in a fire in mid-April. We expect our plant to reopen in June after we complete the resourcing of these components.
We are planning to reschedule our plants’ normal summer shutdown vacation, normally in July to May to recover a portion of the loss manufacturing capacity in the third quarter. To their credit, the North America facilities have remained open throughout the crisis, with some plants on reduced hours due to workforce constraints. And our South America plants have also reopened after being interrupted by component supply issues in April.
AGCO’s first quarter 2020 schedule for factory production hours is shown on Slide 8. Total company production was down approximately 9% for the first quarter versus the same period in 2019. Most of the decline was caused by factory shutdowns, which occurred late in the quarter. To give you a sense of the impact of the shutdowns, the chart on the right shows the difference in production hours compared to the prior year for both the first quarter and for the month of April.
The factory closures during the second quarter will have a significant impact on our second quarter’s sales and earnings. We’d like to caution you that our visibility into future disruptions in our supply chain or future COVID-19 related impacts to our workforce is limited, and may cause us to close plants again.
Turning our attention to AGCO’s order board, as of the end of March, our order board for Tractors and Combines was higher in North America, Europe and South America compared to a year ago. During the month of April, we continue to receive orders, while a number of our factories were shutdown. As a result, our order board has naturally grown as of the end of April, resulting in a healthy backlog for our factories.
We are monitoring the quality of our orders very carefully as an indicator of future demand, essentially watching the mix between stock and retail orders.
I’ll now turn the call over to Andy Beck, who will provide you more information about our first quarter results.
Thank you, Eric and good morning to everyone. I’ll start on Slide 9, which looks at AGCO’s regional net sales performance for the first quarter of 2020. AGCO’s sales were flat compared to the first quarter of 2019, excluding the negative impact of currency translation, which lowered sales by approximately 4%.
The Europe Middle East segment reported a decrease in net sales of approximately 5% excluding the negative impact of currency translation, compared to the first quarter of 2019. Sales declines were driven primarily by loss production caused by the impacts of the COVID-19 crisis. Lower sales in the UK, Scandinavia and France were partially offset by higher sales in Germany.
Sales in North America increased approximately 12%, excluding the unfavorable impact of currency, compared to the levels experienced in the first quarter of 2019. Growth in the sales of high horsepower Tractors, Precision Planting equipment, Hay Tools and Replacement Parts all contributed to the increase.
AGCO’s first quarter net sales in South America increased approximately 14% compared to the first quarter of 2019, excluding negative currency translation impacts. Growth in Brazil was partially offset by lower sales in the smaller South American markets.
Net sales in our Asia Pacific Africa segment decreased about 13% in the first quarter of 2020, compared to 2019, excluding the impact of currency. Sales were also impacted by product availability and were lower mainly in Africa, China and East Asia. Consolidated replacement parts sales were approximately $310 million for the first quarter 2020 and we’re up about 6% compared to the same period in 2019, excluding negative impact of currency.
Moving to Slide 10, we examine AGCO’s sales and margin performance. AGCO’s adjusted operating margins expanded approximately 50 basis points in the first quarter of 2020, compared to the same period last year. Margins benefited from favorable material cost and product mix, compared to the prior year, offset by the impact of factory closures due to supply constraints.
The Europe Middle East segment reported a decrease of $25.4 million in operating income, compared to the first quarter 2019, resulting primarily from the lower sales and production. North American operating income increased $30.3 million in the first quarter, compared to the first quarter of 2019. Higher sales and a positive sales mix contributed to the improved margins.
In South America, the first quarter operating loss was relatively flat compared to the same period of 2019. The costs of our new tier 3 technology products remain above targeted levels, and we are working to lower them through new sourcing efforts.
In our Asia Pacific Africa segment, the earlier impact of the pandemic resulted in a significantly lower production and sales. Operating income declined about $4.7 million due to lower sales and production activities.
Slide 11 details GSI or grain and protein business results by region and product. Our grain and protein sales decreased about 11% excluding negative currency translation impacts in the first quarter of 2020, compared to 2019. Globally, grain and seed equipment declined approximately 21%, with our Europe Middle East and North America region showing the largest declines.
Farmers and grain elevators in North America have been slow to invest, given a weak profitability outlook, stemming from low crop prices and a significant decline in ethanol demand. We’ve also experienced some supply disruptions due to labor availability in our facility there in Assumption, Illinois that contributed to the decline. Increased US-China trade would be supportive of crop prices and demand for more elevator storage capacity.
Protein production sales increased approximately 4% in the first quarter due to strong growth in South America that offset declines in the other regions. The protein production segment is expected to be significantly impacted by the pandemic, particularly in North America with nearly 50% of pork processing capacity in the US currently suspended. In China, protein producers are beginning to recover from the ASF and have started rebuild to their production capability. Our order flow for production equipment in Asia Pacific Africa region has improved throughout the quarter.
Slide 12 addresses AGCO’s liquidity and free cash flow for the first quarter, starting with a free cash flow 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 thereby result in negative free cash flow in both the first quarter of 2019 as well as 2020.
During this period of uncertain business conditions, we have a strong focus on cost and cash control in addition to liquidity. All of our businesses have identified specific cost cutting actions to minimize our operating costs, while our revenues are lower. These actions include, employee furlough, hiring freezes, delayed merit increases, eliminated travel costs and reduced discretionary spending.
The extent of these cuts will be dependent on the level of revenues and supply disruptions we experience. Since we participate in a historically cyclical industry, we have experienced and adjusting our cost structure to future demand levels.
On April 9th, 2020, we completed a new term loan facility which provided an additional $520 million of liquidity, including the new facility, AGCO’s total liquidity as of March 31st, 2020 would have been approximately $1.2 billion, consisting a cash of $387 million and available borrowing capacity of about $820 million.
We’re utilizing some of that liquidity during the second quarter due to seasonal requirements, and the impact of factory shutdowns. However, we feel confident we have sufficient liquidity, provided the length or severity of the pandemic on our operations is not more significant than currently estimated.
Other details for the quarter include losses on sales and receivables associated with our receivable financing facilities, which are included in other expense, net were approximately $8.1 million during the first quarter of 2020, compared to $8.7 million in the same period of 2019.
Going to the next slide, as we focus on returns for our shareholders, we expect cash distributions to continue as an important component of our long-term capital allocation plan. During the first quarter, AGCO completed share repurchases of approximately $55 million. During this period of uncertainty, the company has suspended in a further share repurchases. In addition, the company currently is planning to maintain the payment of its quarterly dividend.
Moving to the final slide, as you know, we withdrew our guidance in late March due to the uncertainty caused by the pandemic. On our – wrap up our prepared remarks with Slide 14, that highlights the factors which will drive our 2020 results in details, our major focus areas. And we stated earlier, farmers are continuing to run their operations and are using their equipment intensively, their near normal activities will drive replacement demand for parts and equipment.
Farmers’ sentiment and demand will continue to be influenced by the ongoing pandemic as well as more normal factors, like local yields, the commodity prices as well as government support. Our ability to meet their demand will be impacted by our success, navigating a difficult supply chain environment and the availability of our workforce.
Our second quarter results are being significantly impacted by production interruptions that have already occurred, and our results for the balance of the year will be impacted by our ability to keep our manufacturing operations up and running.
Going forward, our focus will be on supporting a safe working environment for employees, serving aftermarket demand and providing proactive support for customers and dealers. We’ll continue monitoring local conditions to facilitate quick and decisive actions to changing conditions.
We’ll concentrate on efficient and effective operations of our business given the uncertain conditions. Finally we’ll aggressively manage our costs and conserve cash in order to preserve our liquidity, as well as facilitate important long-term investments, like our digital and product and operational strategies.
With that, operator, that concludes our remarks. We’re ready to take questions.
And we’d like to limit our participants to one question and one follow-up, please.
[Operator Instructions] Your first question today comes from the line of Stephen Volkmann with Jefferies. Please proceed with your question.
Great. Well good morning, guys.
Good morning, Steven.
Hey, Stephen.
Hi, Steve.
Okay. Hope everybody’s doing well. I’m wondering if we can disaggregate a little bit. You talked quite a bit about supplier options closing you down and limiting production. You didn’t talk too much about like what you’re seeing from the demand side. And I know one of you said that GSI would be down to the port situation. But in terms of farming, I guess what I’m trying to get at is, do you think you can basically kind of sell as much as you can make as we go forward here? Or are you worried that there will actually be some decline in end market demand due to these lower commodity prices?
I think we hopefully will be in a position to sell what we make. Problem is not so much demand. The problem is more the various decisions of administrations globally which are not coordinated and, in some countries, it even varies by state. So, and that makes it difficult to really understand or to predict exactly what we are in a position to produce. But I think it looks I guess, if there’s no problem to adjust, or the demand I think is good enough to basically be in a position to sell what we make.
Okay, great and then maybe a quick follow-up for Andy. You guys talked about all sorts of cost cuts. Is there a specific kind of decremental margin that you would counsel us think about as we go through the second quarter?
Sure. You know, the decremental margins, when you look at it, obviously are going to be dependent on what products and what regions those sales declines come out of. Typically, as you know, our margins are stronger in Europe and also, we have a higher fixed cost. They’re higher in investment levels, because of the amount of vertical integration we do in Europe.
So the decremental margins are going to be the highest out of Europe, and then the lower in other regions in and a general statement. I would say as we’re looking at the second quarter, it’s going to be somewhere in that 30% to low 30% range is what I would advise you to focus on.
I would also say one observation with you, Eric, basically, is in the position and was in the position to motivate our teams and everybody is highly aligned and committed. And of course, the outstanding AGCO culture helps here. So we are really in a position to do what is needed.
Great. Well, well done, Eric. Thanks.
Team sport.
I’m his PR guy, you know.
And your next question today comes from the line of Ashish Gupta of Stephens. Your line is open.
Hi, good morning. You know, margins were really exceptional in North America. And just wanted to see if you might be able to dig into, you know, how much of that was from Precision Planting versus you know, you mentioned retail was strong for some of the new products, I believe this kind of hoping you could dig into sort of the strength in North America you know, and then what drove that?
So I think what I wanted to say before the question is answered, is that, these margins somewhat help you to understand our potential. So, now assume that markets come back to normal. They were not normal last year and the year before, and they certainly will not be normal this year, but let’s assume markets come back, margins will go through the wolf, I think.
So that to answer your specific question about the North American margins, as we mentioned, the key factor there was really a strong sales improvement from Precision Planting, their business sales were up over 30% in the quarter. That’s a high margin business kind of aftermarket type margins on Precision Planting.
And then our actual parts aftermarket business was up over 10% as well and almost 15% in parts in North America. So, again, helping the overall margin profile. And then even within our machinery business, we had in a stronger mix selling high horsepower equipment, that’s where a lot of the growth came from.
So, you know, the Precision Planting business is a very seasonal business. The first quarter is basically their big part of their year and they had a great performance in that first quarter. And then we’ll obviously just like normal see their sales taper off for the balance of the year.
Okay, great and just following up on that end. So, I mean, that strength at Precision Planting, are we at the early stages still of that, you know, the winter conference and everything, is that the big driver of the stuff changing performance and what would be described as pretty weak environment?
Yeah, I think there’s a micro and a macro answer to that. For the year it’s like Andy said, that’s very seasonal and much of their products are still tied to the planting solutions. And so farmers want to buy those before planting. And so first quarter is their big quarter within any given year and we expect that to be the same case this year.
On the macro scene, some of the solutions that you saw at winter conference are really still in that pilot phase, we call it, alpha or beta testing phases. And so that you’ll see the full release of those products and the full volumes of those over the next few years, where our strategy for Precision Planting is to grow them from a planting business to a full crop cycle business and from a North America focused business to a global one. And we believe that there’s significant growth in both of those two vectors that has yet to play out over the coming years.
Thanks so much. Good luck, guys.
Thank you.
Thank you.
Your next question comes from the line of Seth Weber with RBC Capital Markets. Your line is open.
Hey guys, good morning. Hope everybody’s well. Just wanted to ask a couple of questions on South America. I guess you know, the outperformance versus the industry, overall industry sales where sales were up versus industry down. Anything you’d kind of highlight there?
And then just the follow-up is Andy, I think you said, you know, tier 3 costs are still kind of, you know, running above target, you know, kind of what’s the trajectory to getting that fixed? You know, when can we expect the supply chain or whatever, you know, other initiatives you have going on there to really start showing up in the model? Thanks.
Very good question. Next question, please.
So, Seth, as you say, South America, we had a better quarter than we expected or our revenue in retail sales were good. So we’re pleased with the revenue side. And our margins are actually better than we had expected. But still you can see that we’re in a loss position. Normally, the first and second quarters are kind of the weaker seasonal quarters that revenue picks up in the second half. So we hope to see some of that as we move forward. You know, but obviously, we’re going to watch what happens with the demand of the industry and we had some comments about some of the factors there.
In terms of improving overall profitability in South America, that’s going to be a gradual process. There’s not a you know, a one quarter fix of this where we’re working very carefully on our supply chain with our supply chain partners in terms of resourcing components, localizing more of the components in order to reduce the cost, also focusing on the value of these products, looking at pricing strategies in order to impact the top line.
The one thing in South America that we’ve got to also recognize is that, the currency moves significantly here in the first quarter, the real move from kind of low 4s to 5.5. And we still are in a net importer of components into Brazil. And that’s even gotten worse, because some of the markets where we export, our product then too has declined a little bit as a result of some of the market weakness. So we’re working on accelerating localization of components as well in order to mitigate that impact as well as look at our pricing opportunity.
In a normal demand environment, would you expect South America to turn profitable by the end of the year? You know –
Yeah, you know, not in a normal environment we had anticipated that we would be show some profitability in the back half.
Okay, great. I appreciate it, guys. Thank you.
Your next question today comes from the line of Ann Duignan of JP Morgan. Your line is open.
Hi, there. Good morning and Martin good, there you haven’t lost your sense of humor in this environment. So we appreciate that. I guess my question maybe first on South America again, is, you know, the notion that if you’re not making money, while the fundamentals in Brazil are by as good as they could ever get, you know, can you really make money if demand rolls over and the fundamentals deteriorate from here? Just –
Definitively [technical difficulty] –
Cost, but you need volume as well?
The answer is definitively yes.
Yeah, Ann I think, you know, it’s a function of demand and volumes typically are, the Brazilian market is stronger than where it is today. So we think there’s a lot of potential there. You know, farms are growing there, they’re going to add about 2% to the amount of farmland farmed this year. And so there’s a lot of reasons why we should see growth in that market going forward.
Again, this is a – maybe a difficult period of time, because of, you know, what’s happening with the general economy and the political situation in Brazil, but there’s still huge potential for that market and going to be a very important market for us in the future.
Maybe just one other comment, this is Eric. You know, although there’s our Tractor business we’ve talked about a fair bit with this transition to tier 3, we’ve had a challenge in profitability. We’re growing our Planter business, we’re growing our Sprayer business, we’re growing our Combine business growing in essentially at a large Ag portfolio.
We’ve established Fendt as a brand in South America put our company owned store right in Sorriso in the heart of Mato Grosso. Those are all businesses that should be supportive of a higher margin profile in the future and they’re on the right track.
Good, thank you for the color. I appreciate that. And then just turning to North America, you know, given where the fundamentals are there, both from the strong dollar but also the ethanol demand. I’m curious to hear why you would expect grain storage to improve at all? And is there any risk, Martin that the grain storage business in North America could be permanently impaired from here?
No, when it comes to a permanent or kind of a structural change, I don’t think so. Because one is, there’s a certain tendency that bigger farmers want to be more independent and therefore, invest in storage. And then second, we also have a lot of all like our installations out, so therefore I don’t think that we will see that.
Okay, I’ll leave it there in the interest of time. Thank you. Appreciate it and keep up with your sense of humor, Martin.
Stay healthy and safe. You’re in New York, aren’t you?
Yeah, I’m in Midtown, yes, it’s a little weird.
So be careful.
Thank you and I will.
And don’t drink too much of the disinfection things. So that was maybe – that’s the wrong advice somebody gave.
Noted, thank you.
Irish Whisky might be okay.
Yeah, that would keep those viruses away, all right.
Yeah, okay.
Thank you.
Thank you. Bye.
Your next question comes from the line of Jerry Revich of Goldman Sachs. Your line is open.
Yes. Hi. Good morning, everyone. And I’m glad to hear you’re all doing well. I’m wondering if you could just expand, Eric, on the comments you made about April. Can you talk about what parts cadence of demand was like for the month? And then you mentioned obviously, with facilities being shut, the backlog expanded in April, but can you talk about a year-over-year, quarter performance for the month just to give us context on the run rate of demand? Thanks.
Sure. Yeah, I think Andy will start it off, and then I’ll add some color to this as well.
Okay, in terms of – here in terms of the order board as we mentioned for tractors, they were up in North America, Europe and South America. North America was up around 5% or 6% at the end of March, that position stayed about the same at the end of April. And Europe, our order board was up about 12% at the end of March and because we didn’t produce many tractors or sell many tractors in April, and we continue to get orders, now our order board’s up over 20% at the end of April.
South America is really, is up significantly. We really had low order board last year and we changed some of the ways we take orders and giving more incentives to give us a more visibility in terms of orders. So that’s not really a fair comparison. But that order board is much stronger than a year ago. Only order board that’s down is our Asia Pacific Africa, and that’s down at the end of April about 15%.
If you look at our North America, overall, all products including grain storage and sprayers and all of that our orders are slightly down at the end of April. But still getting relatively reasonable order intake and retail activities still ongoing. Eric, you want to expand on that?
No, I think you know, essentially as you probably are clearly aware that agriculture has been deemed a critical industry. And so our dealer organization through almost the entire world have been able to be remaining opened, sometimes they’ve had to modify their operations and so the company has been stepping in and providing a lot more handholding through digital tools directly to the dealers and many times directly to customers.
Those are both in the supporting of machines, but also in generating retail demand, and supporting with digital walkarounds and those types of things. So there’s been a lot of innovation across the whole company and leveraging existing tools differently or creating new tools to help the market stay vibrant. And so with this opportunity for this innovation has generated this strong demand that we’re realizing today.
Okay, thank you. And, Andy just a clarification, obviously, you know, the backlog is up in April as you mentioned, but I’m wondering, can you talk about the order intake levels year-over-year, April ’20 versus April ’19?
They were down in all the markets, except for Europe where the order intake was actually higher in April ‘20 versus 2019.
Okay. And on the discussion around making sure orders are for retail demand versus inventories, can you just expand on how you’re managing that process and what proportion of the incoming order board for retail customers versus dealers stocking? Thanks.
Yeah, as we watch the order bank and look at when the order has a customer name on it are destined for retail versus a stock order. And what we’re trying to understand is, where there may be small pockets where a dealer is putting in a demand in with a concern about our like, say, our factory being shut down or something like that. And we’re monitoring any of those back orders that come in, and seeing how fast they convert to retail.
We do this through what we call a control tower. There’s one for each one of our regions around the world, Europe, North America, South America and so on. And then those happen every single day. And they roll up to a global control tower. We have dashboards that we use to drive those control towers, that we monitor things like order board and quality of the order board, factory status, industry, health and those types of things.
And so we’re managing that in the short-term that way, and then the – on alternating days the global control tower looks like more mid-term indicators for where the industry health will be coming out of the COVID situation more like this quarter three, quarter four and into 2021.
Okay. Appreciate the discussion. Thanks.
Your next question comes from the line of Courtney Yakavonis with Morgan Stanley. Your line is open.
Hi, thanks for the question. I’m just going back to some of the comments on North America. I think you mentioned that parts demand was up 15% in the quarter, which seemed to be a pretty big acceleration from last year. Can you just comment on you know, why you think that we’re seeing that? Is that you know, some delay of the replacement schedule and, you know, more maintenance, you know, given the uncertainty right now? And then – and can you also just clarify what parts of the entire company were up as well?
And then secondly, just on comments on Asia, you know when we look at that lost production slide and it doesn’t look like there’s been a very noticeable improvement in April versus the first quarter. But I think you talked about China being back at normal production levels, if you can just help square that and may be kind of explain by the lower orders? Thanks.
Sure. In terms of overall part sales, they were up about 6% for the company. Again, they were stronger in North America than that. Eric, you might want to add to this, but, you know, I think, you know, our first concern was having our warehouses still be operational, having enough capabilities to get parts out to customers as the work is continuing out on the field. We’ve been very successful with that.
And really, I would say we’re operating our parts facilities normally. Now, the ordering patterns of our dealers. I don’t know we’re noticing anything too different than normal, but the warehouses are operating quite well.
Yeah, our fill rates are ahead at all-time highs in many of our locations. And then one thing that’s a little early to call yet, but could be happening is, some of these digital tools that we’re utilizing could be spring some additional parts retail activity with the digital the use of walkarounds at the dealership, and at the customer’s site and a pre-season planter inspections, things like that could be generating a little bit extra retail demand too it’s little early to call it yet.
I think you had a question about Asia Pacific Africa that you know, that’s a number of different markets there. You know, again, we’re back up and running in our China factory, but also that market gets served by almost all of our factories around the world. So if we’re down in Europe, there’s going to be a lot of product availability issues for that region as well. So that’s something you have to keep in mind.
In general, that one of the key markets is Australia, New Zealand, that market seems to be relatively solid right now. We’re seeing recovery as we’ve noted in our remarks in China, the one market that we’re very worried about and expect to remain really weak this year is the Africa market.
Andy plans to sell Fendt Tractors in China now.
I don’t.
How much do we really bring from Europe to China?
No to ANZ?
ANZ, okay you’re talking about okay. That’s mainly Massey, right?
Yes.
Great, thanks.
Your next question comes from the line of Andy Casey with Wells Fargo. Your line is open.
Hi, yes. Good morning. This is actually Patrick Lowe standing in for Andy, thanks for taking our questions. Just going through your slides, as we look through the production shutdown that you guys experienced through April, and now with them being – having resumed production, can operating profit in the second quarter be positive now that things have come back online well, at least a lot of it has come back online?
Sure, you know, obviously, we are – for the second quarter off to a difficult start, because we didn’t have our production up and running in April. So it’s a matter of can we catch up here in the last two months of the quarter, so our target would be to be able to get back past breakeven here for the quarter.
So the answer is a very strong maybe.
All right and in the quarter here, I just want to get a sense of what the contribution is from pricing? I mean, that the sales numbers were actually pretty decent considering the industry volume declines. So I want to get a, you know, from a different angle, what the pricing contribution is during the quarter? And also maybe any discussions regarding market share commentary, you know, coming in and out of your favor by regions during the quarter would be actually pretty helpful.
Right, Patrick, as you are aware, the demand situation across most of the markets was okay, but not exceptionally strong. So our pricing was a little bit on the softer side, it was positive about 50 basis points globally higher, in some areas a little bit lower and others. The good news was the material inflation was actually a benefit. It was a tailwind. So in terms of net pricing, we’re closer to probably 75 basis points or 100 basis points of net pricing for the quarter. So that helped our margins you saw for the full quarter. So that’s kind of where we were.
And then in terms of market share, you know, we’ve talked, you know, over the last few quarters about some important new products. We talked about Precision Planting earlier, our Fendt globalization and of course, our Combine rollouts, seasonally Combines will be more important in the next couple of quarters. But in terms of Precision Planning that’s done very well from a marketer’s standpoint. And our Fendt rollout especially in North America has benefited our market share here too. So yeah, that definitely contributed in the quarter.
All right, thank you.
Your next question comes from the line of Steven Fisher of UBS. Your line is open.
Hi, thanks. Good morning. Just curious for you guys used on commodity prices and equipment demand, because you know, you called out the order books that are above last year and no real demand concerns, you know, you can sell whatever you produce, but the grain prices are lower and it seems like certainly in some cases the farmer stress might be higher. So just curious how you’re thinking about the year and the impact of commodity prices? Do you think we normalize here? What’s the reconciliation there? Thanks.
I think overall, what you read is that there’s a huge demand for food, and that we also have various bottlenecks all over the world. Of course, the whole thing is logistics and how to bring the food to the people who need it, and therefore, manual production varies a little bit and prices vary. So overall, in the long run, I’m a little optimistic that prices will stabilize.
We have, I think – I don’t see that the prices would go down substantially from here, the ethanol decision of the American administration is very important, and what you can see right now, people drive less and use their cars less, which of course also means there’s less fuel consumption.
So when you talk to the – our guys, you will hear that or when you talk to people on the automotive industries, I mean on the board of PPG, so paint demand in refinish, so in repair is down, because cars are not used as often which means also there less accidents and so on. So which is good news, but on the other hand, also not so good when it comes to corn in for ethanol.
Okay. And then just want to ask about Combines versus Tractors, I’m curious why you think Combines sales are so much weaker than Tractors? How much of that is driven by inventory levels of Combines that just needs to be readjusted versus product cycles or technology or something else? And what would it take to balance out that Combine demand versus Tractor demand?
Well I think one thing I would point out is, this is just not a seasonally important quarter for Combines, you know, it’s off to a small base. So you know, those percentages can get skewed a little bit. I would expect the Combines sales to be similar to what we’re going to see with the rest of the row crop market over the course of a year –
Yeah, it’s all seasonal.
So I think it’s more of a seasonal issue. I don’t think there’s anything specific to Combine.
Got it, thanks a lot.
Your last question today comes from the line of Adam Uhlman of Cleveland Research. Your line is open.
Hi guys. Good morning. Hope you’re all doing well. I wanted to follow-up on the North America sales discussion you talked through the you know, the positive impact from Precision Planting but you also mentioned you know, the high horsepower tractors are doing well with Fendt, I guess. Can you just help us understand how much of this sales traction is dealer inventory stocking versus retail demand? And then maybe just go through what the medium-term plan is with that business?
Sure, if you look at the – always we’re – all first quarters we’re always building some dealer inventory. So you always see that our wholesales will exceed our retails in the first quarter, because you’re getting the dealer inventory levels up to the level you want before the spring selling season. So that’s a normal occurrence.
If I look at dealer inventory year-over-year in our North American markets, it’s relatively the same March versus March last year. So no change relating to that as it relates to what we saw in the quarter, again, our retail sales activity were solid in the quarter and we felt good about that.
Maybe the second half of your question was on the longer-term perspective. You know, we’ve got a big focus on filling out the portfolio, which we’ve done on a professional producer for high horsepower in terms of our Machinery business. We’ve got a strong offering now on high horsepower Tractors, Planters, we’ve always had good Sprayers and commercial hay, and the ideal Combine. So that’s, you know, the intention is to continue strengthen our dealer network and achieve full potential out of the Professional Producers segment.
Secondary machinery is the rural lifestyle area for small ag, been adding somewhere between 20, 25 dealers a year in North America to cater to that segment of the market. It’s going to be down in the short-term, because it usually tracks with GDP. But more of your – the long-term side of your question is, we’re continuing to fill that in. We’ve got the global series tractor and some good products there as well.
Precision Planting, we already commented on and our intention is to grow that twofold. And you’ll see some of that technology growth in the other areas show up in North America, then our grain and protein business, we’ve got a strong grain business already. And we think we’re at low commodity prices in the short-term. And some of the rebounds that Martin talked about with fuel prices, farmers will see these low commodity prices as a potential to do some margin capture by grain storage.
And finally, protein, we believe that’s a long-term strong business, but in the short-term like Andy mentioned earlier in the call, with many of the pork processing plants down, our pork producers, especially into some extent also poultry producers are in a bind right now. They can’t go anywhere with their own products so the price they get has gone down even though the price in the grocery store has gone up. But we believe that’s a transient issue and that more mid-term that will stabilize in the long-term we feel good about the protein business.
Great, thanks very much.
And I will now turn the call back to Mr. Peterson for any closing remarks.
We appreciate your interest in AGCO this morning and remind you that I’ll be around this afternoon to handle your follow-up questions and we encourage everyone to stay safe and thank you again for your participation.
And this concludes today’s conference call. Thank you for your participation. You may now disconnect.