Warranty issues and an ill-fated move to more environmentally acceptable Tier 3 engines in Brazil challenge finances
Tough times in agriculture across the globe have put some farm machinery makers into financial difficulties.
Agco, the world’s third-largest full-line manufacturer, saw lower earnings and higher expenses than expected, but it will be able to share with equity holders and maintain research and expansion, says its chief executive officer.
Martin Richenhagen told the investment community last week that despite a large warranty issue with some new balers and an ill-fated move to more to more environmentally acceptable Tier 3 engines in its Brazilian equipment, Agco remains successful and focused on growth and technology.
The company’s move to Tier 3 diesel power appears to have been ahead of the curve when it came to buyers’ demands. Sales in Brazil, and the rest of South America were down about 20 percent.
Eric Hansotia, chief operating officer, said sales in South America for planters, sprayers and combines were significantly down.
The company rushed to release a non-Tier 3 powered Heritage lineup of equipment to reclaim some lost sales opportunities in the region. Hansotia said the company has been able to lower production costs since that release.
Agco builds a substantial line of machinery in South America, including engine plants in Argentina and Brazil.
The company has been investing in a large company store and regional operations in Sorriso, in northern Mato Grosso, in an effort to expand its market share in the soybean and corn producing areas.
Richenhagen said the move north in that country recognizes its growth in production and exports.
Last year, Agco expanded the Fendt brand in South America and began some Fendt planter production there. The company released its new Momentum row-crop planter in Brazil nine months before its North American debut a few weeks ago.
Andy Beck heads finance at the company and said a US$23 million cost associated with warranty repairs and modifications to large square balers was unexpected in 2019.
Other issues that drove up Agco’s costs in 2019 were higher than expected taxes due on its operations of about 45 percent.
Early in 2019, the company said it hoped to top $9.6 billion in sales for the year. Last week’s tally put net sales at just over $9.2 billion, against 2018’s $9.4. Richenhagen said despite lower numbers, Agco would maintain investments in research and development and expansion of operations.
Beck said the company plans to maintain its capital expenditures program at about three percent of sales and will maintain engineering and research at 3.8 percent.
Richenhagen said the company has been investing in “smart technologies” for agriculture and will continue to release new equipment based on these, despite lower sales.
Sales in Europe were down in part due to lower dairy prices. Lower grains and oilseed returns for producers also impaired their abilities to invest in new and renewal equipment on the farms.
In the United States a trade war with China and delays in the government-funded compensation program have kept farmers from purchasing new gear, especially when combined with poor harvest conditions and millions of acres of stranded crop this winter.
Not including currency adjustments, European sales were up slightly over 2018, South America was down 11 percent, Asia-Pacific was down nine percent and North America was up one percent.
European sales make up 59 percent of Agco’s net sales, North America 24, South America nine and Asia Pacific eight.
In North America, combines were down six percent last year and tractors down one. In Europe combines fell 18 percent and tractors two. In South America combines fell five percent and tractors 16.
Despite 3.3 percent lower global sales, reported operating margins for the year were up slightly for 2019 to 3.9 percent with operating income of $348.1 million.
The grain storage, handling and livestock production equipment division, GSI, saw a five percent drop in sales, due in large part to lower sales on the livestock side. The grain storage business was up one percent.
Beck said the counter-cyclical nature of livestock investment, after several seasons of expansion and farmer buying, might be partially responsible for poorer performance. Other issues that may be affecting that division could be related to African swine fever and Chinese-American trade war.
The release of the new Fendt Ideal combine last year came with higher than average costs and the company hopes to see improved harvesting equipment sales in 2020 with the machine entering its second season of marketing.
Tractor sales are expected to be down by up to five percent year-over-year in North America, up five percent in South America and down up to half a point in Europe. Earnings per share for the company are expected to be $5 to $5.20 with free cash flow running between $325 and $350 million.
Beck said the company had been able to reduce its production hours by two percent, aiding its ability to lower operating costs, and that will remain a target to improve returns for 2020.