AGCO sees positive signs for 2017 following challenging year

09.02.2017

Despite a challenging year with weakened market demand, a record U.S. grain harvest and a healthy harvest in Europe, AGCO was able to exceed its financial targets and position itself for new opportunities in 2017, said Martin Richenhagen, chairman, president and chief executive officer (CEO).

“Despite the current market difficulties, our long-term view remains positive,” he said on a conference call with analysts on Feb. 7. “In addition to diligent cost management, we will be concentrating on initiatives that will drive long-term benefits and raise the efficiency of our factories, improve our service levels and strengthen our product offering.”

AGCO posted net income of $160.1 million, equal to $1.96 per share on the common stock, in fiscal 2016, which compared with $266.4 million, or $3.06 per share, in 2015. For the year, net sales were down 0.8% to $7.4 billion. Net sales for the fourth quarter ended Dec. 31 were $2.1 billion, up from net sales of $1.95 billion in the same quarter a year earlier.

Sales for the GSI segment of the business, which specializes in the manufacturing of steel farm bins, commercial storage grain bins and grain silos, were up 18%, excluding currency impacts but including the benefit of acquisitions. Growth in protein production equipment was partially offset by declines in grain storage equipment, said Andy Beck, senior vice-president and chief financial officer. For 2017, the company expects GSI sales to reach $1 billion.

Significant growth in GSI sales in China accounted for most of a 23% increase in net sales during the fourth quarter, Beck said. When AGCO started in that business, it was initially doing business with U.S. companies that had moved to China, he said. That has pulled back and now most business is with local protein producers.

“We had some slower years as we transitioned away to our new customer base but now we’ve been pretty successful,” Beck said. “We’re positive about the trends that we see in Asia overall with our GSI business as a result. I think we’re talking about improvement overall in our Asia business and part of that is also an increase in GSI.”

AGCO’s income from operations for 2016 in the Asia Pacific region increased $39 million.

Sales of grain storage and handling equipment, high horsepower tractors, combines, and sprayers in North America were well below last year’s level, Richenhagen said. Net sales in the region decreased 6.7% for the year. Lower sales and production volumes, a weaker sales mix and other cost increases contributed to a reduction in income from operations of approximately $84.3 million for the full year of 2016 compared to 2015.

In South America, net sales increased 4.3% in the full year of 2016 compared to 2015. Higher sales in Argentina were partially offset by slightly lower sales in Brazil due to weak, but improving, industry conditions. Income from operations decreased approximately $14.5 million for 2016 compared to 2015 due to the negative impact of currency translation and material cost inflation.

Europe/Africa/Middle East net sales increased 3.5% in the full year of 2016 compared to 2015, excluding unfavorable currency translation impacts. The increase resulted from the benefit of acquisitions along with growth in the United Kingdom and Scandinavia, and was offset by declines in Africa, Germany and France. Income from operations increased approximately $1 million for 2016 due to higher sales partially offset by unfavorable currency translation impacts.

Looking ahead, softer industry demand is anticipated across North America and Europe, partially offset by growth in South America, Beck said.

The United States is expected to have another challenging year in 2017, and Western Europe’s farm income remains under pressure and is expected to be below the long-term average. Demand is expected to decline modestly due to weaker market conditions in the cereal markets, Beck said.

In Brazil, stabilization of the government and financing programs has led to improved demand, and the 2016 crop production was healthy, he said. The Argentinean market also improved as more farmer-friendly government policies and healthy crop production has stimulated demand. AGCO South American industry forecast for 2017 assumes growth of about 10%.

AGCO’s net sales for 2017 are expected to reach approximately $7.4 billion. Gross and operating margins are expected to improve from 2016 levels, reflecting the positive impact of pricing and cost reduction efforts partially offset by a weaker sales mix.

Based on these assumptions, 2017 earnings per share is targeted to be approximately $2.50.

“While we’re optimistic about the long-term opportunities for our industry and our business, the priority for 2017 continues to be managing our costs, lowering our dealer and company inventories to better align ourselves with current market demand,” Beck said.


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