This morning, AGCO Corp., the third largest farm equipment maker worldwide, reported first-quarter net sales of $2.3 billion, an increase of 26.5% compared to net sales of $1.8 billion for the first quarter of 2011. Excluding unfavorable currency translation impacts of 4.3%, net sales in the first quarter of 2012 increased by 30.8% compared to the same period in 2011.
The company’s sales in the North American region improved by 57.6%, to $566.5 million vs. $359.4 million a year ago.
“AGCO’s North American sales were up 57.6% year-over-year vs. our estimate of up 40.6%, which includes GSI,” Ann Duignan, analyst for JP Morgan, said in a note. “The region reported 8.9% operating margin vs. our estimate of 7.5%. AGCO's sales were supported by strength in sprayers, high-horsepower tractors, and hay equipment.”
“AGCO’s strong performance in the first quarter produced record sales and earnings,” said Martin Richenhagen, chairman, president and CEO. “We capitalized on improved demand in key Western European markets and continued market strength in North America while executing against our important margin improvement initiatives. Margin expansion in the first quarter was led by the Europe/Africa/Middle East (EAME) and North American regions. EAME’s first quarter operating margins exceeded 11% and North American operating margins improved over 500 basis points compared to the first quarter of 2011. Our GSI acquisition was also a contributor to the positive results, particularly in North America.”
“Industry fundamentals remain excellent and our 2012 sales and earnings outlook has been increased,” continued Richenhagen. “We will maintain our focus on improving profitability throughout 2012, while also increasing our investments to support our longer term objectives. These investments include an expansion at our Fendt manufacturing facility in Marktoberdorf, Germany and construction of the low horsepower production facility in China. In addition, our important investments in new product development and market expansion will remain at high levels in the coming quarters as we work to meet Tier 4 final emission requirements and refresh and grow our product line. We are forecasting another year of solid cash generation after funding our growth investments.”
According to Henry Kirn, machinery analyst for UBS Investment Reseach, AGCO’s guidance on North American ag equipment demand bodes well for shares. “We think investor concerns that North American ag equipment markets may be peaking have been a headwind to ag equipment shares, including AGCO, despite its more significant European exposure. As such, AGCO’s market could help relieve concerns. We note AGCO’s GSI acquisition bolsters its position in this key end market,” Kirn told investors in a note this morning.
Sales growth for the first quarter of 2012 was approximately 19.4%, excluding an 11.4% benefit of acquisitions and the 4.3% unfavorable impact of currency translation. AGCO’s EAME region reported a net sales increase of approximately 28.5% in the first quarter of 2012 compared to the first quarter of 2011, excluding unfavorable currency translation impacts. Sales growth was strongest in Western and Eastern Europe. In the North American region, sales in the first quarter of 2012 improved 57.6% compared to the first quarter of 2011, excluding unfavorable currency translation impacts. The GSI acquisition and growth in sales of sprayer equipment contributed to the results. AGCO’s South American region reported a sales increase of 7.0% in the first quarter of 2012, compared to the first quarter of 2011, excluding unfavorable currency translation impacts. The benefits of acquisitions drove most of the increase.
Sales growth and improved gross margins contributed to higher income from operations for the first quarter of 2012 compared to the first quarter of 2011. Production increases in Europe and North America, and a richer product mix, partially offset by higher material costs, produced improved gross margins. AGCO increased its investment in new product development, resulting in increased engineering expenses in the first quarter of 2012 compared to the same period last year.
In the first quarter of 2012, industry unit retail sales of tractors were up modestly compared to the same period in 2011. Industry retail sales of combines were down substantially from robust levels in the prior year. Record farm income in 2011 and the expectation of continued favorable farm economics resulted in the strength in retail sales of high horsepower tractors. Improvement in the dairy and livestock sector contributed to higher industry unit retail sales of mid-range tractors and hay equipment.
Industry unit retail sales of tractors and combines in the first quarter of 2012 declined compared to the high levels in the same period in 2011. Drought impacted the early harvests in southern Brazil and Argentina and resulted in weaker demand in these markets. Despite the adverse weather in the first quarter, overall industry demand in South America remains at a high level.
Industry demand in Western Europe remained strong during the first quarter of 2012 compared to the prior year period. Healthy farm economics drove increases in both tractors and combines. The tractor sales growth in France, the United Kingdom and Germany was partially offset by declines in Italy and Spain. Combine sales also improved compared to weak levels in the first quarter of 2011.
“The growing population and the shift to higher protein diets are driving increases in the consumption of food and long-term demand for grain,” stated Richenhagen. “Currently, inventories of grain remain at historically low levels on a stocks-to-use basis. Elevated soft commodity prices, resulting from these positive supply/demand dynamics, are providing support for farm income and our industry. In Western Europe, industry demand has returned to more normal levels, and recovery is continuing in Eastern Europe. Positive farm fundamentals continue to support strong market demand in North America. The Brazilian government continues to support their farming industry, and attractive government financing rates have been extended through the end of 2013. We remain positive on our 2012 industry view.”
Global industry sales are expected to grow modestly in 2012 compared to 2011. Growth is expected in Western and Eastern Europe and market conditions are projected to remain strong in North America and South America. AGCO is targeting adjusted earnings per share of approximately $5.50 for the full year of 2012. Net sales are expected to range from $10.2 billion to $10.5 billion for the full year. Gross margin improvement is expected to be partially offset by increased engineering and market expansion expenditures.
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