AGCO Corporation (AGCO) Q4 2018 Earnings Report, Transcript and Summary

Good morning. My name is Nicole and I will be your conference operator today. At this time, I would like to welcome everyone to the AGCO 2018 Fourth Quarter Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] It is now my pleasure to hand the call over to Mr. Greg Peterson, Head of Investor Relations. Please go ahead, sir.

Thank you, Nicole, and good morning. Welcome to those of you joining us for AGCO's fourth quarter 2018 earnings call. We will refer to a slide presentation this morning that we’ve posted to our website that you will find at www.agcocorp.com. The non-GAAP measures used in the slide presentation are reconciled to GAAP measures in the appendix. We'll also make forward-looking statements this morning, including demand, product development, capital expenditure plans, and timing of those plans, acquisition expansion and modernization plans, and our expectations with respect to the costs and benefits of those plans and timing of those benefits. We will talk about production levels, share repurchases, dividend rates and our future revenue, price levels, earnings, cash flow, tax rates and other financial metrics. We wish to caution you that these statements are predictions and that actual results may differ materially. We refer you to the periodic reports that we file from time to time with the Securities and Exchange Commission, including in the Company's Form 10-K for the year ended December 31, 2017. This document discusses important factors that could cause the actual results to differ materially from those contained in our forward-looking statements. We disclaim any obligation to update any forward-looking statements except as required by law. A replay of this call will be available later on our Investor Relations website. On the call with me this morning are Martin Richenhagen; our Chairman, President, and Chief Executive Officer, and Andy Beck, our Chief Financial Officer. And with that, Martin, please go ahead.

Thank you, Greg, and good morning. We appreciate everyone joining us on the call today. 2018 was a year of significant achievement for AGCO. In addition to meeting our financial targets, we launched important new products, expanded our smart farming capabilities, and made investments to support our future growth. We also made progress on our cost reduction efforts while continuing to perform well in the marketplace. My comments start on slide three where you will find a summary of our fourth quarter and full year results. Solid operational performance across our regional business units and constructive market developments are driving sales and earnings growth. Our fourth quarter sales grew about 7% on a constant currency basis compared to the fourth quarter of 2017 with higher sales across all regions. In addition, fourth quarter earnings per share was $1.26 and adjusted EPS was $1.31, an increase of 19% over 2017. We generated nearly $600 million in cash flow from operations and over $390 million of free cash flow for the full year of 2018. Our strong cash generation allowed us to complete share repurchases of over $180 million and continue making important investments in our business while maintaining our strong balance sheet. Slide four details industry unit retail sales results by region for the full year of 2018. Record harvests in North America were offset by lower grain production into the European Union, Argentina and Australia due to dry conditions in those areas. Despite the increasing grain consumption, global grain inventories decreased only modestly in 2018, maintaining pressure on commodity prices. Global industry farm equipment demand was relatively stable in 2018 after improving in 2017. North American tractor demand was improved modestly while combine demand increased more substantially compared to 2017. Replacement demand from local farmers was most of the tractor sales growth. Industry retail sales in Western Europe were down moderately in 2018 from healthy levels the prior year. Conditions for the dairy segment remained positive and helped to offset most of the business caused by the hot dry summer across much of the region and resulting weak harvest. Industry sales declines across many of the Western European markets were mostly offset by growth in the United Kingdom. Industry retail sales in South America were flat compared to 2017 levels. Equipment demand in Brazil improved in the second half of 2018 after more positive terms where the government financing programs were announced. Market growth in Brazil was offset by weaker demand in Argentina in response to a weak first harvest and poor general economic conditions. AGCO's 2018 schedule for factory production hours is shown on slide five. Total Company production was up about 7% for the year versus 2017. Production increased most significantly in Europe and South America where we built transition stock ahead of the emission regulation changes in those markets during 2019. And finally, our December order book for tractors was ultimately flat in North America and Europe, and higher in South America compared to a year ago. I will now turn the call over to Andy Beck, who will provide you more information about our fourth quarter results.

Thank you, Martin, and good morning to everyone. I'll start on slide six, which looks at AGCO's regional net sales performance for the fourth quarter and full-year of 2018. AGCO's sales increased approximately 7% compared to the fourth quarter 2017, excluding the negative impact of currency translation. The Europe/Middle East segment reported an increase in net sales of approximately 10% excluding the negative impact of currency translation compared to the fourth quarter of 2017. Sales growth was the strongest in France, Central Europe and Finland. North American fourth quarter sales increased approximately 1% on a constant currency basis, compared to the fourth quarter of 2017. Growth in grain storage equipment, hay tools and sprayers was offset by lower tractor sales. AGCO's fourth quarter 2018 net sales in South America increased approximately 1% compared to the fourth quarter of 2017, excluding negative currency translation impacts. Growth in Brazil was mostly offset by lower sales in Argentina. Net sales in our Asia/Pacific/Africa segment increased about 16% in the fourth quarter of 2018 compared to 2017, excluding negative impact of currency. Sales growth in Asia accounted for most of the increase. Global part sales were approximately $299 million for the fourth quarter of 2018 and were down about 2% compared to the same period in 2017, excluding the negative impact of currency translation. For the full-year, 2018 part sales increased approximately 2% on a constant currency basis, compared to 2017. Slide seven examines AGCO's sales and margin performance. AGCO's adjusted operating margins improved modestly in the fourth quarter of 2018, compared to the same period last year. Margins benefited from higher sales, increased production and pricing, raw material cost increases, and the transactional impact of currency movements offset these impacts. Operating income grew $9.7 million in South America in the fourth quarter of 2018, compared to the same period in 2017. Progress on our technology transition, improved market demand as well as increased production contributed to the improvement. Europe/Middle East segment reported an increase of $22 million in the operating income, compared to the fourth quarter of 2017, resulting from the benefit of higher sales and production. North American operating income decreased $6.3 million in the fourth quarter compared to the fourth quarter of 2017. Sales growth was offset by lower margins due to weaker product mix, increased warranty costs and higher steel and other material costs. The material cost increases were most significant in GSI's grain storage business, where steel makes up a significant percentage of cost of goods sold. While fourth quarter operating margins exceeded 8% in our Asia/Pacific/Africa segment, operating income decreased modestly compared to the fourth quarter of 2017, due to a rich sales mix last year. Slide eight details GSI sales by region and product. GSI sales increased about 6%, excluding currency impact in 2018, compared to 2017. Globally, grain and seed sales grew approximately 12%, while protein production sales were approximately flat on a constant currency basis. Grain and seed equipment sales grew across all regions except Europe/Middle East with the most significant growth in the North America and Asia Pacific regions. The global trends toward growing population and increased protein consumption should make our GSI business an attractive source of profitable growth for AGCO in the years ahead. Slide nine looks at AGCO's investments through both capital expenditures, and research and development expense. We're continuing to make strategic investments to refresh and expand our product lines, upgrade our system capabilities and improve our factory productivity. We intend to maintain the level of investment in 2019 to execute our product development plan and meet new emissions requirements in both Brazil and Europe. Our spending plan is needed to maintain our competitiveness and to support the long-term growth of the business. As we look beyond 2019, we expect to see our CapEx and engineering, both range from 2.5% to 3% of sales. Slide 10 addresses AGCO's free cash flow, which represents cash resulting from operating activities less capital expenditures. Free cash flow totaled $393 million for 2018 after funding our new product development programs and factory efficiency initiatives. As a result of the strong free cash flow that AGCO has generated over the last few years, our balance sheet and liquidity position remained solid, and we continue to return cash to shareholders. For 2019, after covering our spending on strategic investments, we are targeting another strong free cash flow year. At December 31, 2018, our North American dealer month supply on a trailing 12-month basis was lower for tractors, hay equipments and combines. We expect our North American production to be in line with retail demand during 2019. Losses on sales of receivables associated with our receivable financing facilities, which are included in other expense net, were approximately $11.8 million for the fourth quarter of 2018, compared to $11.7 million in the same period of 2017. As we focus on return for shareholders, we expect cash distributions to continue to be an important component of our long-term capital allocation plan. Over those past 6.5 years, we've executed share repurchases of approximately $1.2 billion, which has had the effect of reducing our share count by over 20%. During 2018, we completed $184 million of share repurchases and we look to continue share repurchases in 2019 supported by another year of strong cash flow. Our 2019 outlook for the three major regional markets is captured on slide 12. In North America the USDA is projecting 2019 farm income to be down modestly in the United States compared to 2018. While low horsepower equipment sales are expected to soften from their historically high levels, high horsepower equipment sales are expected to continue to the gradual recovery. Farm economics are expected to improve modestly across Western Europe in 2019, driven primarily by favorable wheat prices and more normal crop production. Based on these assumptions, we expect sentiment to remain positive and 2019 demand to be stable across the European markets. Industry demand in South America in 2019 is expected to be improved compared to 2018. Higher retail sales in Brazil are expected to be partially offset by lower sales in Argentina. Slide 13 highlights the assumptions underlying our 2019 outlook. The priority for 2019 continues to be managing our costs and continuing to invest in our products and business improvement opportunities. Our market forecast assumes relatively stable industry demand across all regions. Our plan includes market share improvement with price increases in the 2% to 2.5% range on a consolidated basis. At current exchange rates, we expect currency translation to negatively impact sales by about 2.5%. In 2019, engineering expenses are expected to be relatively flat compared to 2018. Operating margins are expected to improve by about 75 basis points due to higher sales levels and the benefit of our productivity and purchasing initiatives, partially offset by the investments we're making in our long-term initiatives. Margin expansion is projected across all regions in 2019. Operating margins in South America are expected to be improved throughout 2019 compared to 2018. South America margins will be pressured in the first half of 2019 from lower production and the impact of our transition to Tier 3 technology for our lower horsepower range. We are targeting an effective tax rate of 32% to 33% for 2019, and interest and other expense is expected to be down about $10 million for 2019. Slide 14 lists our view of selected 2019 financial goals. We are projecting 2019 sales to be in the $9.6 billion range. We expect gross and operating margins to be improved from 2018, reflecting the positive impact of higher sales volumes and cost-reduction efforts, partially offset by investments in our strategic initiatives. Based on these assumptions, we are targeting 2019 earnings per share of approximately $4.60. We expect capital expenditures to be approximately $25 million above 2018 levels and free cash flow to be in the $275 million to $300 million range, after recovering inventory builds associated with new emissions regulations in Europe, and new product introductions. And finally, in terms of our first quarter results, we project sales to be down slightly due to currency pressures. Margin improvement is expected to support an increase in earnings per share, compared to the first quarter of 2018. With these details in mind, we expect our first quarter earnings per share to be in the $0.40 range. That concludes our prepared remarks. Operator, we are ready to take questions.

[Operator Instructions] And the first question comes from the line of Seth Weber with RBC Capital Markets.

This is Brendan on for Seth. As we look to your 2019 free cash flow guide, you mentioned you're expecting another good year, but it is a pretty good step down year-over-year. I was wondering if there was any color you could provide there.

Well, if you look at - we have got some benefit of our sales growth in 2018, which drove up some of these volume -related items, like accounts payable and accrued expense. And so, we don't expect to see as much of a cash flow benefit from that. Those will be flattish or perhaps even a little down in 2019. So, there will be some working capital usage in 2019. So, I think that's the main difference between how we performed in ‘18 versus ‘19.

And then, I apologize if I missed this, but the big production jump in this quarter, what was the source of that?

Yes. We increased production for building ahead units in advance of the transition to emissions changes, both in Europe and in Brazil. So, we are moving to Tier 5 in Europe next year and Tier 3 for low horsepower equipment in Brazil. And we built engines in Europe and we built tractors in advance of that. As these new products get released throughout the year, we have a full supply of inventory on hand, so that we can meet market demands throughout the year.

Your next question comes from the line of Chad Dillard with Deutsche Bank.

So, your manufacturing transition clearly hurt some market share in South America last year. Now that you are mostly through that, can you just give some color or progress on recapturing the loss share? And how many points you are actually baking into that guide right now?

Well, I think, what's happening in South America is a big transition in terms of our product lineup over 2018 but also 2019. So, as I mentioned before, we transitioned all our lower horsepower equipment to Tier 3 in 2019. So, it is not behind us yet. We still have another year of hard work to get those products in the marketplace and through our production. These new products are of higher technology, there are big changes, there basically are global designs that we're bringing into Brazil to accelerate the technology that we think the Brazilian farmers are demanding. So, what's happening in Brazil during 2018 was that we had a very rapid change in these new products, which created some disruption in our manufacturing facilities. And also, we weren’t getting the cost targets that we believe will ultimately get on the new products as well than a lot of change to our supply base as well. So, we've been making good progress with the products that we’ve already introduced in the market. We’ve seen some improvement there, but we have another range of products coming into the market that will create some of the same challenges for us in 2019. And as we said in our comments, we believe that our results will be better in 2019 in South America, but there's still a lot of work in progress to do. In terms of market share, our market shares were similar to the prior year. So, we think these new products will also help us with our competitiveness in a market that's a extremely competitive right now.

What is important to know is that the Brazilian market is basically heading into the same direction as United States or western Europe. So, product does become more and more professional and more and more modern. So, the good news is, we have all these products and they just have to be localized. We have a very good plan how to do that. We have started to do that already last year, continue to do that in 2019. And our vision is to be the leader when it comes to high-tech solutions also in South America.

And then, just going back to North America margins and a little bit of weakness there this past quarter. Can you just like rank order what the impact was between mix, warranty and materials? And then, also, just on the GSI business, can you talk about just your ability to actually capture price to cover the material cost escalation?

Sure. So, when we think about fourth quarter margins in North America, it is important to remember seasonality for some of our specific product lines. GSI, you mentioned is seasonally stronger in the first part of year, as is precision planning. This is the first full year, we have had a precision planning, so that both of those segments definitely had an impact on our margin, just because of their weaker seasonality in the fourth quarter. In terms of the steel impact, we have that kind of across our product line and especially in the second half of year. We did see our gross pricing improve as we went through the year, the fourth quarter, our gross pricing was over too. But, because of the material cost increases, steel was especially -- our net pricing in the fourth quarter was only about 20 bps. So, we definitely saw an impact on our margins as a result of that. We have more pricing in our business and that we put more in the back half of the year. We have more in the full year for 2019, and we do expect pricing in 2019 to be as we have said in the 2% to 2.5% range. So, we do expect margins to be better for us in the GSI segment, which will help in North America and the other businesses. Thank you, Chad. And we will move onto the next caller.

Your next question comes from the line of Jamie Cook with Credit Suisse.

Andy, understanding the comments you made on South America in first half versus second half, but what are you assuming for margins in South America? And do you expect to make money in the first half of the year? Could you quantify what the transition costs are going to be in ‘19 versus ‘18? And then, my second question, just broadly a lot of peers are talking about continued supply constraints, incremental freight costs, stuff like that. Can you just give us some color on what your assumptions are for 2019?

I would start with the second question here, because I think were in a position to manage our suppliers including logistics last year and we will also be in a position to do that this year. So, we don’t expect anything which is not already reflected in our communication this morning. So, we I think will do fine. And our focus in general for 2019 will be on a substantial improvement of our margin. Andy?

Okay. Thank you, Martin. In terms of how we look first half, second half, we are projecting a loss in the first quarter and about a breakeven second quarter. So, ultimately, a loss in the first half and then -- but still much improved over what we did in 2018. And then, we expect to see improvement in the second half as well. So, our margins we expect to be probably about 400 basis points or so above what we achieved in 2018, which was obviously a net loss for the full year. So, as I pointed out before, these transition to the new products is not only what's happening in the factory but it's also with the first cost of the products and we have to work our way through that reducing product costs, reducing our cost to fund suppliers, and that does take some time. As I said, we’re seeing progress so far.

Your next question comes from the line of Larry De Maria with William Blair.

Andy, tax rate 32%, 33% in ‘19, which is moving the right direction, I guess from the expected 40% in the second half. I know, you are looking to move some debt offshore and get that lower compared to your peers. So, where do we stand in that process? And what's the right maybe long term tax rate? Can you move them up to get that into the mid-20%, let's say?

Yes, Larry. So, in terms of what we've done with our balance sheet and our debt, we successfully have moved virtually all our debt out of the U.S. and into other jurisdictions, particularly Europe. So that does have the benefit of really an overall reduction in interest expense. As we pointed out, our target is that $10 million improvement in our below the line items in 2019. But also, it helps improve the profitability of our North America legal entities, which are at operating losses at this point. And so, we need to get North America to be more -- get to a profit position, and that will continue to drive -- drive down that overall tax rate. As you recall, we don't benefit losses on our tax provision for our North America losses. And so, for that reason, we are trying to move as much cost out of the U.S., like interest expense and that we are looking for continued operating improvement as well to drive our profitability up in the U.S. So, Larry, as we said, 32% to 33% this year. If we get the North America business to profit levels, I think we can be 30 or in the high 20s.

And then, can you just delineate between Argentina and Brazil in ‘19, your expectations for the market? And what -- excluding some of the friction of the first half costs, what would the margin normally be, if we could just calibrate kind of a normal run rate margin, going forward?

So, Brazil, I think, we are looking for probably low-double-digit increases in Brazil, around 10% or so, and probably similar reduction in Argentina this year. So, maybe 10% to 15% reduction in Argentina. Your second question, Larry, was about -- can you repeat it, please?

One moment.

We’ll go ahead and move on, operator, to the next question.

The next question comes from the line of Jerry Revich with Goldman Sachs.

Andy, can you talk about the organic growth cadence that you expect over the course of the year? You mentioned the currency comps are obviously really tough in the first quarter, but do you expect slower organic growth in the first quarter than you do in the full-year guide? Can you just flush out how you expect organic cadence to play out?

In terms of organic growth, it’s slightly below first quarter but positive. And then, we have our more substantial growth in the middle quarters of the year and then little softer increases in the Q4. Those are still subject to change, as we look at how the year’s progressing, how our retail sales progress, all sorts of things can move those numbers around a little bit. But, that’s how we look at it, at this point. So, not really big swings on an organic basis from quarter-to-quarter. It's more as you point out relating to currency pressures.

And the first quarter is really good quarter seasonally for your precision planting business. Can you just talk about your expectations for year-over-year growth in that business? Are you folks successfully able to drive adoption ahead of end-market demand for that product?

Sure. Jerry, as you know, the majority of that business has been in North America, and that continues to do well. Penetration rates were actually relatively low for some of their higher end products, and we expect to see growth in North America but then we have even more significant opportunities, as you look to South American to Europe as we develop our distribution in those markets and particularly, in Europe as we are continue with some new product development. So next year, we do expect to see sales growth more robust in the precision planting business, more significant than we are guiding to for the business in total.

Your next question comes from the line of Ann Duignan with JP Morgan.

I just wanted to circle back on the outlook for Argentinean sales to be down 10% to 15%. And if I look at the fundamentals there right now, they are about the harvest, the crop that should be something in the neighborhood of 45% to 50% greater than last year. And farmers there should make money this year, maybe not in Q1 but once we get post harvest and they sell those crops. So, I am curious why you expect that market to be down so significantly, given the fundamentals?

I like what you say and I like what you hear, Ann. Maybe we are little bit too conservative here related to the people we have there in Argentina and our dealers, and they are somewhat coming out of a depression and maybe therefore little bit more conservative than they should. So, if you would be right, which something I would really like to see, then of course it will be very good for us.

Yes, indeed. Okay. So, my second question, Martin, while I have you on the line, is around Europe and UK. You called out UK as being very strong in 2018. We all see what's been written about the impact on agriculture post Brexit. But, what are you hearing closer to feet on the street? And what kind of disruptions would you expect in your business in particular?

Well, we basically try to understand that and we hope we are very well prepared. So, that means the main disruption -- we don’t produce in the UK anymore. So, therefore the main disruption is logistics. Everybody is predicting complications at customs. And so, we make sure that we have enough tractors, maybe there a little earlier than normal, so have a little buffer inventory in case. And then, we have important supplier there, company you know very well, GKN, where we buy rims which basically go on our tractors, also on our Fendt product. So, that is something which has to be organized very carefully because we are very busy in sense with a very tight schedule and capacity. And of course, any disruption caused by some simple components like rims would be very, very bad. So, therefore, try to manage all of it. When it comes to the market as such, we believe that it will be more stable than maybe people assume because a lot of farmers are still optimistic. And the core Brexit approach of farmers is maybe higher than the guys who like to stay in the EU. I'm not sure whether that’s true but that’s what we hear.

So, are you building inventory as we speak? I mean, is that a Q1 impact that you will be producing above retail for that reason?

Yes. That will happen. It’s already happening now. So, we’re just trying to do it now in order to make sure that we don’t have a problem. The numbers are in our cash flow and in our inventory numbers. So, it’s nothing additional.

Your next question comes from the line of Joel Tiss with BMO.

I wonder, Martin, as long as you hear, I wondered if you could talk a little bit about acquisitions and what you're seeing out there in terms of the competitive landscape.

Yes. As you know the industry has very much consolidated over the last many years. And we are looking all the time whether there are any additional opportunities. What we see is some small acquisitions, some of our peers are doing things we knew about but didn’t want to go for it. So, overall, I think, there are not too many big deals feasible and possible, mainly because of antitrust. The big three, I think most probably cannot be combined because of antitrust issues. And then, the smaller ones, most of them are European and family owned, and the owners I know very well, they are not willing or interested to serve. So, therefore, I don’t see huge deals on the horizon. We basically have the strategy to do the one or the other meaningful, smaller acquisition to complete our product offering as we did with precision planting. I think that was a great deal for us. And we look into similar things of course also in the future. That includes the market of startups because sometimes where you might find something attractive there.

And then, if you look out kind of five years or put whatever timeframe you want on it, what do you feel like the biggest strategic opportunities are for you that that you should be kind of laying the groundwork for today?

We lay the groundwork -- I would like echo to be the leader in profitability. And so, I think we will be a company above $10 billion in sales, and I want us to be the leader in margin.

Your next question comes from the line of Andy Casey with Wells Fargo Securities.

For the full year, production increased about 7%; that's good, but it's a little bit beneath what you were thinking coming out of Q3, within 8% growth outlook. First, was that modest shortfall compared to the Q3 outlook, driven by North America or was it due to something else? And then, I have a follow-up.

I think, it’s just within the range of what we expected. There weren’t any meaningful adjustments to production that were unplanned in the Q4.

And then, on the outlook for 2019, should we expect about a 2% to 3% production?

Yes. That’s about right.

And the next question comes from the line of Joe O'Dea with Vertical Research.

First question on Europe. After a string of quarters here with continuing to post strong growth, particularly relative to an end market that you characterize as flattish, and I think in the past you've talked to some product rollout under the Fendt umbrella that’s been driving some of that. But, I just wanted to check in on where you stand. It doesn't look like the guide implies a continuation of meaningful out growth. And so, just where you are in that process? Have you basically kind of harvested the opportunity there, and just to understand growth opportunity set in Europe moving in ‘19?

In Europe, we have basically completed our reorganization of our distribution network with the project you might have heard about Route 66. So, we are getting close to get everything done. We expect our dealers therefore to be some more efficient because they will be all exclusive. And we will be a more important full liner in Europe in the future, starting already -- started already last year. Through the acquisition of Fella, now we are in the position to offer full line of hay and forage equipment for all of our dealers. And that will drive additional growth in this market.

And then, just on North America and talking about a flattish backlog in December, recently getting the Farm Bill, getting a second round of market facilitation program payments, I'm just curious how you gauge farmers’ sentiment following those events? It’s only one month removed but just what you are seeing in January, if there's any kind of positive reaction in order, so some of those things now complete?

I would say really no change there. Order backlog remains consistent with what we had a year ago. There's a lot of conflicting factors going on in North America, still that kind of underlying need for replacement demand driving a lot of farmers to want to upgrade and update their equipment that they purchased maybe five, six years ago at this point. But, as you know, there's still -- margins are still challenged with where the commodity prices are and still a lot of uncertainty around what's happening in the trade front. So, overall, as we said, we expect some improvement but there still are some factors that are holding the farmers back.

[Operator Instructions] The next question comes from the line of Ross Gilardi with Bank of America Merrill Lynch.

Maybe you could talk a little bit more about GSI and the onsite storage business. I mean, I think you said for 2018 grain and seed was up 12%. How much was just North America onsite storage? I mean, despite the margin pressures that you are talking about, I would think that business would just be booming right now with so many soybeans in particular in storage and the trade war and just farmers delaying selling grain and so forth. So, if you could talk a little bit more about, that would be helpful.

Sure. When you look at GSI grain in North America, there was an increase in 2018, 6% increase. So, we did see some increases. A lot of those increases were on the on-farm sector of the business, as you point out some of the drivers there of farmers wanting to store more grain because of some of these trade issues. But, you also have to keep in mind again profitability of the farmer is lower than where it has been, and these are relatively large investments. And so, some of them are still hesitant to make those longer term investments for something that they see as more of a short-term issue. Secondly, a lot of our grain and storage business is surrounded around commercial activities. So, selling to big traders and logistics and co-ops to the big ADMs and Cargills for new processing facilities and things like that. And because of some of their challenges, they’ve pulled back on some of their CapEx in the last few years. And so, we have not seen as much opportunity of growth in that segment of the business. So, that's something that we are looking for opportunity for that to recover, but no sign of that at this point.

And then, maybe European margins longer term, they have been very steady in this kind of 10% to 11% range for a long time now. I mean, Martin, you mentioned your aspirations several years from now to have the best margins in the industry overall. But, going back to the 10% margin target for the Company many years out, where would Europe need to be to get to that target?

Well, of course, we expect also an improvement in Europe, but overall, the issues are more or less outside Europe. But, we think that Europe has also quite some opportunities and we have a portfolio of initiatives we work on. Eric Hansotia, the brand new COO, will focus on margin improvement as his priority number one in 2019 and 2020, and the whole team is very supportive in getting us there.

So, would the objective be more to kind of sustain Europe in that low-double-digit range, and just obviously boost the Americas and rest of the world?

Yes. I think from what we learned through the process, we have plenty of opportunities also to do much better in Europe.

The final question comes from the line of Steven Fisher with UBS.

I just wanted to follow up on North America. And what did your dealers see in terms of yearend retail buying? And, how would a no trade deal affect your North American outlook?

We had a good end of the year in terms of retail. Our performance for our dealers and our retail activity was strong really across a number of product ranges and throughout the number of ranges in our tractor portfolio. So, we were pleased with again how a lot of our new products are being accepted in the marketplace and we’ve got more to come. So, we are pleased with some of the progress that we have made in North America in terms of market performance. It’s hard to predict what's going to happen in terms of trade changes. Again, farmers don't like uncertainty. So, I think if we can get something cleared up, and it’s clear that they have free ability to sell their grain across the world, that will give them more confidence and hopefully stimulate a better performance in 2019.

And maybe just on small ag, I mean it’s held up for a while, despite some tough conditions. So, I'm just curious what factors in your view are now causing small ag to turn a bit weaker in your outlook?

Well, I think, it's just a matter of we are concerned that there has been a lot of buying over the last couple years in that segment. And so, again, these products last a number of years. And so, for that reason, probably there is going to be a point where the market trends back down. We still expect it to be strong and relative to most years very strong. It is driven a lot by government spending and normal economic conditions and not really as related to the ag economy. So, all those are pointing towards positive. And so, we still expect the market to be strong but could trend down a little just because of what's happened in the prior years.

And with no further questions, I'll hand the call back to Greg Peterson for closing remarks.

Thanks, Nicole. And I want to thank everyone for participating this morning and encourage you if you have follow-up questions to get in contact with us. We will be here throughout the day. Thanks and have a good day.

This does conclude today's conference call. We thank you for your participation and ask that you please disconnect your line.