Earnings Labs

AGCO Corporation (AGCO)

Q2 2024 Earnings Call· Tue, Jul 30, 2024

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Transcript

Operator

Operator

Good day. And welcome to the AGCO Second Quarter 2024 Earnings Call. All participants will be in a listen only mode [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Greg Peterson, AGCO Head of Investor Relations. Please go ahead.

Greg Peterson

Analyst

Thanks, and good morning. Welcome to those of you joining us for AGCO's second quarter 2024 earnings call. This morning, we'll refer to a slide presentation that's posted on our Web site at www.agcocorp.com. The non-GAAP measures used in that slide presentation are reconciled to GAAP measures in the appendix of the presentation. We'll also make forward-looking statements this morning about our strategic plans and initiatives as well as their financial impacts. We'll discuss demand, product development and capital expenditure plans and timing of those plans and our expectations concerning the costs and benefits of those plans and timing of those benefits. Future revenue, crop production and farm income will also be discussed as well as production levels, price levels, margins, earnings, operating income, cash flow, engineering expense, tax rates and other financial metrics. Our expectation with respect to the sale of our Grain & Protein business will be discussed. All of these are subject to risks that could cause the actual results to differ materially from those suggested by those statements. These include but are not limited to; adverse developments in the agricultural industry; supply chain disruption; inflation; weather; commodity prices; changes in product demand; interruptions in the supply of parts and products; the possible failure to develop new and improved products on time, including premium technology and smart farming solutions within budget and with the expected performance and price benefits; difficulties in integrating the PTx Trimble business in a manner that produces the expected financial results; reactions by customers and competitors to the transactions, including the rate at which PTx Trimble's largest OEM customer reduces purchases of PTx Trimble equipment and the rate of replacement by the joint venture of those sales; introduction of new or improved products by our competitors and reductions in pricing by them; the war in the Ukraine; difficulties in integrating acquired businesses; and in completing expansion and modernization plans on time and in a manner that produces the expected financial results; the need to fulfill closing conditions, including obtaining required governmental approvals in connection with the sale of our Grain & Protein business; and adverse changes in the financial and foreign exchange markets. Actual results could differ materially from those suggested in these statements. Further information concerning these and other risks is included in AGCO's filings with the SEC, including its Form 10-K for the year ended December 31, 2023 and subsequent Form 10-Q filings. AGCO disclaims any obligation to update any forward-looking statements as except as required by law. We will make a replay of this call available on our corporate Web site. On the call with me this morning is Eric Hansotia, our Chairman, President and Chief Executive Officer; and Damon Audia, Senior Vice President and Chief Financial Officer. With that, Eric, please go ahead.

Eric Hansotia

Analyst

Thanks, Greg, and good morning. Before I go into the quarterly details and the exciting things happening at AGCO, I wanted to take a moment to reflect on how I'm feeling about the industry and the things that we are doing to position AGCO for success. As in prior cycle downturns, there's always a big correction year where the industry slows rapidly as farmers reduce their spend on new equipment. We've known 2024 was going to be that big transitional year. After the transitional year, industry demand tends to float around trough levels for a period of time before ramping back up. The duration and the severity of the decline are influenced by many things like commodity prices, weather and stock-to-use ratios, which will make every downturn a little different. For AGCO, we understand the industry dynamics and are working aggressively to address the challenges and position ourselves for success. We are rapidly cutting production this year faster than in the past to rightsize dealer inventory levels this year in hopes that production and retail demand are more balanced in 2025. We have been actively addressing costs for several quarters. In the second quarter, we made the decision to further restructure our workforce due to the weakening market demand. We also challenged our teams to think differently with technologies and other sustainable lower cost operating alternatives. Much of these savings are still to come in 2025 and beyond, helping to further improve our ability to deliver higher operating margins throughout the cycle. In addition, we are doubling down on being the most farmer focused company in the industry. With our continued role at our FarmerCore, we are helping better serve farmers how they want to be served. In addition to our unique mixed fleet retrofit mindset, we are helping farmers…

Damon Audia

Analyst

Thank you, Eric. And good morning, everyone. Slide 9 provides an overview of regional net sales performance for the second quarter. Net sales were down approximately 16% in the second quarter compared to the second quarter of 2023 when excluding the negative effect of currency translation and the positive impact of acquisitions. By region, the Europe/Middle East segment reported sales down roughly 5% in the quarter compared to the same period of 2023, excluding the impact of unfavorable currency translation and favorable impact of acquisitions. Growth in Germany, France and Spain was offset by lower sales across nearly all other European markets. Increased sales of high horsepower tractors, especially Fendt products, was offset by declines in other products. South American net sales decreased approximately 40% in the quarter, excluding the impact of unfavorable currency translation and favorable impact of acquisitions. Significantly softer industry sales and underproduction of retail demand drove most of the decrease. Lower sales of tractors and combines accounted for most of the decline. The substantial sales decrease in Brazil was slightly offset by modestly higher sales in Argentina and other South American markets. Net sales in North American region decreased approximately 18% in the quarter, excluding the impact of unfavorable currency translation and favorable impact of acquisitions. Softer industry sales and lower end market demand all contributed to lower sales. The most significant sales declines occurred in the high horsepower and mid range tractor categories. Net sales in the second quarter in Asia/Pacific/Africa decreased 35%, excluding the negative currency translation impacts and favorable impacts of acquisitions due to weaker end market demand and lower production volumes. Lower sales in China and Australia drove most of the decline. Finally, consolidated replacement part sales were approximately $488 million for the second quarter, down approximately 1% year-over-year or flat excluding…

Operator

Operator

[Operator Instructions] The first question comes from Jerry Revich of Goldman Sachs.

Jerry Revich

Analyst

I’m wondering if you could just talk about the decremental margin outlook that's implied for the back half of the year. What's the impact to that of the inventory reduction that you folks are delivering? In prior cycles decremental margins for you folks have been closer to 20%. So I'm wondering as we think about '25 after company inventories have come down, should we be thinking that decremental margins in the first half of '25 being closer to the low 20s that you folks have posted historically?

Damon Audia

Analyst

I think, Jerry, as you saw with the production cuts here in the back half of 2024, doing a significant level of reduction, again, the 20% to 25% reductions this year is the highest level we've cut in over a decade, really trying to rightsize dealer inventories as we go through this year. So as we think about 2025 and you listen to Eric's comments about the industry likely floating at this trough level, we would expect, assuming not a significant reduction but we would expect that our decrementals next year should be closer to that mid to high 20s that you would have seen. And again, I think if you factor in the effect of pricing is having here in the back half of the year, you would see that the decrementals from an operational standpoint are in that high 20%, 30% range as well as just being magnified because of the decrease in pricing as well.

Jerry Revich

Analyst

And then can I ask on your Precision Ag business, can you talk about developments that you're seeing in the market? How is the aftermarket Precision Ag business performing in the back half of the year versus what you're seeing on the whole goods side? Can you just double click on the near term performance, if you don't mind?

Eric Hansotia

Analyst

So our -- what we call our business now is PTx, Precision Technologies multiplied, that's the combination of PTx Trimble, the JV we created and Precision Planting. Both of them have a mix of OEM sales and retrofit sales. The OEM sales are down much like the industry, maybe even a little bit more because there's some channel destocking with some of the key OEMs. But we haven't lost any OEM customers, it's just they're moving with the industry. Retrofit has been up but it's cooling. And so we're seeing areas now where even some of the retrofit is going down. But again, we've got our AGCO ramp-up right on track, maybe even a little bit ahead of plan. The CNH dealer sign ups are on track, maybe even little bit ahead of plan. And we've not lost any OEM customers, not lost any talent from our organization in terms of engineers and things like that. So the business is performing like we would expect, it's just being hit by the industry movements.

Operator

Operator

Next question comes from Tami Zakaria with JPMorgan.

Tami Zakaria

Analyst · JPMorgan.

So I was hoping you could help me with some numbers. So the implied back half production outlook, how much is that versus your expectation of retail sales? I'm trying to understand production versus retail sales growth expectation as we exit this year.

Damon Audia

Analyst · JPMorgan.

So Tami, the production in the back half is going to be down, call it, mid to upper 20s -- mid-20s, more pronounced here in the third quarter. I would say on a quarterly basis, a little bit above the annual guidance. And then in the fourth quarter, sort of, I'd say, in the range of that 20% to 25%, mainly because we're lapping the easier comp in South America in the fourth quarter. So you're going to be seeing production levels down in the sort of low to mid-20s here in Q3 and Q4 as we go into 2025.

Tami Zakaria

Analyst · JPMorgan.

So then as you exit this year, how much is your production going to be versus your expectation of the mid cycle volume?

Damon Audia

Analyst · JPMorgan.

So I guess the way I would look at the mid cycle volume, Tami is, last year, we were at about 105% of mid cycle. If you remember last year, there was also a fairly strong channel replacement or filling of that channel as we started 2023 with a very low dealer inventory level. So you would sort of view that at 105% plus some incremental production, it's a little bit of incremental production for that dealer fill, now coming down to an industry of around 90%. So you can see that we're sort of -- production levels are down 15%-plus to get back to sort of, I would say, this mid cycle when you factor in the overproduction, so call it 10% to 15% is probably the range to think about the delta between where we are and getting back to mid cycle.

Operator

Operator

Next question comes from Steven Fisher with UBS.

Steven Fisher

Analyst · UBS.

The pricing down to 0%, what drove that? Was that higher incentives to make trades happen, was it reductions in actual pricing? And how do we think about sort of the regional spread of where that change happened from the prior pricing expectations for the year?

Damon Audia

Analyst · UBS.

Steve, I think the -- generally speaking, the incremental price -- the reduction in our outlook is reflective of the incremental discounts really trying to spur more retail sales. As we've seen the industries weaken here, South America, North America and even to a certain degree, in the non-Fendt branded products in Europe, we've definitely seen the incentives picking up. I think relative to our prior outlook, I would say that the declines or the change has really been focused South America, Europe, and to a lesser degree North America. But I would say Europe and South America were probably the two biggest changes that we saw relative to the last quarter.

Steven Fisher

Analyst · UBS.

And then you're undertaking this restructuring. I'm curious kind of where you think that will leave you relative to the ideal manufacturing structure that you see for the future of the business. Do you think this will get you there or are there still other steps that you think you might be taking over the next couple of years to kind of put the business and the manufacturing structure in place for the next 10 years?

Damon Audia

Analyst · UBS.

So maybe I'll start and then Eric may want to add a few more comments longer term. But the restructuring activities that we alluded to, I would say, we're more SG&A back office orientated. So that 6% reduction in the workforce we've talked about is really reflective of the industry cooling and us trying to shrink our overall cost here. But at the same time, as I may have mentioned during the Technology Day, this is really challenging our teams to look deeper at leveraging technologies, generative AI, and trying to do things in a much more efficient manner. And at the same time, trying to commonize things where we can centralize them potentially in lower cost areas or have centers of excellence versus how AGCO had been built up in the history of a group of acquisitions really not creating that common skeleton. So as we looked at the industry it sort of gave us that opportunity to shrink the workforce to stay where we needed to be, but at the same time, take down or further reduce it through simplicity. So again, I think there's probably opportunities when we look as we learn more about our operations, we learn more about technology. But if you look at what we're talking about that $100 million to $125 million, as Eric alluded to and I alluded to, that's run rate savings, that's not reflective in these numbers that we'll start to see that build in '25 and hopefully more to come as we better leverage technology. But I think on the footprint, Eric, anything else you want to add?

Eric Hansotia

Analyst · UBS.

No, that's exactly right. We're taking fast action on getting ourselves rightsized for the industry that we're seeing. The 6% is a net number so we're actually cutting deeper in some of our high cost countries, hiring back in some low cost countries, but that's really about rightsizing and reflecting the demand we're facing. Then there's a chapter two about thinking differently about how we run the business. And Damon already covered that so I don't need to repeat, but it's largely using artificial intelligence and automating much of the routine tasks that we have and higher leverage of lower cost locations.

Operator

Operator

The next question comes from Mig Dobre with RW Baird.

Mig Dobre

Analyst · RW Baird.

I want to go back to the discussion on production and dealer inventories. I just want to make sure that I properly understand it. So you talked about your industry forecast being down 15% for this year and production for the full year down 20% to 25%. Is it fair to understand the gap between the two is the amount of underproduction or destocking that is happening in the channel? And if so, can you give us a sense from a unit perspective where you think your channel, your dealer inventories are going to be relative to where they exited in 2022? So before we had that kind of like stocking dynamic of last year.

Damon Audia

Analyst · RW Baird.

So maybe we'll have to go back and look at the 2022 so I don't think we have that handy right now, but maybe on a follow-up, Greg can get you that. But I think your comment about the industry decline versus the production decline, that's spot on. That's the destocking that we're talking about here to try to better rightsize the inventory. And again, I think as we said on some of my comments, there is still more work to do here in North America. We do want to take that inventory levels down. Right now, we're sitting at around eight months of inventory so we want to get that down a couple more months, and that's part of the large production cuts we have planned in the back half of the year. Europe has been staying flat the last couple of quarters at around four months of inventory. And again, we probably have a little bit of access in our more volume orientated brands of Massey and Valtra. Fendt's doing quite well from a share capture standpoint, which is keeping the dealer inventory levels at probably the optimal level. And then South America, as that industry continues to decline despite the production cuts we're taking in last quarter, in the second quarter, we cut production in South America 57%. And so a significant cut there. As we see that industry cool, the dealer inventory, though, stayed relatively flat. So again, we now have more production cuts in the back half of the year, trying to get that four months down to probably more around three months by the end of the year as we hope we see some improvement going into 2025 in that market.

Eric Hansotia

Analyst · RW Baird.

And as we said in our comments, this is the big correction year. And most cycles, they go through one big year where there's a big correction, and this one is going from $105 million down to $90 million. And we're being very aggressive, much more aggressive than we would have in other -- in historical cycles to cut production, get it out of the system so that we can be much closer to retail demand in '25.

Mig Dobre

Analyst · RW Baird.

My follow-up is on the mid cycle comment that you had. Maybe a reminder here in terms of how you guys frame mid cycle. And I guess I am wondering, given the fact that machines have become so much more productive, could that actually have an impact on where mid cycle demand from a volume standpoint truly is these days?

Eric Hansotia

Analyst · RW Baird.

Well, it's a 10 year average and we watch for trends in certain markets. So like for example, Brazil is an increasing marketplace. It still has a cyclicality to it but the long term trend is increasing because they're putting more acres into production. So we watch overall trends and we've got that factored into our model. And the intention is that 100% is the average industry that we should expect through the business cycle on a global basis. And so the numbers we're talking about are global perspective. And so we're believing we're about 90%. We believe this is the big correction year. And like I said earlier, oftentimes, there's one big correction year then the industry hovers around that for a little while. But it doesn't move so dramatically like it did this year and then it starts working its way back up again that's what we expect to happen.

Operator

Operator

The next question comes from Kyle Menges with Citigroup.

Kyle Menges

Analyst · Citigroup.

I'd love to follow up on that last question and just dive deeper into mid cycle. So if you're at 90% of mid cycle, could you kind of parse out where you think you are as a percent of mid cycle by region like North America, is that actually closer to 100% than maybe South America and Europe are more in the 80% range?

Damon Audia

Analyst · Citigroup.

I think -- so Kyle, the way I would look at it, Europe tends to be the least volatile of our major regions. Usually fluctuates in the 105% to 95% range, given the level of subsidies that the EU provides for the farmers. So I would tell you it's probably a little bit below, call it, in the high 90s. And then as you move further down, North America is coming closer to the mids, so it's the 90%-ish range that we're talking about. And then right now with the steep correction in South America, I'd put it a little bit below that. But again, remember, South America's corrections, it's coming off of what were some exceptionally strong years and go back to '22. I think it was about 130% of mid cycle. And so your -- again, percent-wise, the change over the last couple of years is quite significant but I would put Europe sort of right below 100% Europe or -- North America around the 90% in South America, maybe a little bit below that right now.

Eric Hansotia

Analyst · Citigroup.

It’s interesting, we're starting to see some early signs of recovery already in our Australia and New Zealand market. They are the first ones to go down. We're starting to see them finding bottom and maybe even recovering a little bit. So each region is in its own different place based on where they've come from and the farmer dynamics there. But they're all behaving like we would normally see in prior cycles.

Kyle Menges

Analyst · Citigroup.

And then I was curious, could you talk a little bit about the Trimble margin performance in the quarter? And is there any change to that full year outlook for Trimble margins in the high 20s?

Damon Audia

Analyst · Citigroup.

The Trimble sales in the quarter were a little bit more challenged. Again, I think what you're seeing with Trimble is a reflection of the overall industry, Kyle. As our industry levels are dropping, as we've talked in the past, there was a significant amount of purchases pre-acquisition from us, putting a lot of inventory in the channel. As the industry has slowed, obviously, that inventory in the channel is now moving out slower than maybe what we had thought a quarter ago and you're seeing that reflected in our industry outlook. And so the sales were a little bit below our expectations. Obviously, that translates to the margin issue given the high margin of that business. Our outlook when we gave you last quarter was the PTx Trimble business was going to be $300 million-plus. As I think about the lower OE sales, a little bit lower industry outlook right now, I would tell you that's probably a little bit below $300 million, so down a little bit, not materially different. So instead of $300 million-plus, maybe $300 million negative would be the way to look at that. But again, it's more a reflection of the industry levels dropping and what was in the channel moving out slower as the industry has slowed. But I think what we would tell you is all of the operational aspects of PTx Trimble, signing up the CNH dealers, connecting with the customers themselves about the value proposition, all of that is in line with our plan, feeling very good about the growth prospects. It's just working through this industry decline and letting this churn, which we knew 2024 was going to be a churn coming off of what CNH was selling to their dealers, moving from Trimble into the AGCO family, all of that was going to create churn in 2024. So again, nothing is changing in the long term prospects, it's just sort of working itself out quarter-to-quarter here.

Operator

Operator

The next question comes from Kristen Owen with Oppenheimer.

Kristen Owen

Analyst · Oppenheimer.

I wanted to ask about the assumption for market share gains. I mean, that's something that you've consistently held through the last three guidance cycles. You talked a little bit about Fendt in Europe but just wanted to see if you could unpack the market share assumptions maybe by product line or by geography, help us understand where that share gain is coming from.

Damon Audia

Analyst · Oppenheimer.

I think, Kristen, I mean, not going into a lot of specifics. But as we've said for the last couple of quarters, Fendt has been doing exceptionally well in Europe, whether that's a result of the new 600 we've launched, the new -- the Gen7 700, all of those are driving great market share performance. Fendt, as an overall product portfolio, just to put that in perspective, is actually up year-to-date. So when you look at Fendt globally and despite this market environment, the sales are actually up 1% or so, give or take. So strong performance driven by Europe. If I think about some of the other regions, we are seeing share growth in South America, not to the extent that we were hoping as part of our original plan, given the competitive environment there but we are seeing some share growth there. And then again, depending on the pockets, whether you're looking at the combines or different horsepower, we're seeing some share growth in other markets. But it's more selective in areas, again, like lower horsepower, for example, here in North America. The team is doing quite well. So it's a little bit of a mix and match beyond those two South America and the Fendt Europe that I touched on.

Kristen Owen

Analyst · Oppenheimer.

And my follow-up is a little bit longer term. I recall during the up cycle, your goal of getting to a more balanced margin portfolio across the regions, some of those efforts were kind of prolonged in South America just given how strong the up cycle was there. Now that we are in this environment of resetting production, particularly in Brazil, are there things that you can do during this downtime to sustainably support the margin improvement in that region?

Damon Audia

Analyst · Oppenheimer.

So I think there's a couple of things that you're seeing here, Kristen. I mean, again, I wouldn't lose too much sleep on South America. Production was down 57% in the quarter, that has a tremendous burden on the P&L here. But if you think about South America and you think about those professional growers in the Cerrado region, that caters to the Fendt portfolio. And so Fendt's still a relatively low share there. We've opened up several stores, growing share there. Hopefully, those professional growers are more consistent with their buying behaviors versus some of the smaller growers who are going to be more influenced by the subsidized funding. So that should hopefully help as we grow the Fendt market share. The second one is the Precision, the PTx businesses in total. And again, that's both the Precision Planting business, which as you know, is growing in South America, still a relatively small footprint there, but we see that growing. Then you layer on PTx Trimble, which again had a good business there with significant growth potential in that market. So we see those being more stable, high margin, higher growth businesses. And then as Fendt grows in penetration, coupled with Massey and Valtra down there, the parts business. Again, we've increased the penetration in the fill rate down there. And again, as that specialty spend grows, the amount of parts business growing there hopefully will again stabilize and bolster the underlying margins and improving the bottom end margins in South America over the next several years.

Eric Hansotia

Analyst · Oppenheimer.

And just a couple of comments, everything Damon said is spot-on. We've moved from a company that was focused on small, low tech tractors in the south of Brazil to one that's got a full crop cycle set of solutions of industry leading products that's focused on the whole region. We probably have more channel change in South America than any other region in terms of improving our dealer capability. So it's a big shift in product, big shift in channel. Both of those we think are good for the long term prospects and health of that business.

Operator

Operator

Our next question comes from Stephen Volkmann with Jefferies.

Stephen Volkmann

Analyst · Jefferies.

Most of my questions have been answered, but I wanted to ask about the cadence of the cost cutting program that you've done, the $125 million, I think it was. Do we get sort of the full $125 million in '25, is that the right way to think about it or does it sort of end the year at that run rate and we maybe don't get the full amount?

Damon Audia

Analyst · Jefferies.

Steve, we won't likely get the full amount. As you know, given our large European footprint, we will go into consultation with workers' councils in Europe, that will take some time. I don't know exactly when we'll be able to wrap that up. But I would like to think -- again, I can't predict the exact timing but hopefully, in the first half of the year, first quarter, maybe first half as we work through, those consultations in sort of the second half. If all goes well, we start to see that run rate then maybe a little bit sooner. But I would have sort of assumed the exit is in that $100 million to $125 million, but definitely getting some of it through the -- as it moves through the course of the year.

Eric Hansotia

Analyst · Jefferies.

But some of those actions have already been taken. In the non-works council areas, some of those actions have already been taken. So it's a mixture.

Stephen Volkmann

Analyst · Jefferies.

And what about on the direct labor side, what are you doing there? How should we think about what sort of benefits might come on that side?

Damon Audia

Analyst · Jefferies.

Steve, we've been reducing our direct labor as a result of the overall industry environment. I think year-to-date, we've taken out probably around 3,000 direct labor associates -- or of course, funding hours over time, flex time, things of that nature. I mean, let me use that as a base when we talk about 2024 and rightsizing the inventory levels, taking the production down, trying to position ourselves for '25. And I think you heard Eric and I both talk about generally feeling this 9% is near the trough level. And again, for us to look into 2025, there are several catalysts that we see should be more positive for us as we go into 2025. You touched on that restructuring, $100 million to $125 million of run rate savings that's not embedded in my numbers. My production is coming down somewhere in the range of 20% to 25%. We look back over the last decade, 25% would be more than we've ever cut in the last decade plus. And any time that we have cut in a big production down year, the subsequent years have been significantly less. And so again, if you think about that retail versus the absorption this year that should be a positive next year if the industry follows, as Eric said, sort of trending in the similar areas. So better restructuring savings, better retail versus production absorption. PTx Trimble, again, we said this is a year of churn. We know it's not at the margins we want it to be. As it works through the dealer inventories, we expect to see that margin accretive in 2025. And then you layer on the Grain & Protein business, which has been margin dilutive this year. As we eliminate that or sell that business, that should be margin accretive next year as well. So if the industry does historical patterns, we feel very good that there's an opportunity that the margins next year could be higher than they were this year, even if we don't see a significant uplift or material change in the industry.

Eric Hansotia

Analyst · Jefferies.

And our last time, our trough margins were more in the 4% to 5% range. This time, we're -- right now, we're reporting 9% for this period. So we've got a lot of structural changes that have been embedded into the company, not even hitting the upcoming ones that Damon just mentioned.

Operator

Operator

Our last question today comes from Chad Dillard with Bernstein.

Chad Dillard

Analyst

So my question is on price cost. Just trying to understand what that data point looked like in the first half of the year and then what are you embedding for the second half of '24?

Damon Audia

Analyst

So for the full year, net zero, Chad, price versus cost was slightly positive. Price was slightly positive here in the first half of the year. When you include all the discounts, it will be maybe a little bit on the zero to slightly negative, the net. The material costs are coming down as well in the back half of the year sort of what closes the gap to keep us sort of at a net neutral here.

Chad Dillard

Analyst

And then just a second question is about South America. So like given you guys are down plus 50% in terms of production in the second quarter, where does that compare versus prior production troughs? And then I guess the second part is just like thinking about if we do get to that, I guess, absolute trough in terms of production, how should we think about like the operating margins of the business? Do you think you can actually maintain positive operating margins there?

Damon Audia

Analyst

I think, again, Chad, for us, we'll have to pull the historical production levels. But I think if -- again, look at the numbers of South America that we're -- we cut production 57% in the quarter and still delivered positive operating margin. I think as Eric alluded to, the structural changes to that business of moving from what were low to medium horsepower tractors into expanding around the crop cycle here with the IDEAL combine, with the Momentum planter, with the Fendt tractors, bringing in our PTx Trimble group now on top of the Precision Planting business there, we have structurally changed the business there. Ideally, we would expect that to be a double digit margin business. Again, this year happens to have two factors going against us. One is the speed at which we're cutting that production. And second, remember, we've been trying to communicate this now for a year. The pricing that South America was delivering a year ago we knew was unsustainable and so we weren't giving really any discounts given the strength of that market. And so we knew that was coming down. So when you put that discounting on top of the absorption, it's really driving the margins down, putting the team in a challenged situation. And despite that what they are delivering is still good margins, positive margins here, which again was a sentiment or a statement of really the way we've structurally changed the business long term there.

Operator

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Eric Hansotia for any closing remarks.

Eric Hansotia

Analyst

Thank you. I'll close today by just saying in the short term, we're focused on executing our plan to reduce inventory and aggressively control costs, to better align our operations with the current weak market environment. The key to our long term success is the continued execution of our farmer first strategy. Our focus is on growing our margin rich businesses like Fendt and parts and service and our Precision Ag business, which we've been investing in heavily over the last few years to become an innovation leader. The strategic actions we've taken over the last six months like launching FarmerCore, forming the PTx Trimble joint venture and divesting the Grain & Protein business should enhance and accelerate the benefits of our farmer first strategy. Over the last few quarters, we've touched on many factors supporting our markets, including growing populations, changing diets, low stocks-to-use levels, increased demand for biofuels and relatively healthy commodity prices. All of these trends give us confidence in the long term health of our industry. And while cycles are typical in the ag industry, how we react and weather them will illustrate how we are structurally changing AGCO to be a better, high performing business regardless of market conditions. And we recognize that we're surely closer to the bottom of the cycle than we are at the top of the cycle. We look forward to seeing you at our upcoming meeting at Farm Progress Show late in August, and thanks for your participation today.

Operator

Operator

Thank you for joining the AGCO second quarter 2024 earnings call. The call has now concluded. Have a nice day.