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Agco warns of weakening South American machinery market as it cuts sales hopes

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Agco cautioned over weakened conditions in the South American farm machinery market as it cut its forecast for full-year sales although, citing a drive to support margins, stood by its earnings forecast.

 

The US-based maker of equipment under marques such as Fendt and Massey Ferguson, which had in July forecast South America’s overall tractor market to prove flat in 2019, said it was now expecting year-on-year contraction of about 10%.

 

While acknowledging regional “benefits” from improved grain production in Brazil and Argentina, these had been “offset by interruptions in the government-subsidised finance programme in Brazil and weak macro-economic conditions in Argentina”.

 

Alberto Fernández, the Peronist who won Sunday’s elections in Argentina, will when he takes office in December inherit an economy currently in recession, and with inflation running at 55%.

 

‘Low levels of demand’

Agco reported “low levels of industry demand” in South America as for the July-to-September quarter, as well as a boost to costs from a changover to newer lines at its Brazilian factories, as it reported sales down 14.8% at $239.4m in the region,

 

It reported an operating loss there of $5.6m, compared with a $12.6m profit a year before.

 

The performance represented the worst of its four divisions, although in Asia it saw operating profits drop by 35% to $11.5m.

 

‘Uncertainty regarding trade negotiations’

In North America, operating profits held flat at $32.5m, on sales down 1.7% at $536.2m, as higher sales of smaller equipment offset a a drop in sales of high-horsepower tractors and combines, depressed by the dent to farm sentiment from downgraded corn and soybean harvests and the US trade dispute with China.

 

“The prospect of lower yields and the uncertainty regarding the outcome of trade negotiations are both contributing to weak demand in the large farm sector” in the region, said Martin Richenhagen, the Agco chairman and chief executive.

 

For Europe, the group reported a rise of 12.3% to $122.0m in operating profits for the quarter, on sales down 1.6% at $1.15bn, a decline reflecting a weakened euro, with revenues up 3.2% excluding foreign exchange effects.

 

Agco noted in Europe a “higher sales and production, pricing, improved factory productivity and a favourable sales mix”, with buoyancy in French, Spanish and central European markets more than offsetting softness in eastern Europe, and in the UK, which remains enmired in Brexit uncertainty.

 

“Healthy milk prices remain supportive of the dairy sector in western Europe,” Mr Richenhagan said.

 

‘Weakening industry conditions’

Overall, he flagged a “challenging environment of weakening industry conditions and negative currency impacts.

 

“Farming conditions continue to be challenging in many of our key markets,” he said, adding that “the current market environment is uncertain”.

 

However, while the group reported a 4.8% drop to $2.11bn in sales for the July-to-September quarter, below the $2.21bn figure Wall Street had expected, its underlying earnings per share, at $0.82, came in narrowly ahead of market forecast of a $0.78-per-share result.

 

“Our continued focus on margins supported our third quarter performance, where we experienced sales declines,” Mr Richenhagen said.

 

“Price increases as well as cost control initiatives and productivity improvement efforts allowed us to offset the impact of lower sales and production volumes in the third quarter.”

 

Full year outlook

For the full year, although Agco reduced its sales guidance by some $100m to about $9.3bn, “reflecting the negative impact of currency translation and relatively flat sales volumes”, it held its forecast for underlying earnings per share at $5.10.

 

“Gross and operating margins are expected to improve from 2018 levels,” the Georgia-based company said.

 

Analysts are expecting to Agco to report full-year earnings per share of $5.08 on revenues of $9.31bn, according to a Refinitiv poll.

 

Agco shares closed 1.2% lower at $76.11 in New York, after tumbling by 5.6% to 72.64 in early deals.

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