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AGCO Corp (NYSE:AGCO)
Q4 2019 Earnings Call
Feb 6, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Nicole and I'll be your conference operator today. At this time, I would like to welcome everyone to the AGCO 2019 Fourth Quarter Earnings Release Conference. This meeting is being recorded. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to our speaker for today, Mr. Greg Peterson, Head of Investor Relations.

Greg Peterson -- Vice President, Investor Relations

Thank you, Nicole, and good morning. Welcome to those of you joining us for AGCO's fourth quarter earnings call. You will find a presentation this morning posted at our website that we will reference today at www.agcocorp.com. We will discuss non-GAAP measures and those measures are reconciled to GAAP measures in the appendix of that presentation.

We will also make forward-looking statements this morning, including demand, product development and capital expenditure plans and timing of those plans, expansion, modernization and our expectations with respect to the costs and benefits of those plans and timing of those benefits. We'll also discuss 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 events may differ materially. We refer you to the periodic reports that we file from time to time with the Securities and Exchange Commission, including the Company's Form 10-K for the year ended December 31st, 2018. 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 these forward-looking statements except as required by law. We will have a replay of this call available on our website.

On the call with me this morning are Martin Richenhagen, our Chairman, President and Chief Executive Officer; Andy Beck, our Senior Vice President and Chief Financial Officer as well as Eric Hansotia, our Senior Vice President and Chief Operating Officer.

And with that, Martin, please go ahead.

Martin H. Richenhagen -- Chairman, President and Chief Executive Officer

Thank you, Greg, and good morning to those of you joining us on the call. We appreciate your interest in AGCO and your participation today. I'll begin my remarks on Slide 3, where you will find a summary of our fourth quarter and full year results.

We ended the year in a disappointing fashion with a number of items negatively impacting our fourth quarter results. The end markets were weaker than we expected and new product warranty costs increased significantly, rationalizations of our grain and protein business added expenses to the quarter and our effective tax rate was higher than anticipated. Andy will discuss all of these items in detail in a few minutes.

While our full year results did not meet our goals, we did make progress in many important areas in 2019. We launched a number of smart products, which are being well received in the marketplace. We expanded operating margin 55 basis points without any top line growth. We generated over $400 million in free cash flow, repurchased $130 million of our shares and raised our dividend.

While our markets remain challenging, we have maintained our 2020 financial outlook. We are targeting margin expansion and earnings growth, driven by price increases as well as ongoing cost on coal initiatives and productivity improvement efforts.

Slide 4 details industry unit retail sales by region for the first full year of 2019. Weak industry demand in the fourth quarter in most of our major markets were a key contributing factor to AGCO's sales underperformance in Florida [Phonetic]. In North America full-year industry retail tractor sales were down modestly compared to 2018 with lower tractor sales across most categories above 40-horsepower. Demand was negatively impacted by a difficult growing season, the trade dispute with China and the delayed Market Facilitation payment. Fourth quarter industry sales were slightly lower than the prior year as a late year buying surge did not materialize.

In Western Europe industry demand trended progressively lower in the back half of 2019 due to a challenging commodity price environment and higher input costs for dairy producers. Fourth quarter industry sales in Western Europe weakened significantly resulting in a 11% decline versus the prior year. Industry sales declines of the full year experienced in UK, Germany and Scandinavia were partially offset by growth in France and Finland.

Fourth quarter industry sales in Brazil did not recover as we expected, resulting in a significant decline for both the quarter and the full year. Fourth quarter industry sales in Brazil and all over South America were down over 20% compared to prior year. Farmers remain very cautious despite improved grain production in Brazil and expanding trade with China. In AGCO's Asia/Pacific/Africa region, industry sales were significantly lower due to drought conditions in Africa and Australia.

AGCO's 2019 schedule for factory production hours is shown on Slide 5. Total Company production declined by about 4% for the fourth quarter versus the same period in 2018. Compared to the prior year, production was lower in South America, flat in Europe and higher in North America. For 2020, we are targeting a production decrease of approximately 1% to 2%. And finally our December order board for tractors is up in North America but down in Europe and 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. Andy?

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

Thank you, Martin and good morning. I'll start my remarks on Slide 6 which lists the items that impacted our results in the fourth quarter. The white portion of this slide lists the items that are excluded from the adjusted EPS that we report. The first item relates to goodwill and other intangible impairment charges of approximately $177 million or $2.33 per share primarily related to our European grain and protein business. While we expect this business to contribute positively to our future results, our accounting assessment with this charge was appropriate in the fourth quarter. The other items excluded from our adjusted EPS also include restructuring expenses and a one-time tax gain related to Swiss federal income tax reform. In the shaded portion of this slide, we've listed the items that remain in our adjusted results.

The first item relates to warranty expense, which was $23 million or about $0.20 higher than the fourth quarter of 2018. The majority of the increase related to filed product improvement campaigns that we initiated to correct performance issues on some new harvesting products. The most significant issue was with the model of our large square baler. The second item in this section relates to our decision to rationalize certain brands and products within our grain and protein business. As a result of these actions, we incurred costs of about $7 million or about $0.07 a share. We anticipate this rationalization will reduce cost and complexity, while improving our overall product line.

In addition to these items, our fourth quarter results were heavily impacted by our sales falling well below forecast. The chart shows the estimated impact of the lower sales compared to forecast. As Martin discussed previously, industry sales in the quarter were weaker than anticipated, which contributed significantly to our variance in sales.

Our sales, operating income and earnings per share were all negatively impacted by the lower demand, particularly in our Europe, Middle East, Asia/Pacific/Africa and South America regions. The last item lists the impact of the fourth quarter effective tax rate, which was higher. And excluding the gain, the Swiss gain, the rate was approximately 45%.

On Slide 7, we look at AGCO's net sales performance for the fourth quarter and full year of 2019. AGCO's sales were down 1% compared to the fourth quarter of 2018, excluding the negative impact of currency translation, which impacted sales by approximately 2%. The Europe, Middle East segment sales were up 3%, excluding negative impact of currency translation compared to the fourth quarter of 2018. Sales growth in Germany and Central Europe were offset by declines in the UK, Finland, Spain and the Baltics.

AGCO's fourth quarter 2019 net sales in South America decreased approximately 15% compared to the fourth quarter of 2018 excluding negative currency impacts. Weaker market demand in Brazil and other South American markets resulted in the decline. Sales in North America increased approximately 2% excluding favorable impact of currency compared to the levels experienced in the fourth quarter of 2018. Higher sales in our Precision Planting products and combines were partially offset with lower grain and protein equipment sales. Net sales in our Asia/Pacific/Africa segment decreased about 11% in the fourth quarter compared to 2018 excluding the impact of currency. Sales were lower in both Africa and China. Part sales were approximately $299 million for the fourth quarter, which were up about 3% compared to the same period in 2018 excluding currency impacts.

Slide 8 examines AGCO's sales and margin performance. AGCO's adjusted operating margins were lower in the fourth quarter of 2019 compared to the same period last year. Reduced levels of production and sales, the impact of higher warranty expenses as well as grain and protein rationalization costs, all contributed to decreased operating margins in the fourth quarter. For the full year AGCO's operating margins improved by more than 50 basis points despite lower sales and production volumes as well as the charges that we discussed. On a regional basis for the fourth quarter, Europe, Middle East margins declined 40 basis points compared to the fourth quarter of 2018 on relatively flat sales. Higher warranty expense was mostly offset by the benefit of pricing as well as ongoing cost control efforts. North American operating margins were similar to the prior year as margins were impacted by both the warranty in grain protein -- and protein rationalization costs. In South America, the fourth quarter operating results did not improve as expected, primarily due to much lower sales and production levels resulting from weaker market demand as well as by higher warranty and bad debt costs.

The costs of our new Tier 3 technology products remain above targeted levels and we're working to lower them through new sourcing and cost-efficiency efforts. While sales did not reach our targets in the Asia/Pacific/Africa region in the fourth quarter, our operating margins in our APA segment improved by about 75 basis points over the prior year. A favorable product mix and cost control efforts contributed to the improvement.

Slide 9 details AGCO's grain storage and protein production equipment sales by region and product. Sales in this product group decreased about 5% excluding currency impacts for the full year of 2019 compared to 2018. Globally grain and seed equipment sales grew about 1% on a constant currency basis with growth in Europe and South America. Protein production sales decreased approximately 10% on a constant currency basis with the largest declines in the Asia/Pacific/Africa and North America regions.

We mentioned at our Analyst Meeting in December that we were in the process of reassessing our grain and protein business to determine how to improve its performance for our customers. Our goals included a more technology rich product lineup, a stronger focus on key markets and improving cost structure through footprint and other efficiencies. As already discussed, some of these actions taken related to brand and product rationalization and footprint changes in the fourth quarter impacted our results this year. We project that these actions will support better solutions for our customers and improve results for AGCO.

Slide 10 looks at AGCO's investments in both capital expenditures and research and development. We intend to maintain a strong level of investments in our products, resulting in capex at about 3% of our sales and R&D spend at about 3.9% of our sales in 2020. We are continuing to refresh our full line of equipment with a focus on smart machines.

Slide 11 addresses AGCO's free cash flow, which represents cash resulting from operating activities, less capital expenditures. Free cash flow totaled approximately $423 million for 2019 after funding new product development programs and factory efficiency initiatives. As a result of the strong free cash flow that AGCO generated over the last few years, our balance sheet and liquidity position remains solid and we continue to return cash to shareholders.

For 2020 after covering our spending on strategic investments, we're targeting another healthy free cash flow year. At December 31st 2019, our North America dealer month supply on a trailing 12-month basis was flat for tractors and hay equipment and higher for combines. Losses on sales receivables associated with our receivable financing facilities, which are included in other expense net were approximately $12.1 million during the fourth quarter compared to $11.8 million in the same period of 2018.

Moving on to the next slide, as we focus our returns on -- for share -- returns for shareholders, we expect cash distributions to continue to be an important component of our long-term capital allocation plan. Over the last seven years, we've executed share repurchases of over $1.3 billion, which had the effect of reducing our share count by over 26%. During the full year of 2019, we completed $130 million of share repurchases and expect cash generation to fund additional share repurchases in 2020. During the fourth quarter AGCO's Board approved a new $300 million share repurchase program.

Our updated 2020 outlook for the three major regional markets is captured on Slide 13. We have maintained our forecast for 2020 regional industry sales despite the lower than forecast results for 2019. In North America the USDA is projecting 2020 farm income in the US to remain challenged due to low commodity prices and uncertainty with market facilitation program payments. We project North American industry tractor sales to be down 0% to 5% in 2020 compared to 2019.

EU farm income is expected to soften in 2020 driven primarily by lower milk prices, partially offset by normal -- more normal crop production. Based on these assumptions we expect sentiment to remain weak and 2020 industry demand to continue to soften across the Western European markets.

Following two years of supported farm income and lower level of industry demand in Brazil, we expect to see modest market improvement in 2020. Demand in Argentina is expected to remain at low levels.

Slide 14 highlights the assumptions underlying our 2020 preliminary outlook. The priority for 2020 continues to be managing our cost and continuing to invest in our products and business improvement opportunities. Our 2020 forecast assumes a modest softening of industry demand in Western Europe, in North America and higher industry sales in South America. Our plan includes market share improvement with price increases of about 2% on a consolidated basis. At current exchange rates, we expect currency translation to be relatively neutral.

Industry -- engineering expense is expected to be relatively flat compared to 2019 at about 3.9% of sales. We are targeting an effective tax rate of about 33% for 2020. Interest and other expense is expected to be approximately flat compared to 2019 levels.

Slide 15 lists our view of selected 2020 financial goals. We are projecting sales to be in the $9.2 billion range. Higher sales and cost reduction initiatives are expected to drive margin improvement. Based on these assumptions, we're targeting 2020 earnings per share of approximately $5 to $5.20 with the projected earnings improvement expected to be phased in the second half of the year. We expect capital expenditures to be approximately flat compared to 2019 levels and free cash flow to be in the $325 million to $350 million range.

In terms of our first quarter results, we project 2020 operating income to be approximately 10% below Q1 2019 with a significantly higher effective tax rate versus the prior year. With these details in mind, Q1 2020 earnings per share are projected to be in the $0.50 to $0.60 range.

That concludes our prepared remarks. Operator, we're ready to take questions.

Questions and Answers:

Operator

[Operator Instructions] The first question will come from the line of Ashish Gupta with Stephens.

Ashish Gupta -- Stephens -- Analyst

Hi. Good morning. Thanks for taking the question. Maybe you can give us a sense for where you're expecting end-market improvement to come from. I know you spoke to kind of South America being a little bit better than your outlooks for North America and Europe. But certainly the sales outlook ended the year on a weaker tone. Just kind of wondering where we're going to see that revenue improvement in 2020.

Martin H. Richenhagen -- Chairman, President and Chief Executive Officer

Well, when we did put our plan together, we basically did not assume any trade deal with -- between the US and China, so which in -- after the fact that there was an agreement in the meantime might look a little conservative. So what we would want to see is of course commodity prices going up which then might cause investments from the American farmers.

Ashish Gupta -- Stephens -- Analyst

Okay. And then maybe just taking it another way. Could you maybe just kind of talk about the progression of the year by region, or is there -- I mean obviously the outlook for 1Q is a bit weaker and just sort of maybe the cadence for the year.

Martin H. Richenhagen -- Chairman, President and Chief Executive Officer

Beck, would do you do that?

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

Sure. Yeah, in terms of -- what we are looking in terms of sales, it's relatively as we say, sales were up to reach about $9.2 billion for the full year. First quarter sales were looking to be relatively flat and then some modest increases in the balance of the year with a little higher increase of about 2% or 3% in the fourth quarter. So we are expecting that these markets remain relatively stable but trending down, as we mentioned, in North America and Western Europe and then up in South America.

I think overall our orders are in line for our first quarter and then we'll obviously have to continue to build orders for the balance of the year.

Martin H. Richenhagen -- Chairman, President and Chief Executive Officer

While it's early but also January came in slightly better than expected.

Ashish Gupta -- Stephens -- Analyst

Great. Thank you.

Operator

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

Joel Tiss -- BMO Capital Markets-US -- Analyst

Hey guys. How is it going?

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

Good morning, Joel.

Martin H. Richenhagen -- Chairman, President and Chief Executive Officer

So far so bad.

Joel Tiss -- BMO Capital Markets-US -- Analyst

Can you give us a little bit of an update on the progress to incorporate [Indecipherable] into dealers like what the dealers have been learning and what they're hearing from the initial customers?

Martin H. Richenhagen -- Chairman, President and Chief Executive Officer

Eric?

Eric P. Hansotia -- Senior Vice President, Chief Operating Officer

You bet. So yeah, I think it's quite positive all throughout. Our customers are excited about both the product and the relationship they are building with the dealers. We've set a very, very high bar with all of our dealers, taking on this new product in terms of their qualifications and they're excited to live up to that. So, high energy within our customers and dealers. I think it's off to a good start.

Joel Tiss -- BMO Capital Markets-US -- Analyst

And then, Andy, how come the free cash flow is expected to be down in 2020 with the profitability up a little bit?

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

Yeah, Joel, we are forecasting a slight working capital use [Phonetic] in 2020. We do expect to have our inventories come down as you can see that the inventories ended up higher than where we like to see them. But we anticipate that those will be offset by increases in AR as well as probably in some of our payable and other working capital accounts. So pretty much balancing out the inventory reduction.

Joel Tiss -- BMO Capital Markets-US -- Analyst

Okay. Thank you.

Operator

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

Jamie Cook -- Credit Suisse -- Analyst

Hi. Good morning. I guess two questions. One, can you just provide an update sort of where we are in some of the supply chain initiatives associated with Tier 3 in South America and whether your assumptions on profitability and the cadence of earnings in South America change relative to the Analyst Day?

And then my second question relates to GSI. With the impairment charge you guys took, can you just talk to where GSI profitability sits today and sort of the difference between the US and overseas and sort of the longer-term view on how we think about GSI profitability outside of North America? Thanks.

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

Sure. I think, Eric, maybe you can start with what we're doing in South America and then I can cover those rest of the question.

Eric P. Hansotia -- Senior Vice President, Chief Operating Officer

Yeah. So, South America, we've actually been pretty positive about some of our products like planter growth, sprayer growth and actually even grain and protein in South America. In combines, we had a weak year in the beginning of 2019. We feel like we found bottom there and have got that business moving in the right direction. Our primary focus is on improving the business of tractors and that's the one that really was impacted by the transition to Tier 3 engines. And if we were -- we talked earlier to that we had an assumption on our portfolio plan that proved out to be not as accurate as we had hoped. So we've brought back into production what we call a heritage line of tractors, which is a lower spec, lower cost positioned product line. And then we've got all hands on deck in terms of a cross-functional effort manufacturing, purchasing, engineering and quality, all co-located and working very, very hard at effectively getting that product cost back down.

Jamie Cook -- Credit Suisse -- Analyst

And sorry, did your profitability assumptions change at all or I think you were expecting a loss in the first half of the year and then things to improve in the back half?

Eric P. Hansotia -- Senior Vice President, Chief Operating Officer

Jamie, that's still accurate. We're looking for a lot there in the first half, particularly in the first quarter, with improvement in the second quarter and then offsetting with some positive results breakeven to positive results in the third and fourth quarter.

In terms of your question on grain and protein, we pointed out the profitability as being challenged right now by number of factors and market conditions in North America, the grain market, which is the most profitable sector of our business there, has been down kind of in the same pattern of what we've seen with high horsepower row crop tractor and combine business in North America.

So it's down significantly from where we've seen it before.

The protein sector, as we pointed out, was down this year, but that's been really running fairly well. But there has been some fairly sizable spending levels over the last couple of years and that's trending, cycling and trending back down. Overall, outside of North America we've seen weaker market conditions, particularly in some of our seed treatment products as industry consolidation has impacted us and also the impact of the African swine issue in Europe, I mean in Asia has impacted our business there, which is a sizable portion of the business.

So, right now our sales, as we pointed out, are not where we'd like them to be. Our margins are more like mid-single digits right now. With margins we expect growing in 2020 as we get some of these rationalization and cost reductions done. So we expect to see margin improvement this year. Our North America segment is still the -- that business is still the most profitable piece and that one we expect improvement there as well.

Jamie Cook -- Credit Suisse -- Analyst

Thank you. I appreciate the color.

Greg Peterson -- Vice President, Investor Relations

Nicole, let's in favor -- since we have limited time today, let's limit the questions to one per analyst as we go forward. Thank you.

Operator

Certainly. And the next question will come from the line of Ann Duignan with JP Morgan.

Ann Duignan -- JP Morgan -- Analyst

Hi. Good morning. Yeah, since I have only got one question and no follow-up, Martin let you bail me out [Phonetic] again. I would like you to discuss the margin performance by region. I mean margins seem to be weaker in all regions in fourth quarter versus your expectation. And in Brazil, it looks like factory shipments in January, which just came out, were up significantly more in some segments versus your guidance. And so if shipments are up more than expected, does that mean a bigger than expected loss in the first half? Thank you.

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

In terms of margin performance you're exactly right, we didn't meet our targets here in the fourth quarter. Again, a lot of that was related to some of those warranty charges that we took, as well as the rationalization of the grain and protein. If you would look beyond those, we did see some margin improvement even in the fourth quarter in North America, pretty flat in Europe, and up in Asia and then obviously down in South America. As we look forward, we're looking for margin improvement in all of our regions in 2020.

In terms of Brazil, margins will continue to be challenged there. Our production was down about 20% in the fourth quarter, which impacted our results and in the first quarter they're going to be down similarly, I think down 20% from a year ago. And so that's going to impact our results.

You're right that we're seeing shipments as we mentioned. We hit our numbers on that first month of the year, which isn't a big month but still positive. But we're also working through some of this inventory that we had on hand in the year and some of those corrections are in the first half of the year in terms of our production.

Operator

The next question comes from the line of Seth Weber with RBC Capital Markets.

Seth Weber -- RBC Capital Markets -- Analyst

Hi, good morning. Wanted to ask about the warranty issue that you called out. I guess I think in your prepared remarks, it sounded like it hit all three regions. I guess my questions are really how comfortable are you that this is a one -- that most of this pain was hit in the fourth quarter and it won't kind of bleed into 2020? And can you give us any detail on the break-out on how much it hit each region? Thank you.

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

Sure. In terms of the warranty, these were mainly campaign costs. So these are proactive field efforts to correct issues that we have on sold units. And so that's kind of a -- is an isolated program and it doesn't affect kind of the overall warranty cost of the product, but it's obviously focused on key products where we had some issues that we need to address in order to support our customers in the right way.

So in terms of our overall warranty, we would expect this not to impact us here in future quarters at the same rate. In terms of the cost of the warranty, there was about a quarter of it in North America, a little more than a quarter in Europe and then the remainder kind of split evenly between Asia/Pacific and South America.

Seth Weber -- RBC Capital Markets -- Analyst

Okay.

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

So we did impact every market.

Seth Weber -- RBC Capital Markets -- Analyst

Okay, and you called out how much the delta was year-over-year, but can you give us an absolute dollar number for what this campaign cost?

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

The campaigns on the two -- there were a number of campaigns, but the two major ones was about three quarters of that -- result about three quarters of the increase that we've talked about.

Seth Weber -- RBC Capital Markets -- Analyst

Right. I was just wondering, is there an absolute number that we can try and get to a normalized margin if we were to add that back?

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

Yeah, I would -- again, I would say, we said $23 million was -- $22 million, $23 million was the increase and about three-quarters of it related to those two campaigns.

Seth Weber -- RBC Capital Markets -- Analyst

Okay, all right. Thanks very much, Andy. Okay.

Operator

[Operator Instructions] The next question comes from the line of Courtney Yakavonis with Morgan Stanley.

Courtney Yakavonis -- Morgan Stanley -- Analyst

Hi, thanks for the question. Just going back, Martin, to your comments that Jan came in higher than expected. Obviously, as Andy mentioned South America surpassed the upside but was that also a comment about North America and any of the surge that you didn't see in December? Have you seen it come in later and kind of just pair that versus what you're talking about with your order book right now still being down in South America?

Martin H. Richenhagen -- Chairman, President and Chief Executive Officer

Well, actually when we -- when we had our Investor Day in New York, we were still optimistic that we would basically be on target and on guidance. And so the downturn in the market came pretty sudden and unexpected basically all over the world. And so we see now things being more stable than before.

Courtney Yakavonis -- Morgan Stanley -- Analyst

Okay. Got you.

Martin H. Richenhagen -- Chairman, President and Chief Executive Officer

I'm not sure whether this was a great answer. So maybe, Andy, do you want to add something?

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

The only thing I would say is just everyone keep in mind January is probably the smallest month of the year. And right now, particularly in North America there is not a lot of retail activity because being in the winter months, not a lot of -- not lot going on. So the market really starts to pick up in terms of retail activity maybe in March and then even more heavily in April. So till we get into those parts of the markets, tough to judge.

What we are doing right now is basically filling orders to our dealers to be ready for those seasonal peaks that happen in the spring time.

Martin H. Richenhagen -- Chairman, President and Chief Executive Officer

And in Brazil -- in Brazil, basically we have started to do a lot of things. So we will have a better product offer. As Eric already mentioned, we will basically relaunch the very small low-tech tractor and so therefore gain market share in that segment again. This basically also had an impact on our overall market share development in tractors. We have basically a lot of new products, which normally might or should help us to generate better results in Brazil.

Courtney Yakavonis -- Morgan Stanley -- Analyst

Thanks. And then just maybe a quick comment on combine inventories being higher than they were. Was that expected given the IDEAL launch or is this also part of the drop-off that we saw at the end of the year with [Speech Overlap] higher?

Martin H. Richenhagen -- Chairman, President and Chief Executive Officer

It's both -- it's a combination of both.

Courtney Yakavonis -- Morgan Stanley -- Analyst

Okay, thank you.

Operator

The next question comes from the line of Ross Gilardi with Bank of America.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

Hey. Good morning, guys.

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

Good morning.

Martin H. Richenhagen -- Chairman, President and Chief Executive Officer

Good morning.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

I guess I just wanted to sort of ask the elephant in the room question here. And why didn't you cut the Q4 guide on December 13th at the Analyst Day? And how do you not cut the 2020 guidance with the fourth quarter coming in 50% below consensus? As you say, Martin, you saw this sudden deterioration in market conditions and as you guys have explained January doesn't really tell you anything about the year, your implied guidance for 15% earnings growth seems pretty optimistic given the down weak [Phonetic] commentary you provided on the end markets.

Martin H. Richenhagen -- Chairman, President and Chief Executive Officer

Yeah. When you look into the history, we always -- we basically were always very, very consistent -- consistent and very good in basically delivering on the guidance. So that's one of the few exceptions where this didn't happen. And when we met in December, we didn't know what was going on yet. So therefore we didn't want -- we -- actually we couldn't see what was in the pipeline and had no reason to change the guidance.

When it comes to 2020, I'm very optimistic that the guidance is feasible and realistic. I would even say most probably likely for slightly conservative.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

But Martin, how can you say that if you just admitted that you didn't have the information on December 13th that the quarter was going to be so bad? How could you possibly reiterate the 2020 guidance not knowing what you now know based on one month of results in the seasonally least important month of the year?

Martin H. Richenhagen -- Chairman, President and Chief Executive Officer

Yeah. But the guidance isn't based on just a month or two. So the overall -- our overall plan, I think it's pretty realistic and pretty strong. So we will -- just come back to me if I'm wrong a the end of the year. So that's the best I know today.

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

Good luck.

Martin H. Richenhagen -- Chairman, President and Chief Executive Officer

Yeah. Thank you very much. It doesn't sound like you're really wishing me good luck, to be honest.

Operator

The next question will come from the line of Stephen Volkmann with Jefferies.

Stephen Volkmann -- Jefferies -- Analyst

Hi. Good morning, guys.

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

Good morning, Steve.

Martin H. Richenhagen -- Chairman, President and Chief Executive Officer

Good morning.

Stephen Volkmann -- Jefferies -- Analyst

I'm wondering can we just do a little bit more detail on the rationalization in the storage and protein business? It seems like a fairly meaningful charge. And I guess I'm just trying to figure out sort of what you're doing there. And if you're exiting certain markets or businesses or something, would that have an impact on 2020 revenue? And then I think you said that profitability would improve on the remaining business. I'm just curious if you can kind of size that for us. So I'll put it all there and leave it at that one question.

Eric P. Hansotia -- Senior Vice President, Chief Operating Officer

You bet. I'll start this off and then Andy can add a few of the numbers, but directionally essentially what we did is we took a look all the way from one end to the other of that grain and protein business and spent some deep analysis on it during 2019 to understand where we wanted to focus that business going forward. Out of that assessment, we identified a few facilities that could be consolidated with other facilities and you saw those being announced and that was part of the charge of the restructuring.

We also exited a business that we felt was redundant in our poultry production operation that we felt it was more efficient to consolidate with one of the others and end up with a less complex business for our dealers and customers.And so we've done that and taken one of the brands and businesses out of the market.

The intention is still to serve the full protein and -- protein market through poultry and swine in our core markets and -- but just do so through a lighter footprint for production and a simpler offering in the marketplace in terms of brands and products. So that was the main focus and rationalization. We also rationalized some of our leadership structure to get more clarity on ownership and accountability.

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

And, Steve, in terms of profitability, well, as we said, our revenue this year was a little bit over $1 billion. I don't see much growth there. Probably flat to slightly down is our first estimate from a profitability standpoint, because we had some of these charges we called out. There was $7 million within our results relating to that. We should see an improvement of double-digit margin improvement. So somewhere in probably the $10 million to $15 million range improvement in those results in 2020.

Stephen Volkmann -- Jefferies -- Analyst

Great, thank you.

Operator

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

Andrew Casey -- Wells Fargo Securities -- Analyst

Thanks and good morning. I'd like to ask another question on North America, but on orders. I appreciate your earlier retail sales comment about the month's typical weakness. But the industry at large has been talking about a pent-up demand that had been kind of held back by all the uncertainty that's out there. If we look at the sentiment indicators, they picked up pretty sharply with the trade deal. I know it's a really short-term question. But did you see any incremental order pick-up during January for some of the early season type of equipment like field prep plant taking high horsepower equipment on top of the already improving end of December order board? And then, if not, what's the typical lag that you might see between sentiment improving and an order pick-up?

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

Yeah, one of the indicators that we watch is for North American market, especially related to some of the seasonal products is the Precision Planting Winter Conference, which is release of our new products and that attracts somewhere about 5,000, 6,000 of the top producers around the country and actually outside the country as well. I attend that myself and talk to quite a few of the farmers and the sentiment is certainly up. They're feeling like it was a positive for the trade deal to be resolved and brought in a fair bit of certainty. But it also came with a comment that what really will drive their buying behavior is when they see commodity prices rise because of those trade deals being put in place. So they're optimistic but yet not pulling the trigger on a lot of orders yet until actual market dynamics move more positively.

Andrew Casey -- Wells Fargo Securities -- Analyst

Okay, thank you.

Operator

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

Ben Burud -- Goldman Sachs -- Analyst

Hi. Good morning everyone. This is Ben Burud on for Jerry.

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

Good morning, Ben.

Ben Burud -- Goldman Sachs -- Analyst

Just had two quick questions on the 2020 guide. One, can you just provide us some color on the market share tailwind that's embedded in the guidance? You point that out on the slides but it would be helpful to get some color on where that share gain is coming from, what markets you see the largest opportunity and if any competitors are playing defense on that angle.

And then quickly. The second question would just be on the margin improvement you made in 2019, the 55 bps you mentioned earlier in the call, how much wood is there to chop on that angle, meaning flat -- if sales were flat again in '20, could we assume that you guys will be able to expand margins further from here? Thank you.

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

Sure. In terms of -- your second question in terms of the margin improvement, we certainly anticipate, as we pointed out, market improvement. I think that the range that we -- that you've discussed is in line with what we are expecting to do. It's obviously dependent on us achieving the pricing levels that we've talked about as well as managing our cost and our productivity in our factories as we expect to do. So those are all important factors in achieving margin improvement.

First question...

Eric P. Hansotia -- Senior Vice President, Chief Operating Officer

Was around the market share gains.

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

Yeah, the market share gains, there are some key new products that we're introducing and expanding. Eric touched on some of those already in terms of growing our high-horsepower market position in South America and -- as well as in North America. We have the second year of our IDEAL combine into the season. And so we expect some growth over the first year, which was kind of a limited release. And so there are a number of areas I would say all relating to the new products where we feel confident that we'll get a good bump from the market. And that should offset some of the market weakness that we talked about.

Ben Burud -- Goldman Sachs -- Analyst

Got it. Thank you.

Operator

The next question comes from the line of Tim Thein with Citigroup. Great. Thank you. Andy, maybe just first on a clarification on your comment earlier on GSI. I think you said mid-single digit margins. Was that a fourth quarter comment or was that a 2019?

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

That's a full year.

Timothy Thein -- Citigroup -- Analyst

Full year.Okay.

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

The business is fairly cyclical or seasonal, excuse me, and their best quarters are the second in third quarter. The fourth quarter is a relatively weak quarter for that business overall historically.

Timothy Thein -- Citigroup -- Analyst

Okay. And I realize there is a fair amount of amortization that goes through that, but obviously the cash margins are better. But if I -- going back, say, two or three years ago, was -- am I right in thinking that was like a mid-teens business for you, for GSI in total?

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

When we first started with the business when it was just North America and we haven't expanded it into some of these other markets and with other product lines, particularly some of the new protein product lines that we added, it was that high. It was in the double-digit range. That, as I pointed out earlier, was when the grain market was much stronger. And that was the most profitable segment of that business. So if we see some recovery in that market, particularly in the -- the as we're talking about it being mainly a North America business, we see recovery in that North America grain business we can get back into those double-digit margin levels for our grain business in North America.

Overall, I would say high-single digits, low double digits for the whole business if we can see some recovery in these markets, but that would be our overall target for that business.

Timothy Thein -- Citigroup -- Analyst

Okay, all right. And just real quick on the 1% to 2% production hour decline, the split, I assume, is in the pretty high single-digit down in the first half and maybe flattish in the back half, is that how we should be thinking about it or...?

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

Kind of probably mid-single digit first quarter, something like that and then progressively getting better for the rest of the year, but you're right, it's more second half improvement.

Timothy Thein -- Citigroup -- Analyst

Okay, right. Thank you.

Operator

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

Charles Dillard -- Deutsche Bank Equity Research -- Analyst

Hi, good morning everyone.

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

Good morning, Chad.Good morning.

Charles Dillard -- Deutsche Bank Equity Research -- Analyst

So I was hoping you guys could talk a little bit more about your expectations for GSI, what's embedded in the guidance and how should we think about the cadence of revenues as we kind of build through to 2020.

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

Sure. As I just mentioned, the business is really fairly seasonal. And so what we have is the revenues in the first quarter and the fourth quarter are much lower than what we see in the second and third. So we're -- as I said, the overall market improvement or sales will be -- will have margin improvement, but no top line improvement this year.

I expect to be down in the first half of the year, probably about 5% with a little flatter in the second half of the year. The sales are -- I think, about two-thirds of the sales are in the second and third quarters.

Charles Dillard -- Deutsche Bank Equity Research -- Analyst

That's helpful. And then just on capex in the fourth quarter, it seems like it came a little bit higher in expense related [Phonetic] to what was guided to. Can you just give a little more color on that?

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

Yeah, we finished some projects ahead of time. We had some spending relating to some improvements in some of our factories and then new product tooling came in a little higher than we expected. But nothing unusual or anything specific to point out.

Charles Dillard -- Deutsche Bank Equity Research -- Analyst

Yeah. Thank you.

Operator

The next question is from the line of Rob Wertheimer with Melius Research.

Robert Wertheimer -- Melius Research -- Analyst

Hey. Good morning, everyone. Could you continue the discussion, please, in Brazil, and you talked about sort of revamping or re -- whatever, some of the smaller tractors in the lower end? Can you talk a bit about your progress in larger farmers in Mato Grosso and so forth as opposed to some historical regions? Thanks.

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

Yeah, the clear intention is to move the center of mass of that business up further north and build further success in that Mato Grosso region. We've got a Company store now in Sorriso which is one of the -- essentially the heartbeat cities of Mato Grosso. And the intention there is to do a great job with parts and service targeting customers, supporting customers and establish a lighthouse success story there. We've got a dedicated team of skilled folks that are doing a really good job there and we are engaging with some of the top customers in that region. But in general, we're also evolving our dealer network where we're signing up new dealers in that region as well so that we've got a two-pronged approach, creating a lighthouse of our own and then attracting more dealers into that region combined with bringing large product -- large source of our product into that area.

So we've already launched the Momentum Planter. It's been a huge success way beyond even our expectations and so we had to raise production on that. The IDEAL combine is out running in the fields right now. We're taking that on a demo tour through all of the key farmers and then we're bringing in the high horsepower tractors. So we've got a high horsepower product plan and a distribution plan to go with it to be successful in that region.

Robert Wertheimer -- Melius Research -- Analyst

And what's the pace of chains on high horsepower tractors just being more present in the region and launched?

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

So the industry pace or our activity?

Robert Wertheimer -- Melius Research -- Analyst

No, no, I'm sorry, I'm sorry. I missed your localized in introductions. I can ask it offline. It is not clear.

Eric P. Hansotia -- Senior Vice President, Chief Operating Officer

The products that we sell in Brazil are primarily localized with the exception of some of the largest equipment that we import. So almost everything that we sell in Europe and Brazil is localized.

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

And the largest horsepower machines that we have -- don't have a natural competitor, so they don't -- they don't have the issue of some of the import duties [Indecipherable] challenges.

Robert Wertheimer -- Melius Research -- Analyst

Perfect. Thanks.

Operator

The next question is from the line of Joe O'dea with Vertical Research.

Joe O'dea -- Vertical Research -- Analyst

Hi. Good morning. Could you talk about any supply chain impact related to coronavirus and kind of what's embedded in the 1Q guide you're talking about and just kind of how you're planning for sort of what you can see at this point?

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

Yeah, thanks for that question. It's something that we're monitoring very closely. I don't think we can give you very concrete answers at this point. We've got our teams and purchasing and supply chain managing and monitoring the situation very closely. It's important to understand that we have our own factories in China and those factories supply not only the local market but are heavily focused on supplying the Global Series tractor, which is our small tractor into a number of our regions around the world. We also make components in those factories that go into assembled equipment in mainly in Brazil and in Europe. So this is something that's important to us and we're monitoring very closely because of the fact that there could be some disruptions to getting parts to our other factories and getting products to our customers in time.

Right now we think that -- right now the production levels are secured, at least through probably mid-March and then we'll start to see if there is going to be any disruptions. It's something that we're hopeful because of the levels of inventory that we're carrying, these types of components that there won't be a disruption, and we can get back up to speed. But it's difficult to really give you much more than that at this point in time.

Joe O'dea -- Vertical Research -- Analyst

I appreciate the details. Thanks.

Operator

And we do have time for one additional question. The final question will come from the line of Adam Uhlman with Cleveland Research.

Adam Uhlman -- Cleveland Research -- Analyst

Hi, guys. Good morning. I was wondering if you could speak a little bit more about your Europe outlook. And specifically I'm curious as to the sensitivity or potential downside scenario if that spreads into Germany, how much of an impact do you think that that would have on farm equipment demand? And then related to that, I guess, what you've been [Phonetic] seeing in Eastern Europe demand trends as ASF is popping up there. Thanks.

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

Okay. So we are still -- there is not much that's changed from our last discussion on Europe demand as we finished the year, we've been also evaluating going into 2020 and ASF was already in Germany in pockets and up in Belgium. So we don't see that as a big change factor. The sentiment seems fairly stable to the feedback that we gave you in December in that it was sluggish in the fourth quarter, but somewhat stabilized going into the new year. I think we're forecasting 0% to 5% down. So that's still how we see the market.

Adam Uhlman -- Cleveland Research -- Analyst

Okay, thanks.

Martin H. Richenhagen -- Chairman, President and Chief Executive Officer

Well, what you saw maybe that's interesting to know, the German government comes in with a billion of additional subsidies. We don't know yet where they will go, but overall that should also have a positive impact on the market in Germany.

Operator

And that does conclude the question-and-answer session of today's call. I will now hand the call back to Mr. Greg Peterson for closing remarks.

Greg Peterson -- Vice President, Investor Relations

Thank you, Nicole and thank you for all of your participation today and your interest in AGCO. And we will look forward to being around today to handle your follow-up questions. Thanks and have a good day.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Greg Peterson -- Vice President, Investor Relations

Martin H. Richenhagen -- Chairman, President and Chief Executive Officer

Andrew H. Beck -- Senior Vice President, Chief Financial Officer

Eric P. Hansotia -- Senior Vice President, Chief Operating Officer

Ashish Gupta -- Stephens -- Analyst

Joel Tiss -- BMO Capital Markets-US -- Analyst

Jamie Cook -- Credit Suisse -- Analyst

Ann Duignan -- JP Morgan -- Analyst

Seth Weber -- RBC Capital Markets -- Analyst

Courtney Yakavonis -- Morgan Stanley -- Analyst

Ross Gilardi -- Bank of America Merrill Lynch -- Analyst

Stephen Volkmann -- Jefferies -- Analyst

Andrew Casey -- Wells Fargo Securities -- Analyst

Ben Burud -- Goldman Sachs -- Analyst

Timothy Thein -- Citigroup -- Analyst

Charles Dillard -- Deutsche Bank Equity Research -- Analyst

Robert Wertheimer -- Melius Research -- Analyst

Joe O'dea -- Vertical Research -- Analyst

Adam Uhlman -- Cleveland Research -- Analyst

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