AGCO Corp (AGCO) Q1 2021 Earnings Call Transcript

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AGCO Corp (AGCO 1.06%)
Q1 2021 Earnings Call
Apr 29, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the AGCO 2021 First Quarter Earnings Release Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Greg Peterson, AGCO Head of Investor Relations. Please go ahead.

Greg Peterson -- Head of Investor Relations

Thank you, James. And good morning. Welcome to all of you joining us for AGCO's First Quarter 2021 Earnings Conference Call. This morning, will refer to a slide presentation that we posted to our website, you'll find it at www.agcocorp.com. We'll be using non-GAAP measures in the slide presentation and those non-GAAP measures are reconciled to GAAP measures in the appendix of that presentation. We'll also be making forward-looking statements this morning, including demand, product development and capital expenditure plans and timing of those plans and our expectations with respect to the costs and benefits of those plans. We'll talk about production levels, share repurchases, dividend rates, future revenue, price levels, margins, 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 Form 10-K for the year ended December 31st, 2020. These documents discuss important factors that could cause the actual results to differ materially from those contained in our forward-looking statements. These factors include, but are not limited to adverse developments in the agricultural industry, including those resulted from COVID 19 including plant closings, workforce availability, supply chain disruptions and product demand. There is also risks around weather, commodity prices, and changes in product demand. We disclaim any obligation to update any forward-looking statements as -- except as required by law. We'll have a replay of this call available on our corporate website later today.

Moving on, so on the call with me this morning are Eric Hansotia, our Chairman, President and Chief Executive Officer; and Andy Beck, our Chief Financial Officer. And with that, Eric, please go ahead.

Eric P. Hansotia -- Chairman, President and Chief Executive Officer

Thank you, Greg, and good morning. We appreciate your interest in AGCO and your participation on the call today. I'm going to begin my remarks on Slide 3 where you can see that we had an excellent start to to 2021. Our first quarter sales grew nearly 20% on a constant currency basis compared to the first quarter of 2020. The recent rally in commodity prices lifted farmer sentiment creating higher demand for agricultural equipment in the first quarter. Adjusted operating income was up over 94% driven by 300 basis point increase in our adjusted operating margins, with improvement achieved in all of our regions. Favorable pricing helped to offset material inflation in the first quarter. However, we expect to see a more significant impact of higher material costs during the remainder of the year. We are also facing significant challenges with our supply chain as capacity constraints and COVID disruptions continue to impact timely receipt of components for production. Based on improved market forecast and our first quarter results, we have increased our financial targets for the full year of 2021. In addition to improved sales and margins, our plan includes increased funding for smart farming, precision Ag, and digital investments to drive our strategic ambitions that we outlined to investors earlier this year.

Last week, we announced a new capital return framework to enhance the company's ability to return cash to shareholders across a variety of market conditions. The new capital return strategy includes our regularly -- regular quarterly dividend payments, share repurchases, and an annual variable special dividend to return excess cash. The announcement included a 25% increase in our regular dividend and a $4 special dividend to be paid out on June 1st. Andy is going to have more details on those plans in a few minutes.

On slide 4, we detail industry unit retail sales by region for the first quarter of 2021. The gradual recovery from the pandemic and reopening of economies have increased the demand for grain, putting pressure on global grain inventories, which are well below last year's levels. Agricultural commodity prices have risen resulting in more favorable farm economics as well as increased demand for machinery. These improved conditions are expected to generate industry growth across all major equipment markets in 2021. In North America industry, retail sales increased about 31% in the first three months of 2021 compared to the same period in 2020. Sales of low horsepower tractors moved above the prior peak levels, while demand for high horsepower tractors also improved. With the fleet age remaining extended, industry retail sales of North America large ag equipment grew approximately 12% in the first quarter. Industry retail sales in Western Europe also increased in the first quarter of 2021 with growth across nearly all major markets. Higher wheat, dairy, and livestock prices are generating very positive farm economics and improved farmer sentiment. We expect this favorable environment to generate increased equipment demand in 2021. In South America, industry sales increased during the first three months of 2021, driven by improved demand in both Brazil and Argentina as well as recovery in the smaller export markets. A healthy first crop as well as favorable exchange rates are supporting positive economic conditions for farmers who continue to replace an aged fleet.

AGCO's 2021 factory production hours are shown on slide 5. While our supply chain and production teams have done a great job to minimize the impact, our ability to meet the robust end market demand has become increasingly difficult. Our supply chain has been impacted by COVID related disruptions as well as capacity constraints due to the surging industrial demand. Currently our European and Brazilian production facilities are feeling the largest impact. For example, production was suspended at our Fendt factories in Germany last week and will resume on Monday. We are facing supplier bottlenecks and delays in all regions and expect significant challenges in the quarters ahead as we work to meet expected increases in end market demand.

Total company production was approximately up 25% for the first quarter versus the same period in 2020, with the largest increase in our South American factories. We are projecting a 10% to 12% increase in full year 2021 production compared to last year with most of the increases occurring in the first half of the year. And you can remember that we had extensive COVID related plant shutdowns in the first half of 2020 and then extremely high production schedules in the second half of 2020.

Turning our attention to AGCO's order board. As of the end of March, our order board for tractors and Combines was significantly higher in North America, Europe and South America compared to a year ago. I'll now hand over the call to Andy Beck, who will provide you more information about our first quarter results.

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

Thank you, Eric, and good morning to everyone. I will start on Slide 6, which looks at AGCO's regional net sales performance for the first quarter of 2021. AGCO's net sales were up about 20% compared to the first quarter 2020, excluding the positive impact of currency translation. Strong end market demand and favorable pricing drove the increase across all regions. Europe, Middle East segment reported an increase in net sales of approximately 12% excluding the positive impact of currency compared to the first quarter of 2020. Largest increases occurred in Germany, Turkey and the UK. Net sales in North America increased approximately 10% excluding favorable impact of currency translation compared to the levels experienced in the first quarter of 2020. Increased sales of tractors, Precision Planting products and replacement parts produced most of the increase. AGCO's first quarter net sales in South America grew approximately 84% compared to the first quarter of 2020 excluding negative currency translation impacts. Sales rose across all the South American markets with the most significant growth in Brazil. High horsepower tractors, Combines and Planters showed the strongest growth. Net sales in our Asia-Pacific, Africa segment increased about 66% in the first quarter of 2021 on a constant currency basis compared to 2020. Last year, our Q1 sales were impacted by plant shutdowns in our China facilities. Strong growth in China and Australia, as well as recovery in Africa were the highlights. Consolidated replacement part sales were approximately $399 million for the first quarter of 2020. Part sales were up about 23% compared to the same period in 2020 excluding the positive impact of currency translation.

Slide 7 examines AGCO's sales and margin performance. AGCO's adjusted operating margins improved by approximately 300 basis points in the first quarter of 2021 compared to the same period in 2020. Margins were supported by higher levels of net sales and production as well as positive net pricing in the first quarter. Our first quarter pricing of approximately 4% was adequate to cover inflationary cost increases. For the remainder of the year we expect material cost inflation to intensify with continued pricing required to maintain margins. The Europe, Middle East segment reported an increase of $42 million in operating income compared to the first quarter 2020 resulting primarily from higher net sales, partially offset by higher warranty and engineering expenses. North American operating income increased approximately $14 million in the first quarter of 2020 compared to the first quarter of 2020 versus '21. Higher sales and improved margins in the grain and protein business all contributed to the improvement. Operating margins in our South America region reached 6.7% in the first quarter and operating income improved $25 million from the same period in 2020. Significant increases in end market demand and improved sales mix, all contributed to the improvement. In our Asia Pacific segment, operating margins expanded to 10.5% in the first quarter, reflecting improved sales and production along with an improved sales mix.

Slide 8 details grain and protein sales by region and by product. Sales increased by about 21% excluding currency impacts in the first quarter of 2021 compared to 2020. Globally, grain and seed equipment sales increased approximately 18% with our North American and Asia-Pacific, Africa regions showing the largest increase. Protein production sales grew approximately 24% in 2020 with higher sales in the Asia-Pacific, Africa and South American regions offsetting lower sales in North America. The protein production segment has been significantly impacted by the pandemic, particularly in North America where protein processing capacity has been challenged. In China, protein producers are beginning to recover from Asian swine fever and have started to rebuild their production capabilities. We are expecting a recovery in the grain and protein sales in 2021 following weak sales in 2020, which were heavily impacted by the pandemic.

On slide 9, we address AGCO's free cash flow for the first quarter, which represents cash used in operating activities less capital expenditures. Our seasonal requirements for working capital are greater in the first half of the year and thereby resulted in a negative free cash flow in both the first quarter of 2020 and '21. AGCO's strong free cash generation last year allowed us to repay $276 million term loan facility that was taken out to provide liquidity last year. Last week we outlined AGCO's capital allocation priorities and a capital return framework, which includes regular quarterly dividend payments, share repurchases, and an annual variable special dividend to return excess cash. Following our strong free cash flow generation in 2020, we were in position to increase our quarterly dividend by 25% and announced the first variable special dividend payable in the second quarter. We currently expect to repurchase shares opportunistically with the target amount of $120 to $150 million during 2021. The variable special dividend payment declared last week in the amount of $4 per share payable on June 1st, 2021 to shareholders of record at the close of business on May 10th. Future returns of cash to shareholders will be based on cash flow generation. our investment needs, which includes capital expenditures and acquisition opportunities, as well as our market outlook. Other details for the quarter include losses on sales of receivables associated with our receivable financing facilities, which are included in other expense net were approximately $4.6 million during the first quarter compared to $8.1 million in the same period of 2020.

Turning to our full-year forecast, our 2021 outlook for the three major regional markets is captured on Slide 10. We have increased our market forecast for all regions and expect higher retail industry demand globally compared to 2020. In North America, higher commodity prices and improved farmer sentiment is expected to result in increased 2021 sales. Replacement demand for an aged fleet of larger equipment is expected to drive most of the increase. Demand for smaller equipment is expected to be more stable after several years of increasing demand. We project North American industry unit sales to be up approximately 15% in 2021 compared to 2020. European Union farming -- farm economics are expected to remain supportive in 2021. Higher commodity prices are expected to support healthy demand from the arable farming segment. Milk prices have increased and economics is positive for dairy producers. Western Europe industry demand is expected to remain strong and grow modestly in 2021. Elevated commodity prices and favorable exchange rates are expected to support additional growth in South America during 2021 as farmers continue to replace aged equipment. And total industry demand in South America is expected to improve 5% to 10% from 2020 levels.

Slide 11 highlights the assumption underlying our 2021 outlook. Our priorities continue to be maintaining a safe working environment for our employees and providing proactive support to our customers and dealers. We also continue to manage our cost while preserving our investments in digital technology and smart farming product development. Our 2021 forecast assumes improved global industry demand with no additional impact from the pandemic. Our sales plan includes market share improvement and price increases of 3.5% to 4% aimed at offsetting material cost inflation during 2021. At current exchange rates, we expect currency translation to positively impact sales by about 3%. Engineering expenses are expected to increase by $50 million to $60 million on a constant exchange rate basis compared to 2020. The increase is targeted at investments in smart farming and Precision Ag products as well as continue our rollout of platform designs. Operating margins are expected to be up approximately 150 basis points from 2020 levels driven by higher sales and production, favorable pricing, net of material cost, and productivity initiatives, partially offset by increased investments in smart products and our digital initiatives. We are targeting an effective tax rate ranging from 28% to 30% for 2021.

Slide 12 lists our view of selected 2021 financial goals. We continue to operate in uncertain conditions and this outlook does not consider any further business drop -- disruptions caused by the COVID pandemic. We are projecting sales to be in the $10.6 billion to $10.8 billion range with 2021 earnings per share targeted in a range of $8.40 to $8.60 per share. We expect capital expenditures to be approximately $300 million and free cash flow to be in the $450 million to $500 million range.

For the second quarter, our current estimate is that earnings per share will be in the range of approximately $2.10 to $2.20 per share. We project a significant improvement in sales and margins of the 2020 levels, which were impacted by COVID impacted suspensions in our European and Brazilian production facilities. We also plan to ramp up engineering expenses in the second quarter to facilitate new product introduction scheduled in 2021. While our order backlog supports our outlook, the timing between quarters of our sales is difficult to forecast due to supply chain challenges that we anticipate will continue during 2021. The quarter two estimate is highly dependent on component availability from suppliers and production levels throughout the quarter.

With that, we'll turn it back over to Greg.

Greg Peterson -- Head of Investor Relations

Thanks, Andy. And in the spirit of expanding participation in the Q&A portion of this call last that you limit your questions to -- well, limit yourselves to one question and one follow-up. James, with that, why don't we move to the Q&A section.

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from the line of Tim Shine with Citigroup. Go ahead please. Your line is open.

Timothy Shine -- Citigroup -- Analyst

Thank you. Good morning. Maybe just give to follow on Andy's comments there in terms of [inaudible] margin improvement 150 basis points. What is that -- I'm just trying to clear. What does that assume in terms of net pricing? I think you gave some color regarding the first quarter. I'm not sure, does that get fully unwound for the full year or is the expectation that it narrows and you stay on the plus side for the full year?

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

Yeah. We're anticipating that we stay on the plus side. So in the first quarter that net pricing was a little below 2% impact. So that was -- we got the pricing in in advance of the surging commodity price increases that we expect to see for the remainder of the year. As we get to the full year, we said our pricing would be 3.5% to 4% and our net price would be about 50 basis points to 70 basis points. So we expect to stay positive. There are some challenges that we see kind of keeping the pricing up with cost in some businesses in the middle part of the year, but by the end of the year we expect to be fully covering all of these costs.

Timothy Shine -- Citigroup -- Analyst

Okay, got it. Just -- and a quick follow-up. On the full year, what is the assumption in terms of your dealer inventories given that the issues around component and just product availability, I'm guessing there's some prioritization there that's going on in terms of hitting retail orders versus stock orders, but maybe just some color there in terms of that kind of 10-7 at the midpoint for the full year revenue outlook, what is assumed in there in terms of where dealer inventory is in the year. Thanks a lot.

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

Right. But we -- as you know, we worked hard on getting our dealer inventories down last year, and as we look at where our dealer inventories are at the end of the first quarter, they're substantially below where we were a year ago. And a lot of that is due to the work that we did last year, but also the strong retail activities that we've had. So to your point, the focus is on retail, for sure, but we want to make sure we've got enough adequate supply of inventory to meet all the demand that we can accomplish. Our business plan or model really anticipates that our dealer inventory will be relatively flat year-over-year by the end of the year. So, no additional increase or reduction plan.

Operator

Our next question comes from the line of Stephen Volkmann with Jefferies. Go ahead please. Your line is open.

Stephen Edward Volkmann -- Jefferies LLC -- Analyst

Great. Good morning, everybody. I'm curious, maybe, Eric, how you're thinking about sort of how this cycle is unfolding here. And maybe I'll refer to your Slide 10 where you have your various regional outlooks. Are those outlooks what you think can actually get produced and sold or is that really what you think demand is? And I guess what I'm trying to figure out is does demand get pushed into '22 because we have supplier issues in '21, and just sort of what are you thinking about in terms of the medium term.

Eric P. Hansotia -- Chairman, President and Chief Executive Officer

Good question, Stephen. Yeah. The way I would respond to that is that I believe that there is more demand out there than the industry will be able to supply in 2021, especially in some of our markets. I think South America will be curtailed with -- the highest confidence of being curtailed. North America is at risk. Western Europe is probably less vulnerable to a curtailment, but there's just a lot of uncertainty left in the marketplace for what the impacts will be on COVID. So your assumption is the same as what I would guess as well, that some of the demand will not be met.

Stephen Edward Volkmann -- Jefferies LLC -- Analyst

And then just to follow up on that, is it logically reasonable to think that incremental margins would be better in '22 as always supply things kind of revert and we have a more normalized kind of a year, assuming that happens?

Eric P. Hansotia -- Chairman, President and Chief Executive Officer

Assuming things smooth out which with vaccines coming online -- that's the root cause of these component issues. That plus a lot of the freight problems, but there is just such a surge, the overall infrastructure wasn't able to catch up and then we're having spot issues all over the place on all sorts of different commodities and largely COVID is the root cause. So it all comes down to our assumptions on that. If the vaccines work their way through the system and they hold and are effective, the next year could return to normalcy and a lot of these hidden costs and waste could fade away, which would lead you to believe that there is some incremental margin to be had.

Operator

Our next question comes from the line of Adam Uhlman with Cleveland Research. Go ahead please. Your line is open.

Adam Uhlman -- Cleveland Research Company -- Analyst

Hi guys, good morning and congrats on the strong quarter.

Eric P. Hansotia -- Chairman, President and Chief Executive Officer

Thanks, Adam.

Adam Uhlman -- Cleveland Research Company -- Analyst

Yeah, I had a question on Slide 5 for your tractor production hours. I guess I'm just wondering why after the second quarter, the hours wouldn't it be more elevated in the second half of the year may be closer to, I don't know, similar -- more like the first half of the year. I guess, why would you be pulling back on your production hours on a absolute basis?

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

I think that last year was kind of an unusual year in terms of production as you know we really had a significant delay in production last year in the second quarter. And so the third quarter when we typically have summer shutdowns and things like that, we actually worked last year. So our plan this year is to have a normal summer shutdowns in our plants in 2.21. And so that's going to naturally mean that our production in third quarter of last year is going to be higher than what we had this year, despite the demand. And in the fourth quarter, we expect to see some production increases back in. So I think also fourth quarter is relatively strong, you started to see some of these market increases. So that's we're seeing so far.

Adam Uhlman -- Cleveland Research Company -- Analyst

Okay. And could you dimension [Phonetic] the order intake? I think you mentioned that it's -- orders are up significantly. Are we looking at like 30% type order growth and maybe flush that out by region. And are you -- assume that you are sold out in some areas of the globe, maybe you could share with us [inaudible]

Greg Peterson -- Head of Investor Relations

Sure. Yeah. So we're, Adam, up close to double, pretty much across the regions, which gives us some very good lead times and gives us some good visibility really into the back half of the year. So yeah, even though the -- we saw some growth in order board through the end of last year, we continue to see orders strengthen as we came through the first quarter and ended up like I said about double where we were last year.

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

And Adam, that includes grain and protein.

Operator

Our next question comes from the line of Jamie Cook with Credit Suisse. Go ahead please. Your line is open.

Jamie Cook -- Credit Suisse -- Analyst

Hi, good morning. I guess just my first question, can you just talk about -- I mean obviously the order book is pretty strong here today. Can you talk about what you're seeing on the market share front, some of the successes potentially in North America, in South America if there is anything to be said there. And then I guess my follow-up question to Andy, obviously the sales growth is looking to be pretty good. For South America, the margins improved again in the first quarter, any change in sort of your margin outlook for South America? Thanks.

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

Sure. You want to take the first half?

Eric P. Hansotia -- Chairman, President and Chief Executive Officer

Yeah, we're continuing on the same trajectory that we have talked to you about in the previous discussions, in that we're seeing good success in our large horsepower -- high horsepower tractors -- and that's driven largely by our globalization of the Fendt brand, and then our precision Ag business. So I can give you a few numbers here. In 2021, our momentum planter volume is going to grow by 60% over 2020. Our Smart Rose. So we also -- in addition to selling full-fledged planters out of the factory we also sell rose that are intelligent largely out of Precision Planting. That's up 42% from 2020. And then our smart nozzle installations that go on sprayers coming out of the factory, we're projecting that we'll be up 35% since 2019. And we expect that to continue to grow across all markets going forward. So -- and our connected machines by the end of the year will be up 4X versus 2019. So Precision Ag is growing strongly and some of the largest growth rates are in North America and South America. But then our full machine sales in terms of high horsepower in North America. And especially the sprayers, planters, Combines, but even tractors in South America are all are growing in terms of share as well.

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

And Jamie, when you look at share, one of the things that looks a little bit puzzling especially with our North American numbers is that our sales didn't grow quite as fast as the market and that's a function of -- it's not building our dealer inventories as much in the first quarter of '21 as we did in '20. So, our retail market share as Eric said, did very well and -- but it's a little bit masked by the fact that we didn't build our inventories like we did last year.

Jamie Cook -- Credit Suisse -- Analyst

Okay, great. And then just any color on the South America margin, sorry.

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

Yeah. So on the South American margins as you said we got up to a good start this first quarter. But we're looking at for the full year at somewhere 100 basis points to 150 basis point improvement in the margins. We do see a little bit of a weaker mix. Some of our stronger margin markets like Argentina, we expect to start to slow back down and we're also -- the cost increase and cost inflation is the most severe in South America right now and so there's challenges keeping our pricing up to offset all of that. So a little bit of a issue in a few markets and a few products there, so about 150 basis points -- 100 basis points to 150 basis points is what we're targeting.

Operator

Our next question comes from the line of Ann Duignan from JPMorgan. Go ahead please. Your line is open.

Ann Duignan -- JPMorgan -- Analyst

Hi, thank you. It's Ann Duignan. Yeah, I'd like to go back to your end market outlook versus your production hours. I'm not sure that you answered the earlier questions sufficiently. I mean, given your outlook this year in the supply chain constraints, your Q4 production absolute hours looks frankly woefully low, I mean, why wouldn't it be higher than Q3 back to at least maybe Q1 or Q2 levels given the lack of dealer inventories, the expectation that demand is likely to be pushed out to 2022? Unless you believe that North America low horsepower is about to fall off a cliff into 2022 after the huge expansion we've seen in the last couple of years. So if you could explain that not the year-over-year production hours, the absolute Q4 hours. Why wouldn't they be higher?

Greg Peterson -- Head of Investor Relations

Well, Ann, what we have in the fourth quarter is that it was against the backdrop of a pretty strong fourth quarter 2020. So we, at this point have our revenue in our projections up only about 3% to 5% in the fourth quarter. So I think we have the huge increase in Q2, and then the back half it's getting a little bore. And Q3 as I mentioned, our sales are expected to be relatively flat versus 2020 because of the increased production we had and catch-up that we did a year ago, and then up about 3.5% -- 3% to 5% in Q4. So I think that's the focus. In terms of is there opportunities for increase? I think it as Eric said is about ability to produce, and certainly we're going to be watching the end markets for the rest of the year.

Ann Duignan -- JPMorgan -- Analyst

But that doesn't really explain the strong demand and the lack of -- I mean every dealer we speak to he says they have no inventory, they need inventory. And if you can produce at the absolute levels in Q2 that you're forecasting like and to produce them in Q4.

Greg Peterson -- Head of Investor Relations

Well, I think we -- last year we had our dealer inventories coming down, and this year that's going to give us somewhat of an increase. In terms of production hours, I'm more focused on what our revenue is going to be and I've already described that. The production hours do -- should pick up as we said in the fourth quarter and then be somewhat in line with what we said the sales increase would be.

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

And then also -- and keep in mind that in Brazil, we also have maintenance shutdowns in the fourth quarter. So, seasonally the production is going to be lower because of those maintenance shutdowns in Brazil. We have those maintenance shutdowns in Europe in the third quarter. So that's why typically that fourth quarter production levels aren't as high.

Operator

Our next question comes from the line of Larry De Maria from William Blair. Go ahead please. Your line is open.

Larry De Maria -- William Blair -- Analyst

Thanks, good morning everybody. You talked about some of the products like momentum planters, etc. But I think if I'm not mistaken Malika's [Phonetic] presentation called that a slower than maybe expected rollout of the ideal Combine. Can you update us on where you are versus where you thought you'd be? Just trying to understand the strength of the overall portfolio including the harvesting as we go into this up cycle. Thank you.

Eric P. Hansotia -- Chairman, President and Chief Executive Officer

Yeah. Ideal Combine is is performing extremely well relative to all the competitors in the marketplace. We run it head to head. We've done test in North America, South America, Europe, Australia, running in the same field against the competition and it's got just outstanding performance. We've been -- in the early stages we had some reliability problems. We believe that those are largely behind us now. But we always had planned to have a stage ramp up here in terms of making sure this is a very complicated machine on the one hand, and we had a lot of dealers that weren't so focused on Combines in some parts of our network. And so we wanted to walk our way into this marketplace. But the machine is performing very, very well. Customers really like it. We've been supporting it very carefully to make sure that the ramp-up has been successful, and so we're on track. And it continues to grow, we're going to have significantly more sales this year and our projection is to be growing that again in the next year. So it's on a steep growth curve globally. We're still producing in two locations in Europe and in South America, and at some point we will turn on a US location when the volumes justify. So that was always part of the plan.

Larry De Maria -- William Blair -- Analyst

Okay, thanks. As a follow up, obviously shareholders supported your proxy and performance in the quarter and obviously it's pretty good. Very good. Are we more or less do we think -- but the activist issue is this maturing and coming to a head or is it becoming -- it is still a distraction, or how would you characterize it overall?

Eric P. Hansotia -- Chairman, President and Chief Executive Officer

Yeah, well, you know, it's -- I would say we got positive votes -- support votes on all directors and all proposals from TAFE. We've been having active discussions within the Board Meeting -- Board meetings, and so I think that it is coming toward -- the discussions are moving toward the center. It's hard to predict exactly where things will go. We've had a long-term relationship with TAFE. But our interest will not always be perfectly aligned. But I think that at least for right now it looks like we've got a strong vote of support during the shareholder meeting and and we'll just see where things go from here.

Operator

Our next question comes from the line of Nicole DeBlase with Deutsche Bank. Go ahead please. Your line is open.

Nicole Sheree DeBlase -- Deutsche Bank AG -- Analyst

Yeah, thanks, good morning guys.

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

Good morning, Nicole.

Nicole Sheree DeBlase -- Deutsche Bank AG -- Analyst

I wanted to start on a question similar to Ann's, but rather than focusing on the revenue performance that you guys expect throughout the year. Can you talk a little bit about how you're kind of thinking about the progression of margins, and it might be that the margin part kind of follows what you said about revenue, but any color would be helpful.

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

Sure. We expect a sizable margin improvement in Q2. Again, last year was down because of the lack of production. So we're looking for 250 basis point improvement in Q2 over Q2 last year. In Q3, our margins, we expect to actually be lower than 2020. Again, we had unusually high sales and production in 2020. And so that's we think will get kind of more normal cadence that we see in 2021. And then in Q4, we expect our margins to be up again year-over-year in the fourth quarter by a 100 basis points to 200 basis points. So all in all, as we said in our comments that that would lead to about 150 basis point improvement in margins on an annual basis.

Nicole Sheree DeBlase -- Deutsche Bank AG -- Analyst

Got it. That's really helpful. Thanks, Andy. And then one more question on margins for you. The other driver of upside. I think versus what we were thinking for the quarter aside from South America was North America margins also looked really strong. Can you talk a little bit about what you're expecting for that segment for the full year?

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

Sure. We've got little bit over 100 basis points improvement for the full year for North America. Some of the improvement as you point out, it came in the first quarter, we had a really good first quarter and the higher production levels and pricing that we expect to get we think can support that margin improvement. The one negative area I'd point out is we do get a little bit of a hit on foreign exchange impacts. We import product from Europe into North America. And so that with the stronger euro is giving us a little bit of a tighter margin on our North America results. But obviously overall with our strong European profits, those are offset by translation benefit. So to the company's bottom line, it's not a big impact, but it does show up in the margins for North America. But overall margin improvement is expected in North America, expect to get to double-digit margins this year.

Operator

Our next question comes from the line of Joel Tiss with BMO. Go ahead please. Your line is open.

Joel Gifford Tiss -- BMO Capital Markets Equity Research -- Analyst

I'd change the format a little bit and have a comment and then a question. I bet Martin is doing cart wheels right now with the stock price so strong versus getting all worked up about how his name is pronounced. Anyway. Can you guys talk about how the operating margins, like what kind of normalized levels could be possible, like looking three to five years out in South America. It seems like there has been a very quick turnaround there. And I just wonder like, if I try to think more structurally what's changed, how do I think about how that translates into margins a couple of years out when things normalize. Thank you.

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

Yeah, Joel, we talked about that a little bit in our strategy discussion that we felt like we needed to continue to focus on the South America margin improvement as a key element of focus for the company over the next number of years. We are way ahead of schedule because of how strong the market is. And so that's really helped us. And where -- we're seeing great success in terms of improvements in all aspects of our business down there, in terms of growing our higher margin planter business, growing in grain and protein, improvement in our part sales. All those things are really driving a lot of this improvement. We still have work to do in terms of our cost structure on our tractors and Combines. We've talked a lot about how we brought in a new and localized some of our global designs, which is the cost have been impacted a lot because we are importing more of the content. So we need to localize more of that and find ways to reduce those. And we're also putting significant amount of pricing in to also offset a lot of this inflation this year, but hopefully that will carry into improvements in margins going forward. So all that being said, we think we've got still opportunity and work to do in South America, obviously the March -- the markets helped us, but we expect South America to be in line with our other regions as we move forward.

Eric P. Hansotia -- Chairman, President and Chief Executive Officer

Yeah, the expectation is we just had another view on that business with the Board. They are very pleased with the progress or like Andy said ahead of schedule from the plan that we presented them last time. And the mission for every business is to be above 10% ultimately.

Joel Gifford Tiss -- BMO Capital Markets Equity Research -- Analyst

Okay, thank you.

Operator

Our next question comes from the line of Chad Dillard with Bernstein. Go ahead please. Your line is open.

Chad Dillard -- Bernstein -- Analyst

Hi, good morning guys.

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

Morning, Chad.

Eric P. Hansotia -- Chairman, President and Chief Executive Officer

Good morning, Chad.

Chad Dillard -- Bernstein -- Analyst

So I wanted to go back to a comment that you had made in your prepared remarks about our low horsepower being above the prior peak. Just wanted to get your perspective. I mean, do you -- are you seeing some sort of structural change in that business that would lead to higher mid cycle higher peaks? And just like what's your view on like a medium term in terms of up demand, can we continue to grow over the next couple of years within this business line?

Eric P. Hansotia -- Chairman, President and Chief Executive Officer

Chad, my -- our expectation here is that this is a -- to some extent a pull forward of demand. This is a peak largely tied to COVID root cause where you have a lot of folks stuck in their home looking outside and doing special projects, you see the same thing happening in home improvements, lumber prices, appliance availability and so on. There is not a structural change in refrigerators, we don't think there is a structural change in small horsepower tractors either. So it's a surge in demand that is very, very high right now, but it's largely tied to COVID.

Chad Dillard -- Bernstein -- Analyst

Gotcha.

Eric P. Hansotia -- Chairman, President and Chief Executive Officer

That wouldn't change the long-term perspective of the industry.

Chad Dillard -- Bernstein -- Analyst

Yeah. That's helpful. And then can you just give some color on the revenue contribution from your Precision Ag business, and I believe you called it out as a $400 million business. How are you thinking about that segment for this year and what's about it in guidance.

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

Yeah, in terms of -- one thing we can report on is the Precision Planting aspect of that. Precision Planting sales I think were up close to 20% in the first quarter, so off to a really good start there. That's about half of that revenue. The rest of the growth is probably in line with what we've seen with our core business. So we are progressing well there and we'll report maybe more specifically on that hopefully throughout the year.

Operator

Our next question comes from the line of Jerry Revich with Goldman Sachs. Go ahead please. Your line is open.

Unidentified Participant

Hi, this is [Inaudible] on for Jerry Revich. You mentioned expectations for 250 basis point year-over-year improvement in margins in the second quarter, which implies flattish margin sequentially, normal seasonalities for margins to be up around 300 basis points sequentially. So I'm just wondering are there any transitory items in the first quarter margins that we should consider.

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

In the first quarter margins?

Greg Peterson -- Head of Investor Relations

Second quarter.

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

Yeah, the second quarter. Well, the second quarter margins, I think the thing to keep in mind is that we have a pretty significant ramp up in engineering expenses and also our SG&A expense is also expected to ramp back up. Last year in the second quarter we've really dialed down everything because we were shut down, weren't producing anything, and so we kind of going back to a little more normal activity level. So our second quarter engineering expense should be up somewhere 40% to 50% and our SG&A up in the 20% to 25% in the second quarter. So I think that is part of it and then also, again, there are some areas like particularly grain and protein where our pricing is lagging a little bit. These surging steel prices on some of the product sales that we'll have in the second quarter. So little bit tighter margins there. So issues here and there on really -- price cost would be the other thing that I'd highlight.

Unidentified Participant

Great. And in terms of the increased investments in smart farming and Precision Ag. I'm just wondering if you can provide extra details on the investments being considered and also how you think about organic versus M&A opportunities.

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

Well, we've already talked to you about the -- it's around $50 million extra in engineering expense, largely that's all aimed at Precision Ag type solutions, and so that's the organic portion. We're actively looking all the time at acquisitions that would fit in either as a product to fill in Precision Ag portfolio or a capability. So you saw 151 Research in our grain and protein business a little while back provided -- provides intelligence to our grain bins. Now you can essentially get an MRI signal of the grain pile. We've got other discussions under way. And so we're looking for a balance between the two to try and accelerate this as fast as we possibly can. Our vision is to become trusted partner in industry leading smart Ag Solutions and we want to propel forward as fast as possible to deliver on that vision.

Greg Peterson -- Head of Investor Relations

The other piece of it, we're also that -- investing and it doesn't show up in engineering as in our digital customer experience. We talked a lot about that at our Analyst Meeting. And when you think about our web presence and our ability to do business with our customers electronically, that's one of the areas that has been a key focus and we think it's going to help us drive better penetration of some of our products and better service levels to our customers going forward. So that's another area that we're spending a lot of time and effort around.

Operator

Our next question comes from the line of Kristen Owen with Oppenheimer. Go ahead please. Your line is open.

Kristen E. Owen -- Oppenheimer -- Analyst

....for taking my question. Really strong performance in grain and protein in the quarter, I believe you came into the year with a strong backlog there. So can you talk about the order trends for that business and what your market share expectations are for the year?

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

So the grain and protein order board is up about 80% I think versus a year ago. So we have a good order backlog. Really varies a lot by region, where we have seen significant orders increase in Asia-Pacific, Africa as we mentioned in our comments. There is lot of interest in refreshing and improving the protein production capabilities of that market. So we have very strong demand there. South America, the market is still strong. In North America, we're seeing very high orders and interest on the grain part of the business, so the silos and conditioning equipment and handling equipment. But our orders are down and -- are down on the protein equipment. So protein is as we also commented, is where there is a lot of issues in terms of with the higher commodity prices, there's higher input costs. So, their margins are challenged and also, still a lot of disruption from the COVID situation in terms of protein production facility. So they're not investing right now. So it's a little bit of a mix of what's going on, better in grain and worse in protein right now.

Kristen E. Owen -- Oppenheimer -- Analyst

Okay. Thank you for that color. And then my follow-up question is really as it relates to the other side of the coin on commodities inflation. We are seeing a lot of tightness in crop protection that's driving up prices. So can you talk about any impact that that may be having on demand for some of your Precision Technologies? Thank you. You mentioned some numbers around sprayer orders, but any additional color you can provide there.

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

So I think it's a great time for Precision Ag growth, there is a general -- for the reasons you said, Precision Ag, one of the roles of Precision Ag is to more efficiently apply inputs; seed and chemical. And so that's one driver. And then the second driver is general affordability of the farmer. And both of those are extremely positive right now. And so that's why I gave you those numbers of what we're seeing in terms of growth year-over-year in planter and sprayer technology. So it's extremely strong anywhere from 40% on rose, 60% and planters, and 35% on our nozzles from 2019.

Operator

Our next question comes from the line of Rob Wertheimer with Melius Research. Go ahead please. Your line is open.

Rob Wertheimer -- Melius Research -- Analyst

Yeah, hey, I just have a big picture question on where you would put kind of Europe in the cycle. You showed the Western Europe numbers, I don't know if the rest of EMEA has been generally stronger over the last couple of years. Was that structural or not? And where -- do you have more granular detail on how much you saw [Phonetic] in France and Germany and other places? Is 2021 clearly high cycle or where would you characterize it? And then the real question I guess the follow-up is, are you seeing farmers want to sustainably purchase more or accelerate trade in especially in Europe due to Precision Ag? I'll stop there. Thanks.

Eric P. Hansotia -- Chairman, President and Chief Executive Officer

We'd say Europe is close to mid cycle. It just doesn't go through the same volatility swings that other markets do. One of the major reasons is that there is a higher subsidy level in Europe so that provides more stability, because the larger portion of their farmer income is subsidy based. They don't have the highs and the lows that other markets do. So we see increased farmer sentiment, increased market demand, and that's generally based on really commodity price driven today, and so those two are linked closely. Precision Ag is also a driver, it's of interest. We're growing our Precision Planting business in -- throughout Europe, and it's growing. It doesn't grow quite as fast as we're seeing in North America and South America, typically those two markets lead. And one of the reasons is farm size, that the average farm size in Europe is generally smaller. Now, in Eastern Europe, that's not the case, but in Western Europe an average firms is a little bit smaller so precision ag adoption happens a little bit later than it does in North and South America.

Operator

And we have time for one last question. Our final question comes from the line of Brett Linzey with Vertical Research. Go ahead please. Your line is open.

Brett Linzey -- Vertical Research -- Analyst

Hey, thanks for squeezing me in and good morning everybody.

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

Good morning, Brett.

Brett Linzey -- Vertical Research -- Analyst

Yeah, I just wanted to come back to the order boards, really healthy, appreciate all the color on some of the different technologies. Have you already opened order slots for next year? Is there customer indication they're looking to procure equipment looking at the next year?

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

No. We don't have order slots for next year yet. Those are just dealer forecasts and market forecasts.

Brett Linzey -- Vertical Research -- Analyst

Got it. And then just back to the production downtime you noted suspending production in Germany. What is the duration there and what is the anticipated impact, and I guess what is the gating factor to shuttering more capacity in other regions?

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

Yeah. So most of these shutdowns that we described, this one was week to ten days, something like that. We've been -- we've had plants -- some plants not be affected so far. We've had some plants down two weeks so far. And what our manufacturing teams are working on is how to catch these lost days back up working with unions and work councils to determine whether we can work on weekends, we can take vacation days or flex days, all sorts of mechanisms to get that capacity back in later in the year. So that's part of the challenge this year is constantly replanning and reforecasting and and working on being as flexible as possible so that we can produce and meet all the demands that are out there. But a lot of these are a couple of days here and there, or a week. And so that's what we're dealing with right now.

Operator

And with that ladies and gentlemen, I'd like to turn the call back over to Mr. Peterson for some closing remarks.

Greg Peterson -- Head of Investor Relations

Thanks, James. And we just want to thank everyone for participating today and for your interest in AGCO. We look forward to continuing to answer questions as we go forward in the coming days. Thanks and stay well, everyone.

Operator

We thank you for joining the call today. This concludes today's conference call. You may now disconnect.

Duration: 59 minutes

Call participants:

Greg Peterson -- Head of Investor Relations

Eric P. Hansotia -- Chairman, President and Chief Executive Officer

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

Timothy Shine -- Citigroup -- Analyst

Stephen Edward Volkmann -- Jefferies LLC -- Analyst

Adam Uhlman -- Cleveland Research Company -- Analyst

Jamie Cook -- Credit Suisse -- Analyst

Ann Duignan -- JPMorgan -- Analyst

Larry De Maria -- William Blair -- Analyst

Nicole Sheree DeBlase -- Deutsche Bank AG -- Analyst

Joel Gifford Tiss -- BMO Capital Markets Equity Research -- Analyst

Chad Dillard -- Bernstein -- Analyst

Unidentified Participant

Kristen E. Owen -- Oppenheimer -- Analyst

Rob Wertheimer -- Melius Research -- Analyst

Brett Linzey -- Vertical Research -- Analyst

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