AGCO, Trimble joint venture to expand 'mixed fleet' mindsets: CEO

Agricultural machinery manufacturer AGCO Corporation (AGCO) is set to take a $2 billion stake in Trimble, Inc. (TRMB). AGCO Corporation CEO Eric Hansotia sits down with Yahoo Finance Live to discuss the joint venture with Trimble and the customer benefits of AGCO's venture into the industrial software space.

"Precision agriculture is all about helping a farmer get more yield out of their farm with less inputs, putting sensors on machines to be able to understand variations in the soil or variations in the crop," Hansotia explains. "And then having the machine do on-board compute, sometimes using artificial intelligence libraries and having real-time adjustments to have the machine optimize itself."

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Video Transcript

JULIE HYMAN: A tie-up in the agricultural sector, AGCO investing $2 billion in assets from Trimble. That'll end up in a joint venture. The goal, to boost its offerings in the precision agricultural business and better compete with industry leader Deere. Joining us now, AGCO CEO Eric Hansotia. Eric, it's great to see you again. Really interesting deal that you guys announced yesterday. Precision agriculture, for folks who are not familiar with it, what does that entail? What does it include? And what is this going to do for AGCO?

ERIC HANSOTIA: Yeah, precision agriculture is all about helping a farmer get more yield out of their farm with less inputs, putting sensors on machines to be able to understand variations in the soil or variations in the crop, and then having the machine to onboard, compute, sometimes using artificial intelligence libraries, and having real-time adjustments to have the machine optimize itself. Farmers get a lot of value out of this. They can raise their yields. They can treat each spot on the field differently, optimizing their inputs like fertilizer and fuel and seeds and things like that. And it's kind of the big area that we're focused on.

JULIE HYMAN: It seems like it's the big thing sort of in agriculture generally right now as well for farmers. I'm curious. I know that you guys bought this new technology and are putting it in this joint venture with Trimble. When you're trying to market this to farmers, I imagine there's an added cost for them. What has been the demand from farmers for these kinds of products? And how much of this is adding on to what AGCO already produces? And how much of it is that you plan to produce new development and new products from this partnership?

ERIC HANSOTIA: Well, this deal, you know, it's the biggest ag tech deal in history. So it's large in size, but it's also very interesting in that, to your question, it allows us to not only grow our capacity and scale to innovate on our machines, on our AGCO tractors, combines, sprayers, planters. But Trimble and AGCO are kind of the only two main companies that have a mindset of, we call it mixed fleet. That means we'll sell technology on anybody's brand equipment.

So that could be selling to a farmer that has a five-year-old competitor, A, and a 10-year-old competitor, B. We don't mind. We're going to sell a technology module onto those machines that help take that machine and give it more capability, more precision. And so it grows not only AGCO core, but this mixed fleet opportunity. And the reason we do that is we want to serve every farmer, not just those farmers that have, in the past, bought our equipment.

JOSH LIPTON: And Eric, you have a long-term target here of 12% operating margins. I'm curious how this deal impacts and influences that bogey here.

ERIC HANSOTIA: Well, we had that target before we announced the deal. And this really just changes our portfolio mix. It's 30% margin kind of business at a high growth. I think one of the other questions Julie asked is, what's the demand? This type of business within AGCO already has been growing. We like to say 15% to 20% is our planning volume, but the last couple of years, we've been growing at over 30%.

So lots of growth, and that's because even though the farmer has to pay a little bit, we give them a one to two-year payback. That's been always our target. Try to pay it off in one year for the farmer, sometimes in two, in terms of the value they get. And so that's generating the underlying demand. That leads, then, to the margin question. 12% was prior to this deal. All of the analyst reports are coming out, and they see us going much higher. We haven't committed to a target yet in terms of margins. We have committed to a target in terms of size.

We had aimed for our precision AG business to grow to 1 billion by 2025. We now see our way to growing that to 20-- to 2 billion by probably 2028 or even earlier. So scale is going to be a lot larger of a high margin, high growth business within our business. And I'm sure that will lead to raised targets in terms of margin.

JULIE HYMAN: And Eric, explain to me exactly the structure of the joint venture, right? So this is going to be a standalone joint venture. It won't trade separately, right? Is it that you collect 85% of the revenues and other proceeds from it, and Trimble gets 15%?

ERIC HANSOTIA: We'll actually consolidate the entire financials within AGCO. So you'll see that in our revenue and in our operating margin. And then Trimble will receive kind of a below the line equity investment transfer for their 15% participation, but the overall business, it is a standalone company, but it won't trade on its own. It will consolidate under AGCO's financials.

JULIE HYMAN: And Eric, finally, as we speak, we've got flooding here in New York City and the broader region, just another the reminder of some of the changes that climate change are bringing to us. Obviously, it's disruptive here in the city, but it's also very disruptive if you're trying to grow crops for a living. How much of this precision AG is aimed at trying to mitigate some of those effects and still get those crop yields with unpredictable weather patterns?

ERIC HANSOTIA: Yeah, unpredictable weather globally, whether it's too much water or not enough in terms of drought, both of those are big issues all around the world, getting more severe, getting more prevalent. That just puts a headwind on the global ability to grow crops. And that's coming at a time when the farmer has to increase yields. We're going from 8 billion people to 10 billion people. We're eating more meat in our diet, which is a multiplier, using more biofuels.

So those two are fighting each other, all putting pressure on the farmer. And the only real solution are these precision AG technologies. That's why they're growing so fast. That's why there's so much value generated for the farmer. They have to grow yields while using less inputs.

And precision AG is the avenue to get that. It's really coming through automated features, which is stepping stones on the way to automating the entire machine, having autonomous vehicles running, which we showed in the field this summer at our Field Tech Days, and committed that by the end of 20-- by the end of this decade in 2030, we'll have the full crop cycle automated-- planting, spraying, harvesting, all operating, optimizing itself, no operator in the cab.

JULIE HYMAN: It's fascinating stuff. Eric Hansotia, great to catch up with you again. Thanks for being here.

ERIC HANSOTIA: So great to see you. It's an exciting time. Love to be in agriculture, and a huge day, pivotal day for AGCO.