to Help Feed
The challenges within the agricultural industry over the last four years have been significant and so have the opportunities. In 2017, I am proud to say that AGCO met these challenges and fulfilled our financial objectives, while making progress on a long list of strategic initiatives. Our clear vision at AGCO is to deliver high-tech solutions for farmers feeding the world. Ensuring there is a sufficient supply of food to meet the demand of a growing population and its changing diet, while addressing resource and environmental limitations, will not be an easy task for the world. But AGCO is the company that can help make it happen. Within this report, you will see many examples of how AGCO’s culture of innovation is helping us rethink farm machinery from the ground up and offer more productive solutions to farmers.
The farm equipment industry downturn that began in 2014 extended through most of 2017. We responded aggressively and took action during this period to manage our working capital and align our cost structure in response to the lower demand. In addition, we continued to make strategic investments in our technology and products consistent with our priorities. As a result of these efforts, AGCO’s 2017 results improved from 2016, and I am pleased to share with you that we expect them to be better again in 2018.
AGCO reported 2017 net sales of approximately $8.3 billion, which was an increase of 12.1% compared to 2016. Reported net income was approximately $2.32 per share. Adjusted net income1 was approximately $3.02 per share, which increased by 22.7% from the previous year. We generated approximately $373.7 million in free cash flow1 after funding significant investments in new products and other long-term profitability improvement initiatives. Our cash flow also allowed us to make two strategic acquisitions, while maintaining a strong balance sheet.
AGCO’s mission, with the shareholder in mind, is to achieve profitable growth through superior customer service, innovation, quality and commitment. Our strategy is focused on achieving organic growth, margin expansion and improved returns on invested capital. In addition to our cost-focused initiatives, AGCO will continue to invest in new products, new technology and improved distribution in order to accomplish these goals.
Our clear vision at AGCO is to deliver high-tech solutions for farmers feeding the world.
Focus on Growth
Our investments in new products are proving effective and have been well-received by customers and industry experts. In 2017, AGCO’s equipment earned numerous awards at three of the world’s most significant farm shows: SIMA in France; Agrishow in Brazil; and Agritechnica in Germany. At Agritechnica, the world’s largest indoor farm show in Hanover, Germany, we received 17 major awards, including Machine of the Year for our new Fendt track tractor and our new IDEAL combine. In addition to new product development, we expanded our product offering through the acquisitions of Precision Planting and the forage division of Lely in 2017. Precision Planting solidified AGCO as one of the global leaders in planting technology, and Lely balers and loader wagons are market leaders in Europe. These additions further support our full-line strategy by accelerating growth in our harvesting and crop care product lines.
Fuse® is AGCO’s suite of precision-farming products and services. Our Fuse initiative allows us to find creative new ways to improve productivity. Sensor and digital technologies are in demand and influence customer decisions when buying new equipment. By delivering increasingly intelligent machinery, AGCO is able to enhance the customer experience, improve dealer capabilities and grow sales of machines, services and parts. Our Fendt 1000 tractor is a great example of providing cutting-edge connectivity through the AGCO Connectivity Module, VarioGuide auto steering, Tractor Management System and more. Fuse pioneered the open approach in agriculture—bringing innovation that optimizes yield and efficiency through development, joint ventures and partnerships. We will continue our commitment to putting the grower first by providing solutions that simplify the data management process.
Inefficiencies in handling crops after harvest create significant long-term opportunities for our grain storage and handling business, especially in developing crop export markets such as Brazil and Eastern Europe. In addition, animal-rearing methods are modernizing in emerging markets in order to drive productivity as well as food security. In our GSI family of products, we have assembled an unmatched grain, seed and animal protein business with strong brands, products and distribution. Our product breadth and global coverage enable customers to experience world class productivity. GSI recently launched a slate of new products featuring new sensors, control systems, telematics and data analytics to make operators more efficient and profitable. In August 2017, we announced the establishment of a manufacturing joint venture with CP Foods in China to manufacture protein production equipment. The new manufacturing joint venture will greatly expand GSI’s production capabilities in Asia and support sales and margin growth in the region.
Focus on Margin Expansion
During the downturn over the last four years, we worked diligently on our cost reduction strategies targeted at purchasing actions, factory productivity and new product development. Our initiatives aim to reduce material costs, improve productivity in all areas of our operations and lower new product costs through intelligent engineering. We are continuing to make targeted reductions in sales, administrative and fixed manufacturing costs, balanced against focused spending related to development of long-term new market and product opportunities.
Our strategic spend on engineering also includes investments in AGCO’s global platform and module strategy, which is intended to leverage common product architectures and integrated solutions across AGCO’s various sites and brands. We have connected our regional research and development centers to support increased component standardization to lower costs and improve our products. We plan to address all of our tractor ranges with distinct platform initiatives. Our award-winning small tractor platform initiative was launched successfully with the full product range now in production. Similarly, sales are ahead of expectations for our ultra-high-horsepower category, which includes the Fendt and Challenger 1000 models. Our new IDEAL combine consolidates a number of combine platforms and represents a significant milestone for AGCO given its major advancement in harvesting technology.
We have built a strong capital structure and will strive to maintain our investment-grade credit rating. Our plans include continued capital investments to improve efficiency and maintain the pace of our new product introductions. Our healthy balance sheet and strong cash generation have enabled us to return cash to shareholders, and we plan to maintain this practice through both dividends and share repurchases.
AGCO enjoyed another successful year in 2017, thanks to the commitment and contributions of our over 20,000 talented employees across the world. I am also grateful to our strong network of dealers who provide unmatched service to our customers. On behalf of our Board of Directors, thank you for your interest and your investment in AGCO. We know that by working together, we can continue to deliver innovations that improve lives around the world.