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MOODY'S: HERE'S WHY AG EQUIPMENT MAKERS WILL MANAGE THIS DOWN CYCLE BETTER THAN THE LAST ONE
Aug. 15, 2024
Source: Moody's
Better positioned than prior downturn. Cost cutting and investing to develop new products and services has the three largest agricultural equipment manufacturers better positioned to deal with weakening demand than ahead of the 2014-16 downturn. We expect that, even in the face of significant declines in revenue, EBITA margins in 2024 will remain in the 9% -- 20% range for all three companies, thanks in part to key operational changes, good cost management and more flexible manufacturing processes.
Cost cutting, even as revenue rose on robust demand and pricing. The companies -- AGCO Corporation (Baa2 stable), CNH Industrial N.V. Company (Baa2 stable) and Deere & (A1 stable) -- have made significant progress in controlling and/or reducing costs, even as revenue climbed. Cost cuts have included workforce reductions, footprint optimization and more simplified, strategic supply chains. Higher revenue was driven by robust demand for new equipment, strong pricing and a mix shift to higher-margin equipment with advanced technologies.
Debt levels in check. The ag equipment companies have kept debt levels from increasing while revenue soared, instead relying more on cash flow to fund investments in the business. Even with the robust cash flow over the past couple of years, all three companies opted for discretionary shareholder returns such as opportunistic share repurchases and special dividends to preserve financial flexibility.
Acting rather than reacting. Strategic pivots from all three manufacturers show that they were making necessary preparations in advance of eventual weaker demand, even during record years 2022 and 2023. Currently, all three are cutting back sharply on production in 2024 in an effort to work down inventory levels to be better prepared for 2025. This is in contrast to more reactive stances the companies had taken before and during previous downturns.
Weak food prices will slow equipment demand through 2025 and spur ABS risk. Beginning in the third quarter of 2023, the ag equipment sector started transitioning from a more than two-year period of peak cycle conditions to the current weaker demand environment. We expect lower crop prices and higher interest rates to continue weighing on demand well into 2025. This weakening demand and decreasing farm income pose performance risks to equipment lease asset-backed securities, though credit enhancement will support transaction performance. Still, longer-term trends point toward strong crop prices and, as a result, demand for new, technologically advanced farming equipment.
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