DEAR FELLOW SHAREHOLDERS, CUSTOMERS, DEALERS AND EMPLOYEES:
As I reflect on our progress over the past year, I first want to say thank you for your continued commitment to and investment in AGCO.
I am proud of what we accomplished together during 2018 as we innovate and help farmers improve their efficiency and productivity, and I am also very optimistic about the opportunities ahead. It’s exciting and gratifying to see farmers across the world taking our slogan, Your Agriculture Company, to heart, and I credit our people for making that happen.
The value of our brands, our products, our distribution and our customer service was evident as we delivered substantially improved results despite a challenging global agricultural market. As our industry continues to evolve as farmers increasingly adopt smart-farming capabilities, our manufacturing, distribution, sales and product development teams executed exceptionally well to meet evolving customer needs. We are transforming our processes and customer interactions around an increasingly digital model. We are changing not only what we deliver to dealers and farmers, but also how we deliver it.
AGCO’s 2018 results improved significantly from 2017, and I am pleased to say that we expect our results to be better again in 2019. AGCO produced solid financial results while making important investments to position us for future success. AGCO reported 2018 net sales of approximately $9.4 billion, an increase of approximately 13% compared to 2017. Reported net income was $3.58 per share. Adjusted net income* was $3.89 per share, which increased by approximately 29% from the previous year. We generated approximately $393 million in free cash flow* after funding significant investments in new products and other long-term profitability improvement initiatives. Our free cash flow was largely used to support share repurchases of approximately $184 million in 2018.
We put customers at the center of what we do—how we innovate, how we move our business forward and how we help our customers feed a growing world. Each of our leading brands makes customer service a priority, providing professional advice, responsive maintenance and active aftersales support. AGCO will continue to invest in new products, new technology, improved distribution and enhanced digital capabilities over the next few years with a goal to expand our margins and produce higher returns on our invested capital. Our strategy will focus primarily on organic growth through new product development aimed at making farmers more profitable, utilizing smart-farming capable products where it makes commercial and operational sense to do so. We also intend to be opportunistic with bolt-on acquisitions to fill any product niches or expand geographic reach. Our focus on customer service will never waver.
We are growing our business by delivering the broadest product offering in the industry. We provide full-line smart-farming solutions throughout the agricultural production cycle, starting with soil preparation and cutting-edge smart planting, continuing through spraying and harvesting, and ending with grain storage and protein production equipment. Smart Farming is capturing data, wirelessly and remotely, from our equipment. Fuse® smart farming solutions add value to this data for the farmer by providing a picture of what is happening on the farm and help farmers reduce input costs and make changes that increase productivity. Our IDEAL combine, which will be commercially available for the first time in 2019, is a great example of our focus on smart-farming solutions for the benefit of our customers. It utilizes 43 computers and 40 sensors that together measure crop flow going through the combine. It captures data, provides visualization and will be the only combine in the world where the farmer can watch what is happening to the crop as it goes through the machine. As I mentioned, digitalization is changing the way farmers are managing their operations, and it is changing what they expect from their farm equipment. Our response has been to bring our employees, customers, distributors and key industry players together to develop and deliver mechanization and agronomical solutions tailored to individual farmer needs, powered by data shared in a secure, trusted environment. We expect our digitalization focus to improve our customer experience, service levels and efficiency in the coming years.
Our focus on margin expansion encompasses growing the top line as well as taking costs out of the business. AGCO’s global platform and module strategy is intended to leverage common product architectures and integrated solutions across AGCO’s different sites and brands. We have connected our global research and development centers, targeting a reduced number of parts with a higher degree of differentiation through more consistent brand strategies and accelerated innovation. Again, with our margin focus, we expect to lower direct material costs as a result of bundled volumes with full transparency on global cost structures. We are addressing all of our tractor ranges through distinct platform initiatives. Our small tractor platform and the premium-high-horsepower Fendt and Challenger 1000 models have been in the market since 2016. In the next few years, we will begin selling new products from the premium-high-horsepower, combine harvester and mid-range tractor platforms. We also have a number of other cost reduction programs aimed at improving our labor efficiency and lowering our material costs.
“AGCO will continue to invest in new products, new technology, improved distribution and enhanced digital capabilities.... And our focus on customer service will never waver.”
AGCO continues to invest in obtaining and retaining the best people to bring our customers the best products and service in the business. Two of our most important people-centered programs are AGCO Academy and AGCO University. AGCO Academy continues to provide information, coursework and training to keep our dealers current and constantly connected to their retail customers. AGCO University develops our employees for both their future and AGCO’s future. AGCO’s core values of Team Spirit, Respect, Accountability, Integrity, and Transparency foster inclusion and form the foundation of our diversity and inclusion initiative we call TRAIT. TRAIT embraces the power of unique perspectives and thoughts while creating a culture that drives business success and individual fulfillment. This is good for our people and good for our business.
The AGCO Agriculture Foundation, a private philanthropic organization launched early in 2018, will support non-profit initiatives that contribute to global food security, support sustainable agriculture development and have a positive economic and social impact on communities around the globe, particularly in developing countries.
During 2018, Eric Hansotia was appointed Chief Operating Officer. Eric has been an important part of our senior leadership team for the past five years. Eric’s leadership and broad industry knowledge make him uniquely qualified for this important new position. He has made significant contributions to AGCO’s success, particularly in the areas of our precision-agriculture and harvesting-product offerings. His strong strategic view on the future trends in global agriculture along with his operational experience will ensure AGCO continues to be successful in meeting the changing needs of our retail customers. I look forward to working closely with Eric on our initiatives to achieve sales growth and improved returns.
We are optimistic about the opportunities in 2019 and beyond. AGCO finished 2018 in a much stronger position than we started, with our businesses delivering on our strategic priorities and generating positive momentum across the board. In closing, I reiterate my gratitude for the commitment and contributions from all of our over 20,000 talented employees across the world and to AGCO’s shareholders and customers for their ongoing support.
and Chief Executive Officer
*See reconciliation of non-GAAP measures in Financial Summary.