AGCO’s (AGCO) revenues in 2Q16 fell 3.6% YoY (year-over-year) to $2.0 billion—compared to Wall Street analysts’ estimates of $1.9 billion. The negative impact of currency translations on sales was ~2.5%. AGCO classifies its business segments based on geographies. The regions including EMEA (Europe, Middle East and Africa), North America, South America, and Asia-Pacific were responsible for 59%, 26%, 10%, and 5% of sales year-to-date, respectively.
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Sales in the EMEA region, the largest geographical segment, rose 5% YoY in 2Q16. Revenues in the French market have been pretty strong after the government initiated tax subsidies for farmers in 4Q15. Revenues in the North America region fell 10% YoY. Declines in high horsepower tractors and hay and forage equipment were only partially offset by growth in small and mid-sized tractors. Other agriculture (DBA) equipment manufacturers such as Deere & Company (DE) and CNH Industrial (CNHI) also reported similar declines in the North America region in recent quarters. In South America, revenues fell 14% as the overhang of political instability, a decline in economic growth, and uncertainty surrounding the funding of subsidized agrarian (MOO) support led to weaker sales in Brazil. Revenues in the Asia-Pacific region rose 23% YoY during the quarter.
AGCO’s operating margins contracted 160 basis points to 4% due to a decline in production and a revenue mix that leaned heavily on low-margin products. For example, the company sold more of the low-margin small and mid-sized tractors at the expense of high horsepower tractors that earn higher margins for the company. Similarly, regions such as South American and North America, where production levels declined, earned lower margins YoY compared to the EMEA and Asia-Pacific region where production increased.