AGCO Corp (AGCO) 2016 Q4 法說會逐字稿

Good morning. My name is Scott and I will be your conference operator today. At this time I would like to welcome everyone to the AGCO 2016 fourth-quarter earnings release conference call.

(Operator Instructions)

Greg Peterson, AGCO Head of Investor Relations, you may begin your conference.

Thanks, Scott, and good morning. Welcome to those of you joining us for the AGCO'S fourth-quarter 2016 earnings conference call. We will refer to a slide presentation this morning which we posted on our website at www.agcocorp.com.

The non-GAAP measures that we do use in the slide presentation are reconciled to GAAP measures in the appendix of the presentation. We will also be making forward-looking statements this morning, including demand, product development and capital expenditure plans and timing of those plans; acquisition, expansion, and modernization plans and our expectations with respect to the costs and benefits of those plans and timing of those benefits; production levels, share repurchases and our future revenue, price levels, earnings, cash flow tax rates and other financial metrics. We wish to caution you that these statements are predictions and that actual events may differ materially. We refer you to the periodic reports that we filed from time to time with the Securities and Exchange Commission including the company's Form 10-K for the year ended December 31, 2015 and subsequent Form 10-Qs. These documents discuss important factors that could cause the actual results to differ materially from those contained in our forward-looking statements.

A replay of this call will be available on our website.

On the call with me this morning are Martin Richenhagen, our Chairman, President, and Chief Executive Officer and Andy Beck, our Senior Vice President and Chief Financial Officer and with that, Martin, please go ahead.

Thank you, Greg, and good morning everybody. We appreciate everyone joining us on this call.

My comments start on slide 3 where you can see that in the fourth quarter of 2016, AGCO'S sales were up about 7% and for the full year our sales grew about flat. Our 2016 diluted adjusted earnings per share reached $2.47. In the year of challenging farm fundamentals and weak industry demand, I'm pleased to tell you we met our financial goals, launched important new products, completed a strategic acquisition, and made important investments to improve our product offering. Our cost-reduction efforts are being balanced with our commitment to customer support and maintaining an aggressive sales and marketing platform. In 2016, we also generated $169 million in free cash flow, which helped support the funding of share repurchases of approximately $213 million and acquisitions that further strengthen our GSI platform.

Despite the current market difficulties, our long-term view remains positive. In addition to diligent cost management, we will be concentrating on initiatives that will drive long-term benefits and raise the efficiency of our factories, improve our service levels, and strengthen our product offering.

Slide 4: The details industry unit retail sales results by region for the full year of 2016. The past year was a challenging year for our industry and AGCO due to weakened market demand. The record grain harvest in the US combined with the healthy crop production across Europe and Brazil resulted in increased grain inventories and lower soft commodity prices. Deteriorating farm economics negatively impacted farmer sentiment and we experienced lower industry equipment demand in all major markets.

The farm equipment fleet remains relatively young in North America and industry retail sales in the row crop sector have declined through 2016. Sales of high horsepower tractors, combines, sprayers and grain storage and handling equipment remained well below last year's level. Industry retail sales in Western Europe have been more stable compared to 2015 levels. Profitability remains strained for dairy producers hurting equipment demand while lower commodity prices have kept market demand soft from the arable farming segment.

Industry retail sales declines were most pronounced in France and Germany. Market conditions in South America were difficult during the first half of 2016. More recently, demand is stabilizing in Brazil where solid farm fundamentals are beginning to overcome previous weakness caused by political and economic challenges. More supportive government policies in Argentina also have contributed to higher sales in that market.

AGCO's 2016 production schedule for factory production hours is shown on slide 5. We lowered the seasonal build in our company and dealer inventory was building the first three quarters of 2016. The increase in the fourth quarter resulted primarily from the build of tier three emission transition stock in Brazil production hours declined about 5% for the full year of 2016, compared to 2015. We expect production to be down modestly in 2017 versus 2016. Globally, our order book for tractors is down at the end of December 2016 compared to the end of December 2015. Orders were higher in South America and Asia Pacific, and lower in North America and Europe.

I will now turn the call over to Andy Beck, who will provide you more information about our fourth-quarter results.

Thank you, Martin, and good morning everyone, I'll start on slide 6 which looks at AGCO'S regional net sales performance for the fourth quarter and full year of 2016. AGCO'S sales increased approximately 9% in the fourth quarter excluding the negative impact of currency translation of approximately 1.8%, compared to fourth quarter 2015. AGCO benefited from the impact of acquisitions which increased sales by approximately 3%, and the strong growth in Brazil in the fourth quarter 2016 compared to the fourth quarter of 2015.

The Europe Africa Middle East segment reported an increase in net sales of approximately 2% excluding the impact of negative currency translation compared to the fourth quarter 2015. Excluding acquisitions, EAME sales were down about 1%. Sales declines in France were mostly offset by growth in the UK and Scandinavia.

North American sales increased approximately 4%, excluding the unfavorable impact of currency translation during the fourth quarter of 2016, compared to the levels experienced in the fourth quarter of 2015. Excluding acquisitions North America sales were about flat. AGCO'S fourth quarter 2016 sales in South America increased approximately 54% compared to the fourth quarter of 2015, excluding positive currency translation impacts. Market demand in Brazil and Peru from very low levels in the fourth quarter of 2015 and growth in Argentina was also very strong.

Net sales in our Asia-Pacific segment increased about 23% in the fourth quarter of 2016, compared to 2015, excluding the negative impact of currency. Significant growth in GSI sales in China accounted for most of the increase. Parts sales were $282 million for the fourth quarter 2016, and were up about 6% compared to the same period in 2015 excluding the negative impact of currency.

Moving to slide 7, it details AGCO'S sales and margin performance. Our fourth-quarter results were highlighted by solid margin performance in our Europe Africa Middle East and APAC regions where gross margins improved during the fourth quarter compared to the same period in 2015. Consolidated fourth-quarter operating margins were approximately flat compared to the fourth quarter of 2015. The benefits of higher sales and our ongoing efforts targeted at labor productivity and material costs were offset by a weaker sales mix and higher engineering expenses and other costs.

The Europe Africa Middle East segment reported operating margins of 10.6% during the fourth quarter 2016. The benefit of higher sales was offset by increased engineering expense. North America's operating margins were lower in the fourth quarter of 2016 compared to the same period last year. The negative impacts associated with lower production and weaker sales mix and other costs increases all contributed to the decline.

Operating margins in the South America region were up on the extremely low levels experienced in the fourth quarter of 2015. The benefits of higher sales and production were partially offset by material costs and inflation. Operating margins in the Asia-Pacific region improved significantly as production continues to ramp up in our new Chinese manufacturing facility.

Slide 8 details GSI sales by region and product. The GSI sales were up about 18% excluding currency impacts but including the benefit of acquisitions that are reflected in the results for the full year of 2016 compared to 2015. Growth in protein production equipment was partially offset by declines in grain storage equipment across of the regions. Excluding of the positive impact of acquisitions, GSI sales were down approximately 6% on a constant currency basis. For 2017, we expect GSI sales to reach $1 billion.

Slide 9 looks at the investments we have made in business -- in our business over the last decade to capital expenditures and research and development. After completing a number of major plant productivity projects, meeting tier 4 emission requirements in both Europe and North America and making heavy investments in new products, we have reduced our CapEx and R&D programs during 2014, 2015 and 2016. We are continuing to make strategic investments to refresh and expand our product lines, upgrade our system capabilities, and improve our factory productivity.

For the full year of 2016, our CapEx totaled $201 million, a slight decrease from 2015. Our engineering expense increased to about 4% of sales, in 2016. Despite the softer demand environment, we intend to increase the level investment to execute our product development plans resulting in increased CapEx and engineering spend in 2017. Our spending plan in 2017 is needed to maintain our competitiveness and to support the long-term growth of our business.

Slide 10 addresses AGCO'S free cash flow which represents cash resulting from operating activities less capital expenditures. Free cash flow totaled $169 million for 2016, after funding the increase in South American inventory to build the necessary tier 3 emission transition stock. As a result of the strong free cash flow that AGCO generated over the last few years our balance sheet and liquidity position remain strong. After covering our increased spending on strategic investments, we're targeting free cash flow of $225 million to $250 million in 2017.

At the end of December 2016, our North America dealer month supply on a trailing 12 month basis was lower for combines and high horsepower tractors, while higher for all tractors due to inventory increases for the low horsepower sector. Tractor inventories were over eight months and combines were about four months. Losses on sales of receivables associated with our receivable financing facilities which are included in other expense net, was approximately $5.7 million during the fourth quarter 2016, compared to $5.4 million in the same period of 2015.

As we focus on returns for shareholders, we expect to make cash distributions an important component of our long-term capital allocation plan. Over the past three years we have executed share repurchases of $1 billion, which had the effect of reducing our share count by approximately 20%. With our current $500 million share repurchase authorization completed, our Board of Directors has approved a new $300 million program that expires in December 2019. Our current plans are to start modestly for 2017, as we assimilate our recent acquisitions and then accelerate the program in 2018 and 2019. We are also committed to responsibly growing our dividend in the coming years. We expect to fund these programs with operating cash flow.

Moving onto the next slide, slide 12, our 2017 Outlook for the three major regional markets is highlighted. Our forecast is unchanged from our December analyst meeting. In the United States the USDA estimates farm income will be down 17% in 2016, and most experts expect 2017 to be another challenging year. Our 2017 forecast for North America has tractor sales down 5% to 10% compared to 2016. With the targeted decline in equipment demand, the large agricultural equipment sector in North America is expected to be down more than the low horsepower equipment segment.

In Brazil, stabilization in recent months of the government and financing program has led to improved demand. Economics our Brazilian farm -- farmers remains solid and as 2016 crop production was healthy, the majority of the Brazil crops are exported. With the higher sugar and ethanol prices, demand from the sugar producers has been improving. The Argentina market improved in 2016 as more farmer-friendly government policies and healthy crop production has stimulated demand. Our South American industry forecast for 2017 assumes growth of approximately 10%.

Lastly, we expect a modest decline in the Western European market. Farm income remains under pressure in 2016 and is expected to be below the long-term average. As we look into 2017, we expect demand to decline modestly, due to weaker market conditions in the [cereal] markets. Curtailed production is starting to support milk prices and temporary subsidies by some EU countries may help demand in the important dairy sector.

Slide 13 highlights the assumptions underlying our 2017 Outlook. While we're optimistic about the long-term opportunities for our industry and our business, the priority for 2017 continues to be managing our costs, lowering our dealer and company inventories to better align ourselves with current market demand.

Our 2017 forecast assumes softer industry demand across North America and Europe, partially offset by growth in South America. Our plan includes market share improvement with price increases in the range between 1.5% and 2% on a consolidated basis. At current exchange rates we expect currency translation to negatively impact our sales by about 3%. Acquisitions are expected to increase sales by about 2.5%. In 2017, engineering expense is expected to run about 4.1% of our sales which amounts to an increase of approximately $10 million on a constant currency basis compared to 2016.

Operating margins are expected to improve by about 50 basis points due to the benefit of our fixed cost reduction efforts as well as continued progress on our productivity and purchasing initiatives, partially offset by weaker sales mix. We are targeting an effective tax rate of approximately 40% for 2017, the increase in the tax rate will mostly significantly impact our first-quarter results, due to the timing in 2016 of our accounting change relating to US deferred tax assets.

Slide 14 lists our selected 2017 financial goals. We are projecting 2017 sales to be in the $7.4 billion range. We expect gross and operating margins to be improved from 2016 reflecting the positive impact of our cost reduction efforts partially offset by weaker sales mix. Based on these assumptions, we are targeting 2017 earnings per share of approximately $2.50. We expect capital expenditures of $200 million to $225 million and free cash flow to range between $225 million to $250 million.

As we indicated at our December analyst meeting, earnings per share in the first quarter of 2017 are expected to be significantly lower than reported for the first quarter of 2016, primarily due to higher income tax expense. We are expecting a loss between $0.20 to $0.25 per share in the first quarter of 2017. Absent the increased income tax expense, EPS would be approximately breakeven for the first quarter. And with that, operator, we are ready to take questions.

(Operator Instructions)

Nicole DeBlase, Deutsche Bank.

Yes. Thanks, guys. So looking at 1Q, totally understand the net -- the tax issue, but I guess thinking about production, what's the expected year on your movement in production and how does that look from a regional perspective?

Hi Nicole. Our production looks to be down in the first quarter. We're having the impact overall of kind of getting off to a slower start in production in both North America and Europe. We're working, again, on our dealer inventories in North America and in Europe if you recall the first quarters quite strong last year and we expected to be a little weaker here in the first quarter of 2017.

Also in South America production will be down because, again, we built forward some stock to transition our way through the 2017 change to tier three, so that's giving us a lower production as well in Q1. So those are impacting our first-quarter results and so as we mentioned, our tax rate should be much higher in the first quarter as we set our tax rates going to be about 40% for the full year, but that's not a uniform 40%. It will fluctuate from quarter-to-quarter based on how we have to do the accounting for the US tax rate. And, as a result, that'll have us have a much higher tax expense in the first quarter and not be a benefit that we were -- not be in line with the actual earnings in the first quarter.

Okay. Got it.

There is a cost of the potential that the taxes -- tax laws might change with a positive impact on AGCO.

Okay. Understood. Thanks, Andy and Martin and then just as my follow-up and in the North America business I was a bit surprised to see it lose money this quarter, despite the year on your revenue growth. So can you just elaborate on this, and then maybe give us a sense of how North America margins might look at 2017?

Sure. In addition, all year we've been having lower margins in North America as it relates to lower production levels, product mix, as we're -- the high horsepower sales are down and those are the higher margin products. So those have been impacts throughout the year. In the fourth quarter we also had higher costs in Q4, including a higher warranty for fourth quarter that addressed an issue that's now been rectified in our current production. So it was kind of a discrete item that was -- it should be one-time in nature. And if you take out that cost and some -- you take out that cost, then we would have been much closer to our earnings in the prior year.

Okay. Got it. Thanks. I'll pass it on.

Andy Casey, Wells Fargo Securities. Your line is open.

Good morning. Thanks. Could you give a little bit more color on what Cimbria may have added to operating profit during the fourth quarter?

Yes. Cimbria in the fourth quarter is -- is not one of their stronger periods so we had acquisition impacts in the first quarter -- fourth quarter of 2016 was about 3% overall, which was mainly the Cimbria business. In terms of earnings it was probably just slightly positive. We had the higher amortization expense impacting, as well. So a little better than breakeven for the quarter.

Thank you, Andy, and correct me if I'm wrong, some of that amortization expense should go away for 2017? Is that right?

Yes. It does start to come back down. So we had amortization expense in the fourth quarter of $13.5 million. It should be -- it'll probably be a little higher in the first quarter 2017 and then come back down to about $13.5 million for the rest of -- excuse me -- yes. $13.5 million for the rest of the year.

Okay.

It was -- let me correct myself I was looking at the wrong slide. It was $15.9 million for the fourth quarter 2016. It comes down a little in the first quarter, but stays a little higher and then it should be the rest of the year about $13.5 million for the second, third, and fourth quarter.

So we're looking at about -- Andy -- about $55 million next year for amortization, or for 2017.

Okay. Thank you. And then for your comment in response to Nicole's question about North America, you referenced that absent that warranty charge you would have been closer to the prior years' operating profit. Does that pretty much imply that warranty accounted for about $11 million to $12 million headwind year-over-year?

Yes. That's about right.

And that goes away -- that contained in the quarter, should not continue into the first quarter?

That's right.

Okay. Thank you very much.

Jamie Cook, Credit Suisse.

Hi. Good morning. My first question just on South America, the -- obviously the sales will be pretty strong in 2017. But, Andy, just trying to get a feel for how you're thinking about profitability with production being done in the first quarter. We have Tier four costs at some point you're going to have to be able to pass through. And just I think Martin said at the analyst day the competitive environment had been pretty bad so putting all those things together how do you think about overall profitability? That's my first question.

Yes. In terms of South America our profitability, we expect the margins to improve in 2017 overall versus 2016. Some of the factors that you discussed are going to mute that to some extent, particularly in the first quarter. We expect that the margins will just be slightly up because we do have lower production and we also have some advanced tier three transition costs and marketing cost for the new products that we are introducing. So our expenses are up higher in that first quarter. So we'll just be slightly up in the first quarter and then you see better results mid single-digit margins for the rest of the year.

Okay. And then just my second question. I know you've talked about getting the excess -- you still have a little access -- a little bit of excess inventory out of the channel. Productions going to be down a little bit year-over-year. Martin, any chance you could talk about your confidence level that this is the last year -- that we get -- we fix the used inventory issue in 2017. I'm just trying to get a sense for how you're feeling about that as we transition to 2018.

Well, I think in South America, it looks like we would have bottomed out and therefore, let's say, because our inventories are in pretty good shape, we shouldn't have to face a similar problem next year. In North America, we can't -- we hope that markets will be up. But it's not for sure yet and Europe is very similar. So Europe I think the biggest potential we have in the markets which went down so much last year, (inaudible) in Germany.

Okay. Thanks. I'll get back in the queue.

Larry De Maria, William Blair.

Hi. Thank you. Good morning.

Just curious about I know it's obviously the small segment rest of world, but the cadence of the margins through the year and where we should think about that kind of a run rate in sales and margins at some point when it's kind of mature. Because I know you're ramping up production levels on low horsepower so, any color on the rest of the world where that should be in terms of sales and margin run rate, and if that varies through the year very much.

Yes.

The opportunities in the rest of the world are certainly in Africa. We also I think have opportunities in China because this is a market we just start to enter so there are opportunities to grow market share. And then, let's say, you could be optimistic after what we heard so far from the administration about the relationship between Russia and the US that the Russian situation starts to be -- to normalize and that Russia could come back.

Okay. But the ramp on the whole horsepower tractors, that ramp will be embedded in the individual segment as opposed to the rest of the world then, is that right?

Yes. And also, Larry, we will benefit some in the APAC region in the sense that some of those overhead costs from that region are going to be carried by the units that then gets sold in the other regions. So we are looking for margin improvement partially because of that increased production as we introduce the global series tractor. So we're looking for APAC margins to be in the low fours probably in 2017. Some of that is, as I said, because of the global surge production and then the rest of it is just development of that market including some benefit probably from GSI. So.

Okay. But in other words there is no major ramp in sales from the global series that will be embedded elsewhere then? Got it.

That's right.

Thank you.

Joel Tiss, BMO.

Hey, guys. How is it going?

Hey, Joel.

Good.

All right. So you guys always seem to give us conservative guidance and find a way to beat that guidance. So I just wondered if we could get a little bit of a sense of some of the areas that in 2017 that could give us a little surprised to the upside? You already mentioned to Larry, Russia, and China. Is there anything else in there where you feel like you don't really have as clear of a picture yet for 2017 that could end up being a little bit better?

I think it's maybe the combine business in South America. And then, of course, also I think some of our core markets in Europe could come back so. Therefore overall I think, as you know us, so our plan, wants to be realistic, less conservative, and so we hope that we can continue with this addition in 2017.

We also have an important initiative in the area of cost-reduction. We call it radical innovative new thinking, so we are expecting further efficiency gains and productivity gains all over the company.

Okay. And that was my other question, can you give us a sense, because you've been doing a lot of restructuring and changing the footprint for the last five years at least and I just wonder, are there any big steps left to do? Or is it more just tweaking at the margins?

It's both so we look into some radical bigger steps but we also, let's say a lot of the initiatives are smaller things our organization handles this very successfully.

All right. Thank you.

You're welcome.

Jerry Revich, Goldman Sachs.

Hi. Good morning, everyone.

Good morning, Gary.

I'm wondering if you could talk about the GSI performance in China it sounded like that drove most of the growth in Asia in the quarter if I heard your remarks correctly, Andy, can you talk about it? Is that a discrete project win? What's the carryover into 2017? And how we should be thinking about it within the context of the segment guidance you laid out?

Well, in terms of GSI for this year, yes, our sales in the fourth quarter GSI doubled from the year before so we had a really good result. We are seeing a good momentum in the protein area in China. When we started that business we were really getting in with US companies that had moved to China to establish their operations.

A lot of that's now -- they've pulled back out and now most of our business is with local producers of protein. And so we had some slower years as we transitioned away from our -- to the new customer base of but now we're being pretty successful. And so we're positive about the trends that we see in Asia overall with our GSI business as a result. For 2017, I think we're talking about improvement overall in our Asia business and part of that is also an increase in GSI, certainly not doubling it again, but looking for further increases.

Okay. And in terms of in South America, can you talk about where dealer inventories stand today? Obviously, tier three is going to drive some variation. But if we think about where dealer inventories stand before the tier three pre-buy and compare that to historical levels, can you just flesh that out for us how much room is there for Dealers to normalize their inventories excluding the tier three transitional lumpiness, considering how much of that markets been down?

Yes, Jerry. So as I guess the preference for my comments the inventory levels that are dealer's typically carry in Brazil are much lower than what they would carry in Europe or North America. So anytime we have inventory issues globally it's typically not in Brazil. But as you talked about, that tier three transition did lead to some increase in dealer inventories were up higher than normal just a little on the new, although, it's kind of a mixed bag and that on the youth side there's been a lot of interest and a lot of buying of the used equipment ahead of that tier three transition. So I would tell you that our used equipment is actually down some, a little lower than normal in Brazil and the new equipment is up a little from where it is normally.

Okay. And lastly in South America, can you talk about your production plant over the course of the year? So you mentioned productions down in the first quarter. When do you expect the increased production what's embedded in your guidance?

The production will ramp up throughout the year. So as we transition to the new production and we get rid of that transition stock it'll come back. So second half of the year the production will be up from what we have in the first half on quarter over quarter. But relative to the prior year, you'll see it down because obviously a year ago we were adding -- we were over-producing to build that stock particularly in the fourth quarter. So relative to last year, the second half will be low as well.

Okay. Thank you.

Steven Fisher, UBS.

Thanks. Good morning, the Q4 revenues looked a little better than expected and I think your expecting 2017 FX impact is slightly less than expected. What are the offsets that keep your total revenue forecast for 2017, just flat as 7.4?

Yes. We're for the full year 2017, what we have, as you said, currency going to be a negative of about 3%, acquisitions should add about 2%, so -- and then you have pricing of about 1.5% to 2%. So what that implies is the industry declines that we are forecasting, that we laid out, are going to be offset for the most part by market share, new products, things like that give us an opportunity to improve our sales over and above what those industry declines that we indicated were.

So relative to what you provided in December, it sounds like some of the headwinds might be a little bit less or some of the business performing a little better. That's of rounding or conservatism or --

yes. I'd say mainly rounding. And as you say, we did a little better at the end of this year than what we had expected. But for the most part everything is pretty consistent. Assumptions are all very consistent with what we had. So no major changes.

Okay. And then just one clarification in terms of the North American profitability in 2017, you expect at the segment level to be profitable in every quarter?

Except for the first quarter.

Okay. So that will be down in the negative in the first quarter. Okay.

Right.

Got it.

And then for the full year it'd be pretty similar from the margin perspective to what it was 2016.

Okay. Great. Thank you.

Tim Thein, Citigroup.

Thank you. Good morning.

First, Andy, for you, Martin had alluded earlier to some potential benefit to AGCO should some form of corporate tax reform be put forth in the US. And I get it at this point it's pure speculation. But just thinking about it from a high level, my thought was that if you're not at least currently in a taxable or positive taxable income generated in the US. And also, part two of that is, just can you give us -- even if it's kind of broader parameters, your position from a net import versus export standpoint?

Sure. You are basically right. We're in a -- currently in a loss position in the US, so any changes in the corporate tax rate wouldn't impact our results at this point in time. But obviously as the market recovers we expect to be back in a tax paying position and then that would benefit our results. The other thing were hoping to see is the ability to bring cash back on a more readily, easier basis than before. So that would certainly help us because we do generate a lot of cash overseas. So we're watching those things very closely.

On the import export, we've looked at that and we're really very balanced. So we do import product into the US, but we also are an exporter of our factories into Canada and to our other markets around the world, and our net impact is basically neutral.

So overall -- let's say something around $400 million to $450 million on both sides. So imports and exports with a slight -- I think the exports a little bit more than the import.

Okay. That's helpful and then just on the material cost side, I think you had outlined at the analyst day of expectation for about $40 million of year-over-year benefit on the sourcing side. Obviously, there been a couple of steel price increases, not just in the US but in some of the other markets. And I think there's some questions in terms of the sustainability of that. But just update us in terms of your expectations. Do you still feel confident in your ability to get that roughly $40 million?

Yes.

I think you have to look at it in a way that it's not coming so much from price development and installation and so on, but our major efforts in the area platform solutions, which gave us a certain tailwind.

Okay. So net of any steel and other material cost increases your more than able to offset as I guess --

Yes.

So that 40 million that you were referring to was a savings that we target every year and that's compared to what normal inflationary cost would be so. So what we want to do beat the economics -- material economics by $40 million. And so that our assumption is that we can price for the normal economics that we see, steel prices, and other increases and then have that better performance on what actually comes that we capture in our material costs and that should help us get our margins improved.

Okay. Understood. Appreciate it.

Ann Duignan, JPMorgan.

Hi. Good morning, guys.

Good morning.

I wanted to circle back on Joel's comments about setting the bar low and beating Martin -- I noticed that part of your variable compensation is based on the target EPS and anything below that compensation goes down. Has there been any change to any of the variable comp metrics as we go into 2017?

No. Go ahead, Martin. Go ahead.

No. Go ahead, Andy.

Okay. All of the metrics are the same. We are -- our bonus objectives are based on net income, free cash flow, operating margin, and a quality metric that we -- non financial metric on quality that we measure.

Yes. Okay. Good to know there's no change. And then from an end market perspective, we see what's going on in the dairy industry in Europe we see what intervention is done to dry milk powder and European Union inability to put it back on the market.

Can you talk about perhaps trends in Germany individually and what your expectations are for both those countries in 2017? In terms of equipment sales?

Well, as I said, I think countries like France, Germany, and some of the Scandinavian markets might have a little upside potential. It's too early to talk about it. So the dairy industry in Europe in general is a difficult one, as you know.

Maybe it -- and it depends a little bit on what the various countries are doing so on one end, you have the EU regulations and subsidies and on the other hand you have countries trying to do something on top of that so I think the initiatives, which are in place in Germany, the new Secretary of Minister of agriculture, so far.

Okay. And what's your current Outlook for both those countries, then, if you think there may be some upside to your Outlook?

Go on.

Yes. Baked into our forecast for sales for 2017, kind of low to mid single-digit declines in Germany and France.

Okay. Thank you. I'll get back in line.

Joe O'Dea, Vertical Research.

Hi. Good morning. It looks like what you're talking about with the different components of revenue drivers that about a point of contribution from market share gains. Could you just talk about what you achieved in 2016 and then where you think you'll get the biggest contribution of those gains? I think you previously commented on some pretty competitive pricing South America. So maybe not there, but where the share gains are going to be most beneficial?

Yes. The share gains that we are getting where we are performing -- outperforming the market we did quite well in North America in 2016. A lot of new products we introduced, particularly the global series helped us. But we did well in all sectors. In Europe we also outperformed a number of markets. And then, as you can see, from the sales results in our Asia region, we're also seeing higher sales. And so, all those are contributing as you point out, South America, more competitive. We're not seeing that market share growth there at this point in time.

Okay. And then on Europe in the quarter, we saw some pretty steep declines in the registration data year-over-year; your performance far better than that. So can you talk about just a little bit of the disconnect and just where inventory levels are in Germany and France and whether you can put that in context with months of inventory and how that compares to kind of years?

Sure. There was some anomalies relating to registration reporting between the third and fourth quarters so you have to kind of look through that. I would recommend that you look more at what's happened for the full year and as we pointed out, the market was down modestly for the full year.

And so I'm not sure -- certainly fourth quarter was strong for France in 2015 and was much weaker because of the fact that they had just put in some tax incentives for farmers and so that should kind of clear out as we look at 2017. In terms of our performance, no, that's looking at registrations. Our shipments to dealers are a little more uniform. And as we look at our dealer inventory we think it's in pretty good shape in Europe. It's a dealer inventory looks to be down in both France and Germany and that's a good sign for us.

Okay. Thank you.

Mike Shlisky, Seaport Global.

Good morning, guys. I wanted to touch briefly on interest cost in the fourth quarter, here, that were up a bit. There was some new debt obviously on the books. Is the roughly $15 million you saw the appropriate run rate for 2017?

Let's see.

Sorry to -- it's $18 million. Sorry.

It's about $18 million. That looks to come down a little in the first quarter. I would say that are run rate is going to be more like $14 million, $15 million on average.

Okay. Got it. And then secondly, it looks like your income from your France JV kind of hung in there in 2016. Given what is going on right now in the market, can that sustain your thinking to 2017 for the full year?

Yes. We have being pretty flat year-over-year.

Okay. That'll do it for me, guys. Thank you so much.

Thank you.

That was our final question for today Mr. Peterson I will turn the call back over to you.

Thanks, Scott. We appreciate everyone's participation today and if you do have follow-up questions I encourage you to get back in touch and have a great day.

Thank you, guys.

This concludes today's conference call. You may now disconnect.