AGCO Corp (AGCO) 2002 Q2 法說會逐字稿

Good day everyone. Welcome to today's AGCO Corporation call. Today's call is being recorded. At this time I'll turn this call over to Mr. Robert Ratliff, chairman of the board, President and Chief Executive Officer for AGCO Corporation. Mr. Ratcliffe, please go ahead.

Thank you. Welcome to the AGCO second quarter conference call. I have with me today Don Millard, our Executive Vice President and Chief Operating Officer; Andy Beck, our Senior Vice President and Chief Financial Officer; and Molly Dye, our Vice President of Corporate Relations.

I would like to begin the call with the following statement regarding its content. During the course of this conference call, we state our beliefs and may make projections and other forward-looking statements regarding future events and the future financial performance of the Company. We wish to caution you that these statements are predictions and that actual events or results may differ materially.

We refer you to such periodic reports that are filed from time to time with the Security and Exchange Commission, including the Company's Form 10-K for the year ended December 31, 2001. These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

With that would I now like to summarize our financial results for the second quarter. Net sales for the second quarter of 2002 were $772.6 million compared to $659.3 million in the prior year. For the first six months, net sales were $1.4 billion, which was approximately 17% above the prior year.

Operating income for the quarter, excluding restricted stock compensation expense and restructuring expense, was $58.7 million compared to $33.3 million in the prior period. For the first six months, operating income was $97.9 million compared to $44 million in the prior year.

Diluted earnings per share, excluding restricted stock compensation expense and restructuring expense, was 39 cents for the second quarter compared to income, excluding restricted stock compensation expense, restructuring expense, and an extraordinary loss of 11 cents in the prior year period. Year-to-date earnings per share excluding restricted stock compensation expense, restructuring expense, and accumulative effect in accounting principle was 60 cents per share, compared to 6 cents per share in 2001.

Free cash flow for first six months was a use of cash of $93.4 million, compared to a source of cash of $35.7 million in 2001. Our second quarter results were highlighted by margin improvement, sales growth, and the benefit of prior cost cutting initiatives realized. We continue to remain on target to meet our cost reduction targets in 2002 which will significantly improve our performance over 2001.

Now I'd like to turn the discussion over to Don Millard to discuss the industry and AGCO's condition in each region.

Thank you,Bob. First in North America, total industry retail unit sales of tractors during the first six months of 2002 increased approximately 2.2% when compared with 2001. Industry sales were higher in the compact and utility tractor segments, but lower for the higher horsepower segment. AGCO's retail unit sales for tractors increased in the first six months of 2002 when compared with our sales in the prior year period.

Industry retail unit sales of combines in the first six months of 2002 were 16.9% lower than 2001. AGCO's retail unit sales of combines in 2002 were higher than the prior year due to a more normal combine production schedule in 2002 compared to 2001. In Western Europe, industry retail unit sales of tractors for the first six months of 2002 were 6.4% higher compared to 2001. AGCO's retail unit sales of tractors increased compared to 2001, particularly in the UK and Germany. Market recovery was evident in markets that were particularly impacted by concerns over livestock diseases in 2001.

In South America, industry retail unit sales of tractors increased approximately 16% for the first six months of 2002 compared to 2001. Brazilian market increased 19.4%, while the Argentine market decreased approximately 67%. AGCO's South American retail unit sales also increased in 2002 compared to 2001. Availability of subsidized financing in Brazil continues to support strong demand, while the economic and currency crisis in Argentina continues to severely impact that market.

In the rest of the world, AGCO's net sales in dollars for the first six months of 2002 increased approximately 11% compared to the same period in 2001. With increases primarily in Eastern European and Australian markets.

Although the North American high horsepower and combine markets are expected to be weaker than earlier anticipated, the markets in Europe and South America are somewhat stronger. Our worldwide industry forecast is for a relatively flat market in 2002 compared to 2001. Andy Beck will now cover the financial results.

Thank you, Don. Reported sales were 17.2% greater than 2001 for the second quarter and 16.8% higher for the first six months. Ag-Chem generated net sales of $136 million on a year-to-date bases. Challenger generated net sales of $10.7 million in the second quarter. Including the impact of both acquisition, net sales for the first six months are 9% higher than the first six months of last year.

Currency translation was neutral to net sales in the second quarter. For the first six months, currency translation negatively impacted net sales by $17.7 million, primarily due to the weakening of the Brazilian real.

Excluding the effect of Ag-Chem and Challenger acquisitions and currency translation, net sales compared to the prior year were 11% greater on a year-to-date basis. On a regional basis, excluding the impact of acquisitions and currency translation, net sales for the second quarter in the first six months of 2002 compared to 2001 were as follows: For the quarter, North America up 21%; South America, up 46%; Western Europe, up 7%; rest of world markets, including Central and Eastern Europe, Asia Pacific, Africa, and the Middle East, up 37%. For the first six months North America, up 12%. South America, up 26%; Western Europe, up 8%; rest of the world markets, up 10%.

Part sales in the quarter were $137.4 million compared to $132.6 million in 2001. Excluding the effective acquisitions and currency translation, part sales in the quarter were 4% above the prior year period.

In the second quarter, our gross profit margins compared to 2001 increased from 17.2% of net sales to 18.3%. Our gross margins improved over the prior year due to cost reduction initiatives and higher production. Production and inefficiencies experienced in the second quarter of 2001 and our Hesston plant, totaling $2.3 million, were eliminated in 2002. Gross margins for the first six months of 2002 were 18.5%, compared to 16.5% in the prior year. The Hesston plant cost inefficiencies for the first six months of 2001 were $6 million.

During the first six months of 2002, AGCO incurred $27.8 million of restricted stock compensation expense, primarily related to the first quarter awards earned under the Company's long-term incentive plan. The charge for the second quarter was approximately .8 million. $15.1 million of the expense is noncash expense.

The Company reported restructuring and other frequent experience of $22.7 million for the quarter, of which included $21.3 million in expenses related to the planned closure of the Company's tractor manufacturing facility in Coventry, England, announced in June 2002. The Coventry expenses included an $11.2 million noncash impairment charge related to the write-down of machinery and equipment to estimated fair value, and $10.1 million related to severance and other facility closure costs. The Company has recorded $23.6 million of restructuring expenses year-to-date in 2002.

Other components of the expenses recorded primarily relate to cost reduction initiatives in Europe to reorganize and consolidate certain engineering and SG&A functions, and the restructuring of the Company's North America information systems function.

Losses on sales of receivables, primarily under our security advertization facilities, which is included in other expense net, was $3.7 million for the quarter compared to $8.6 million last year. The second quarter 2001 amount includes $3.6 million of costs associated with the initial funding of securitization facilities in Europe and Canada completed in 2001. The remaining decrease is due to lower interest rates in 2002 compared to 2001.

Year-to-date discounts on sales or receivables for 2002 were $7.4 million compared to $13.6 million in 2001. The year-to-date 2001 amount includes $4 million of costs associated with initial funding of facilities.

Interest expense net for the second quarter was $14.4 million compared to $15.5 million in the prior year and $28.5 million for the first six months, compared to $29.4 million in the prior year. Interest expense decreased due to lower interest rates in 2002 compared to 2001.

Moving on to the balance sheet: Accounts receivable and inventory combined were $212.8 million higher that at the end of December 2001. The increase includes approximately $29 million of receivables in inventory related to Caterpillar Challenger. The remaining increases in inventory receivables is to normal seasonal increases in working capital, as well as currency translation of $34 million. Funding under accounts receivable securitization programs was $389.5 million at the end of June, compared to $402 million at the end of December.

In North America, our dealer inventory month supply at the end of June on a trailing 12-month basis was as follows: Approximately eight months for tractors, which is slightly higher than the prior year; eight months for combines, which is also higher than the prior year; In addition, our dealers month supply of hey equipment is approximately eight months, which level with the prior year.

Our debt to capital ratio was 45.8% at June 30, 2002, compared to 46.9% at 2001 -- June 2001, primarily due to lower debt levels in 2002. EBITDA, excluding restructuring expenses, was $73.5 million for the second quarter of 2002 compared to $49.5 million in 2001. For first six months of 2002, EBITDA was $113.1 million, compared to $74.6 million in 2001.

Unit volumes for worldwide tractor and combine production during the second quarter were 14% higher than 2001 levels, with the increase attributable to the majority of our facilities. Despite the flat industry condition, AGCO expects to generate earnings growth from cost reduction initiatives. Net sales are projected to increase approximately 12-13%, primarily due to sales and the new Challenger product line introduction, a full-year impact of Ag-Chem, and the strengthening of the euro. Net income per share, before restructuring expense, restricted stock compensation expense, and accumulative effect of the accounting change, is projected to be in the range of $1.05 to $1.10 per share. Including the positive benefit of 15 cents related to the accounting change which eliminates goodwill amortization expense.

Improved margins in sales growth are expected to generate continued earnings improvement, will partially be offset by the negative impact of Challenger in 2002 and production start-up costs related to the European production rationalization. Restructuring expenses are expected to be in the range of $35-40 million, and primarily relate to the Coventry facility and staff rationalization action, which will result in cost reduction.

For the third quarter, AGCO expects adjusted earnings per share to be between 15 cents and 20 cents per share, compared to 5 cents per share in the prior year.

Thank you, Andy. Prior to opening up the call for comments, I'd just like to report that we have no reservations regarding signing the officer certifications with the SEC, and that we plan on filing our certifications when we complete our second quarter Form 10-Q in August. That concludes our comments. Operator, we are ready to open up the conference call for questions.

Thank you. The question and answer session will be conducted electrically today. If would you like to ask a question, you may signal by pressing the star key followed by the number one on your telephone. We will proceed in the order that you signal us and take as many questions as time permits. Once again, if do you have a question, please press star one. We'll pause for a moment. Our first question will come from Steve [Bokeman] with Morgan Stanley.

Hi. Good afternoon.

Hi.

In the release you had some details about the Challenger outlook in terms of how many dealers you'd signed up and so forth. I was wondering if you might just comment on that. I think it said there were more pending and 45 done. Just your outlook there, Bob. And then if you would talk about what you think that could mean financially for the company, given that it's been a bit better than expect sod far.

Certainly. The target right now is 55 dealers here in North America out of 64. We have three that are in the process, 7 waiting to line up. We think the 55 is achievable here within the next 30 days.

Outside of North America we have had presentations in Europe. We don't have a firm number on how many. But we do believe that our strategy there is going to be very successful and will extend not only Western Europe but into Eastern Europe and on into Russia. This week, our presentations are going on in Australia. We have five distributors there. We believe all five will sign. They've given us that indication already. They handle not only Australia but Southeast Asia and China. So we're very anxious to get that one completed.

Our indications are also very strong out of Central Asia on some specific signings there. And we've had strong indications already from South America. We just haven't had time to get them all signed up, but the outlook is still very strong.

As far as the number of distributors that we will have throughout the world, the only issue probably is the ability of AGCO to produce the incremental products that we've advertised in this Challenger brand of this year. Some of those new products won't be available till after the first of the year. So we're not going get the full sales impact of the full brand range in 2002.

As far as the financials, we have committed -- and I think to you as well -- that we will give guidance on the financial outlook of this venture in August. And this is still our target. The volumes have changed, as we've indicated to you in the past, from the initial pro forma, which only included 30 distributors in North America. We certainly have a lot broader range of products that we're looking at right now and volume. So later in August, we hope to conclude an estimate on the sales of those products over the next three years.

Okay. That would be great. Maybe also little more color -- I think there were some comments about some additional costs that were being incurred. Start-up costs on some of the challenger products, which was maybe, potentially, pinching margins going forward a little. I'm not sure if I read that right.

Steve, we have had -- we've talked all along in terms of the Challenger introduction, that it would not be accretive to earnings in this first year. We're getting our operating team together. A lot of the products aren't going to be available until the end of the year. So we're not going to get a full compliment of the sales that we would expect next year, so it's going to be a slight negative impact. That's more just getting the operating team together, marketing costs, things like that.

Okay. So that's not a change from what you've said previously.

No. That's right.

Thanks very much.

Moving on, we'll take our next question from [Mannis Meyer] with JP Morgan.

Good afternoon.

Hi.

Hi. First question, Bob and Don. I'm look at the outlook statement, and basically the U.S., it looks like you're basically expecting flat demand. Now, are we being a bit conservative just based on what's happened to commodity prices recently? Can we expect positive demand in the second half? That's my first question. And then second question is for Andy, just on working capital and ending debt balance at the end of this year. I don't know if he has any guidance for us on that. Thank you.

Thanks. The first part on the effects of commodity price improvement in the second half, I think you have to look at that through both sides of the tunnel. You know, in one sense the reason the commodity price is going up is the drought and the loss of product yield. So the farmer is losing some income because of those weather-related issues. And on the other hand, he's gaining some income per bushel. So we think it's kind of an offset. I don't think there's any real landslide in his direction at his moment. If the commodity prices prevail and we use up some of the surpluses, I would think it would bode well for 2003. But we're not forecasting any dramatic demand changes the balance of the year.

And in terms of working capital, we talked before about the impact of the Challenger start-up in terms of having to invest in working capital and get a base of working capital to support that business. And so what we're still looking at is a use of cash from a free cash flow standpoint of about $25 million. We would expect debt levels, accordingly, to be slightly up from last year.

And moving on, we'll hear from Gary McMannis with JP Morgan.

Hi. I'm looking at your guidance. I think if I'm doing my math right you're suggesting a fourth quarter that's down year over year. Assume that's true, what are the reasons why you would expect the fourth quarter to be weaker?

I think it's going to be flat to slightly down. The reason for that is a few things. Most importantly is volume-related. In North America there's been a significant shift from last year in terms of when we produce products, especially relating to the AGCO tractor introduction that we had in the fourth quarter of last year and hay equipment and combine sales last year, which were weighted to the back end of the year because of the production issues we had at Hesston, where as this year, we produced them earlier and wholesaled them earlier so they're ready for retail sale. So that will impact our sales in the fourth quarter.

Secondly, we still get some impact relating to Challenger in the fourth quarter, and we have some costs associated with ramping up our labor force in Bovay and in [Cannois], Brazil related to getting started with production in the first quarter of next year of products that we've produced in Coventry in the past.

Okay. And second question, on the third quarter guidance, I guess 15-20 cents, what's the assumption you're using for the sprayer business? If I'm not mistaken, it lost like $7 million in the third quart are a year ago. What kind of numbers should we assume there?

In terms of sprayers, we would expect in the third quarter to be at a minimum breakeven probably with some profits. So a significant improvement over third quarter of last year. You recall third quarter of last year, we shut down the facility to move our Wilbur and spray tube products into the Jackson facility. It so was a fairly disruptive period of time in that business last year. And this year it's going to be a more normal situation for the sprayer business. We should enjoy a lot of cost savings as a result.

Okay. And then the last question. It seems like you're suggesting -- I want to make sure this is true -- you seem to expect both the North America and Europe industry volumes are essentially flat in the second half of the year, year over year; is that right?

Yeah. We think that's about right.

Even though it looks like Europe was up more than 10% in the second quarter, you said that Europe was up in the first quarter flat, and then for the six months it's up 6%, so it would suggest that the second quarter has to be up 10% plus.

I think most of the first half recovery in Europe was offsetting the livestock issues of a year ago. As you'll recall, they were pretty much fixed and didn't affect the second half in Europe.

Okay. Great. Thank you very much.

Our next question from Joanna Shatney with Goldman Sachs.

Good afternoon. Another great quarter. Can you guys talk about production year over year, third quarter and fourth quarter? You alluded to being down year over year in the fourth quarter. That's consistent with your par guidance. But are we down year over year now in the third quarter, as well?

Year over year in production?

Yup.

Yes.

No -- year over year in production in the third quarter will still be higher, about 15% if you exclude the Challenger production, probably about 10%. And then in the fourth quarter, our production will be significantly down from last year. Probably in double digits.

Okay.

There's a big shift in the production compared to last year on an overall full-year basis, our production will be up 3-5%.

Okay. The inventory number, I know we built inventory in North America for spring and spring was little lighter than we thought. Can you just tell us what the production change in North America is, if any, or were you able to make up some of it on market share gains?

We've reduced production in North America by probably about 5% from where we were. But in terms of impacting our factories, for the most part we're substitutional in terms of putting in another market, so we haven't had that significant of a production change from where we were.

Okay. Just to go through the pluses and minuses, Ag-Chem is still expected to be between 20-25 cents accretive to earnings this year?

Yes, that's right.

And restructuring benefits still around 20-25 cents, positive?

That's right.

And I know you're doing another round of restructuring, and we also get some ramp up impact from this year so we'll have incremental benefit from whatever you do this year next year. What do you expect the restructuring benefits to be next year to kind of help us out with if we have flat volumes, where you think you can get the earnings leverage? Is it something as large as the 20 cents that we saw this year? Or expecting to see this year?

Well, I believe that the first thing that we will look at is in terms of the Coventry closure, as you know from our strategy there, we're going to be out completely under could haven tri-- coventry by June of next year so by the -- and so in the back half of next year we will start getting the savings from that restructuring. So we talked about a savings estimate of $20-25 million. I would expect to get some savings in the second half of next year. Probably less than half of that number, though. Then in terms of normal cost reduction initiatives that we have that are ongoing in terms of global purchasing initiatives, productivity improvement initiatives, we're still targeting similar cost reductions that we had this year.

In between $5-10 million?

Probably at least that.

Okay. And last question and I'll get in queue. If we assume some dilution from CAT this year and we're offsetting with some ramp-ups, should we expect CAT to be a accretive to earnings as we picture it right now beginning next year?

Yes.

Okay. Thanks.

We'll take the question from Morgan Stanley's James [INAUDIBLE].

Good afternoon. Great quarter, gentlemen. Just looking more on the cash flow broadly, any changes in capital spending? And then as we look to next year, as the inventory has been built up for the Challenger acquisition, should we be looking for that year to be cash flow positive? And can you kind of give us some range on that flat revenue guidance you gave us?

In terms of capital expenditures, we still expect it to be in the $50 million range for the year. In terms of working capital used as it relates to Challenger, we do expect to build it up. but we expect that to be a sufficient base of working capital so that the requirements for next year would not be as great. It all depends on the sales volume levels. We would expect that it would not be a significant increase next year in that requirement.

Your overall question about what amount of working capital or cash flow we can generate next year, I don't have a clear answer. We haven't put together a plan for next year. But I think that there is opportunity to reduce working capital in our business. And we will continue to try to do that. And I think that will be one of our objectives for 2003.

Thank you.

Moving on, we'll take a question from Michael Harris with Deutsche Bank.

I've had my questions answered. Thanks.

And once again, if you would like to ask a question, please press star one. Our next question will come from John [McGinty] with Credit Suisse First Boston.

Good afternoon. Just trying to make sure I understand. On a full year basis, Andy, you said production was going to be up 3-5% over last year.

That's right.

And where is that -- I guess what I'm trying to understand is, where is that relative to your projected retail sales?

Probably about slightly higher -- well, a little higher than retail because of the Challenger working capital requirement.

But if you took the Challenger out, in other words, if you took Challenger out, is it essentially, then, producing with retail sales?

Yes.

Okay. Does that mean that at the end of the year you anticipate being -- having your inventory levels back to, you know -- in other words, the month supply, which were higher than they were a year ago, and actually in tractors they were higher than they were at the end of last year -- in other words, are you taking some inventories down in the second half?

Absolutely. Our production schedule was much more front-end loaded than last year. So our month supply should get down into more historical levels of what we have at year end. Especially in the fourth quarter, where our retail sales are much higher than what we're putting into the pipeline at that time.

And you're not -- can you just refresh my memory -- on the Challenger inventories you're not -- and I don't know how much of this you're willing to talk to now versus what you'll specify in August. But will there be a further inventory build of Challenger related in '03? I mean, there'd be a further, obviously, if there are more retail sales. But will you have to build up your inventories to a higher level, or your dealer receivables to a higher level than they are at the end of '02?

What -- we're hoping it will not be significant. We are introduce something new products, especially combines next year that aren't available this year. So there will be some working capital requirement there. But as the inventory starts to turn, we believe that we can grow sales on that working capital base, so it's not going to be proportional at all.

Okay And then the guidance -- the guidance that you're giving us -- I'm sorry-- is it dollar -- I'm sorry -- too many conference calls today. Was -- it was 95 cents to $1.05. It's now $1.05 to $1.10, so it's 10 cents higher?

That's right.

Okay/ Is that volume? Is that cost? Or is that currency?

It is volume -- some volume. I would say the margins are in line with what we had expected. And there is -- where we thought we would be we're taking into consideration where the Euro is now. So there's a currency impact, as well.

Is the volume or currency impact bigger or are they about the same, of the 10 cent difference?

Probably half and half.

Half and half. Okay. Thanks very much.

And our next question from Tom [Kramco] with CS First Boston.

Good afternoon.

Hi, Tom.

Can you -- when you look at North America, if I took the numbers down right, industry for the six months up 2.2%, you guys up 12%. Obviously combines at Hesston are doing better. Can you talk about that out performance and how you got there?

I think combines is a big piece of the number, so don't discount that too quickly. Because a year ago we really weren't in production hardly in the first quarter at all. We really have been making up a lot of combine business this year, really right on our plan, according to what we anticipated, even though the market is off significantly.

If you just look at tractors, alone, how do you think you did versus the industry?

Well, the compact area, which is the high unit number area, we have increased our market share significantly there, because we introduced not only some new models in the Massey line, but we introduced the AGCO line of compact tractors, and that has significant gains for us.

Okay. And at Hesston, you talked about the dollar change year over year. Clearly, you're doing better. Can you put that in perspective as far as margin on that business verses the tractors and verses where's you want to be at Hesston? Are you fixed, or are you just better?

Oh yeah. We're fixed as far as that's concerned. In the sense of the overruns that we had last year in our start-up, which accounted for about $10 million. We've got that fixed. But we're going for even better cost reductions there. We had a target for the year in the area of $12 million. We're on a run right to achieve it.

Okay. You make reference to the costs of Coventry and the potential savings there, and I guess the costs and savings are split over two years. Can you ballpark, sort of, split those costs and split those savings as far as when you should pay and when you should receive?

In terms of cash?

Yeah. The cash costs, I think you had $35-40 million from '02 to '03.

Right. Well, most of the cash requirement will be next year, as we pay out severance and things like that as the facility gets closed out. The savings, as I mentioned before, the full benefit will be in 2004. We would expect to get some of that the back half of next year. But it would be less than half of that benefit.

Okay. And last question for you, Andy. Availability on a revolver?

Our revolver is currently at $180 million, and it's a $350 million facility.

Okay, and the whole remainder is available?

With exception of probably $3-5 million that we used for letters of credit and things like that. The rest would be available.

Thank you.

And we'll now take a follow-up question from Steve [Bokeman] with Morgan Stanley.

Andy, I wanted to just make sure I understood. I thought in a previous question you had talked about a working capital use of 25 this year. Is that what you said?

I said our free cash flow would be a use of 25 million. In terms of working capital, we should have a use of about $90-100 million.

90 to 100. And does that include everything you need to do to build the base for Challenger?

Yes.

And then did you also say that you did not expect that to go up in 2003?

That's the current thinking. But it's dependent on the sales projections and what our potential is in 2003. So I reserve the ability to change that depending on what our sales volume is next year.

That's fair. It just seems very low to me. Are you building this off the model of the 30 dealers that you had planned originally, or do you think you can get 55 dealers kind of in the program and up and running with that level of working capital?

If you look at it, what we've said is we're looking to build roughly $125 million of working capital. That's if you assume turning that twice during the year. That would be supported $250 million of sales. And we would hope we could support even more with that base. But incrementally it won't than significant.

Okay. Great. Thanks.

And once again, if do you have a question, please press star one. We'll take another follow-up question from Joanna Shatney with Goldman Sachs.

I just wanted to get an update on what you are expecting by each of the regions for the industry. Can you just update us on North America? In your previous conference call you talked about it being "up slightly." Is that forecast down for this year given how weak the spring was for the industry?

Yeah, at this moment, Joanne, we're look at it flat. We can't see any upside unless something happens pretty quick.

Okay. And is it fair enough to say that Western Europe is going to end a year up, even if the second half of the year is flat? It will be, right?

Yes.

OKay. Great. That's it. Thanks.

And, Mr. Ratliff, there are no further questions. I'll turn the comments back over to you for additional or closing remarks.

Thank you very much, everyone, for attending our conference call. All of this information will be on our website. We invite you to give us a call if you have any questions. Thank you very much. That will conclude our conference.

And that does conclude today's conference. Thank you for your participation.