AGCO Corp (AGCO) 2002 Q3 法說會逐字稿

Please stand by. Good day everyone. Welcome to today's AGCO Corporation 2002 third quarter earnings announcement.

Today's call is being recorded. At this time, I will turn the conference over to Mr. Robert Ratliff, Chairman of the Board, President and Chief Executive Officer for AGCO Corporation. Mr. Ratliff, please go ahead.

Thank you .

Welcome to the AGCO third 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 , our Vice-President of Corporate Relations.

I'd like to begin the call with the following statement regarding its contents. 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 of results may differ materially. We refer you to such periodic reports that are filed from time to time with the Securities and Exchange Commission, including the company's Form 10-K for the year ended December 31st, 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, let me continue and to summarize our financial results for the second quarter, excuse me, for the third quarter.

Net sales for the third quarter of 2002 were 687.8 million compared to 577.2 million in the prior year. For the first nine months, net sales were 2.1 billion, which was approximately 18 percent above the prior year.

Operating income for the quarter excluding restricted stock compensation expense and restructuring expenses was 38.5 million compared to 22 million in the prior period.

For the first nine months, operating income was 136.4 million compared to 66 million in the prior year.

Diluted earnings per share excluding restricted stock compensation expense and restructuring expenses was 22 cents for the third quarter compared to five cents in the prior year period.

Year-to-date earnings per share excluding restricted stock compensation expense, restructuring expenses and accumulative effect in accounting principle was 84 cents per share compared to 12 cents per share in 2001.

Free cash flow for the first nine months was a use of cash of 107.3 million compared to a source of cash of 71.3 million in 2001.

Our third quarter results were highlighted by margin improvement, sales growth, and the benefit of cost-cutting initiatives. 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, and good afternoon.

In North America, total industry retail unit sales of tractors during the first nine months of 2002 increased approximately three percent when compared with 2001. Industry sales were higher in the compact tractor segment, relatively flat in the utility tractor segment, and significantly lower for the high horsepower segment. AGCO's retail unit sales of tractors increased in the first nine months of 2002 when compared with our sales in the prior year. Industry retail unit sales of combines in the first nine months of 2002 were 24.7 percent 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 nine months of 2002 were 4.9 percent higher compared to 2001. AGCO's retail unit sales of tractors also increased compared to 2001. 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 17 percent for the first nine months of 2002 compared to 2001. 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 through the first nine months of 2002. In the rest of the world, AGCO's net sales in dollars for the first nine months of 2002 increased approximately 22 percent compared to the same period in 2001. Although the North American high horsepower and combine markets are weaker than earlier than anticipated, the markets in Europe and South America are somewhat stronger. Our worldwide industry forecast continues to be for a relatively flat market in 2002 compared to 2001.

Andy will now cover the financial results for the quarter and the nine months.

Thank you, Don. Reported sales were 19.2 percent greater than 2001 for the third quarter and 17.6 percent higher for the first nine months. Ag-Chem generated net sales of 172.6 million on a year-to-date basis, which is 81.2 million greater than a partial-years sales in 2001. Challenger generated net sales of 51.1 million on a year-to-date basis. Excluding the impact of both acquisitions, net sales for the first nine months are approximately 11 percent higher than the first nine months of last year. During the third quarter, currency translation positively impacted net sales by $18 million, primarily due to the strengthening of the euro, offset by weakness of the Brazilian real. Currency translation was neutral to net sales on a year-to-date basis. Excluding the effect of the Ag-Chem and Challenger acquisitions and currency translation, net sales compared to the prior year were approximately 11 percent greater on a year-to-date basis. On a regional basis, excluding the impact of acquisitions and currency translation, net sales for the third quarter and first nine months of 2002 compared to 2001 were as follows: for the quarter, North America, down 10 percent; South America, up 32 percent; western Europe, up 10 percent; the rest of the world markets, including central and eastern Europe, Asia/Pacific, Africa, and the Middle East, up 35 percent.

For the first nine months: North America, up four percent; South America, up 28 percent; Western Europe, up nine percent; the rest of the world markets, up 18 percent.

Parts sales in the quarter were $134 million, compared to $129 million in 2001. Excluding the effect of acquisitions and currency, parts sales in the quarter were two percent above the prior year.

In the third quarter, our gross profit margins compared to 2001 increased from 17.8 percent of net sales to 18 percent. Gross margins for the first nine months of 2002 were 18.3 percent, compared to 16.9 percent in the prior year. Our gross margins improved over the prior year the addition of high-margin sales, cost reduction initiatives, and higher production levels.

In addition, production costs and efficiencies at our Hesston plant in 2001 of approximately 7.9 million were eliminated in 2002. Gross margins were negatively impacted by low margins on Challenger tractors due to the initial mix of models sold.

During the first nine months of 2002, AGCO incurred $28.5 million of restricted stock compensation expense, primarily related to first quarter awards under the company's long-term incentive plan. The charge for the third quarter was approximately $.7 million.

Approximately 15.4 million of the expense is non-cash expense. Due to the increase in AGCO's stock price in October, additional awards under the plan were earned. This will result in additional expense in the fourth quarter of approximately $14 million.

The company recorded restructuring and other infrequent expenses of $33.3 million for the first nine months of 2002, which included 30.2 million in expenses related to the planned closure of the company's tractor manufacturing facility in Coventry, England, announced in June. The Coventry expenses include an $11.2 million non-cash impairment charge related to the write-down of machinery and equipment to estimated fair value, and $19 million related to severance, retention payments, and other facility closure costs.

Losses on sales receivables, primarily under our securitization facilities, which is included in other expense, was $3.7 million for the third quarter, compared to 4.9 million last year. Year-to-date discounts on sales of receivables were 11.1 million in 2002, compared to 18.6 million in 2001. The year-to-date amount for 2001 includes $4 million of costs associated with the initial funding of securitization facilities in Europe and Canada completed in 2001.

Interest expense net for the third quarter was 13.7 million, compared to 15.6 million in the prior year, and 42.2 million for the first nine months, compared to 45 million in the prior year period. Interest expense decreased to lower interest rates in 2002 compared to 2001.

Moving on to the balance sheet -- accounts receivable and inventory combined were $175.5 million higher than at the end of December, 2001. The increase includes approximately $105 million of receivables and inventory related to Caterpillar Challenger. The remaining increase is due to normal seasonal increases in working capital. Funding under accounts receivable securitization programs was $388.8 million at the end of September, compared to $402 million at the end of December.

In North America, our dealer inventory month supply at the end of September on a trailing 12 month basis was as follows: approximately 7.5 months for tractors, which is in line with the prior year; 9 months for combines, which is higher than the prior year; in addition, our dealer month supply of hay equipment is approximately 7 months, which is level with the prior year. Our debt to cap ratio was 46.4% at September 30, 2002, compared to 46.3% in September 2001. EBITDA, excluding restructuring expenses was 52.4 million for the third quarter, compared to 49.4 million in 2001. For the first 9 months of 2002 EBITDA was $165.5 million, compared to 123.9 million in 2001. In the third quarter of last year, we received approximately $10 million of dividends from our joint ventures, compared to approximately $2 million in 2002. Excluding this impact, EBITDA was $11 million higher in the quarter compared to the prior year.

Unit volumes for worldwide tractor and combine production during the quarter was 16% higher than 2001, with the majority of the increase in our South American facilities. Net sales are projected to increase approximately 13 to 14% for the full year due to the sales in 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 expenses restricted stock compensation expense and the cumulative affect of the accounting change for the full year is projected to be in the upper end of our previous guidance, which is $1.10 per share, including the positive benefit of 15 cents relating to the accounting change, which eliminates good will amortization expense. Improved margins and sales growth are expected to generate continued earnings improvement that will be partially 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 40 to $45 million and primarily relate to the Coventry facility closure.

Thank you, Andy. Lastly, as announced yesterday, AGCO signed an agreement on October 22 to acquire the assets of Sunflower Manufacturing Company, Inc., a product line of SPX Corporation. Sunflower is a leading producer of tillage, seeding and specialty harvesting equipment. They're located in Beloit, Kansas and they serve the North American agricultural equipment market. The recent agreement anticipates a closing soon, after regulatory approvals are obtained and provides for a cash purchase price funded under our revolving credit facility. The purchase will involve approximately $35 million estimated net asset, a majority if which are receivables and inventory.

Sunflower has generated sales of approximately 45 million in both 2000 and 2001 with anticipated 2002 sales of approximately 45 million as well.

Historical EBITDA margins have averaged 15 percent.

Long-term plans include expansion of the Sunflower products into export markets and the addition of new technology and some allied product innovation from AGCO.

That concludes our comments. we're ready to open up the conference call for questions.

Thank you. The question-and-answer session will be conducted electronically today. If you would like to ask a question, you may signal us by pressing the star key, followed by the number one on our telephone. We will proceed in the order that you signal us and take as many questions as time permits.

Once again, if you do have a question, please press star-one.

And our first question will come from with Morgan Stanley.

Good afternoon. Very good quarter gentlemen. In the past, you've actually given a view on your operating cash flow for the year, and I was wondering if you could give us an update on where you think that's going to be.

Our projection has not changed . We believe that our operating cash flow will be about $25 million and our free cash flow will be about negative $25 million. That includes a build-up of working capital related to the Challenger business, somewhere between $110 and $120 million.

And then my next and final question is more sort of broad-based. As you move into next year, without taking about sales, you've done a very good job of increasing your gross margin. What's sort of the upper limit do you think of the gross margin that you guys can achieve in a better-demand environment?

Well we've been on a program to increase our gross margins about, at least a minimum of one percent a year, and as we go forward, we would expect to do that in the next couple of years.

The upper limits, I hate to say there's a limit, but we would expect to get into those 20's, if you will.

Thank you.

Our next question will come from with UBS Warburg.

Good afternoon. Can you walk through your market outlook by region for '03? Do you have preliminary thoughts?

We have not really begun to get into some final data on the 2003 plan; however, from a process point of view in building our plan, we start with the assumption that the industry is flat and any upside would be blue sky that we don't put into our plan, however, looking at the market, we would generally share with you that Europe has recovered more from the livestock disease issues and is somewhat flat to the year 2000. And we would expect it to hold pretty close to that number.

South America is a little uncertain at the moment as we await the determination of the new president in South America, or particularly in Brazil, and we have some verbal assurances that will continue there, and if it does, then we would expect at least that market to hold flat going forward, but we have to wait and see how that's going to work out. Certainly, in the rest of the world, the uncertainty with general economy and hostilities around the world make that a very uncertain prediction as we speak. I guess North America is the big question and, of course, we've seen the declines in the utility and the high horsepower product lines. We are of the opinion that in 2003, we should begin to see the benefits of higher commodity prices, the Farm Bill, and, certainly, the opportunity to increase exports. And those should bode some positives for North America, although we haven't put a figure on what that improvement will be. It's something we'll be looking for.

Alright. Alrighty. So Europe flattish?

Yes.

OK. Can you work through your sources and uses of funds as you see them over the next 12 months? Are we--it sounds like we're almost done with the working capital funding. What do you expect acquisition spending to be and how do you intend to fund the activities?

Well, from just a base business standpoint, we don't expect to have a significant increase in working capital requirements relating to the Challenger business. We do expect sales to increase next year, but we hope that the base of working capital that we've established will be sufficient. And the rest of our business, I would anticipate that we will lower working capital levels next year, particularly in North America where we are--we have, in some cases, more inventory than we'd like at this time due to the softer demand that we've seen in North America this year. As to the question about acquisitions, we take those one at a time and make those determinations as they come.

Alrighty. And funding for those, just out of cash flow?

Normally, in any--now the acquisition of , as we indicated to you, was cash. But in normal acquisitions that we've entered into over the past years have been funded on about a 50-50 basis of debt and equity and we would expect to stay at least at that level, if not more equity.

Terrific. Thanks.

Our next question will come from John McGinty with Credit Suisse/First Boston.

Good afternoon. Andy, when you gave the number of net operating cash flow of 25 million and free cash flow of a negative 25 million, which I believe--at least if my notes are right--is, in fact, you know, is not a lot different than where you were, how do you kick in the $40 or $50 million that you're going to pay for ?

Well, I'm not counting that in the free cash, so my number's excluding acquisition.

OK, so any acquisition would come after that number?

That's right.

OK. And did--when you were just answering David's question, where specifically is the working capital that's too high?

North America.

Combines? Small tractors? I mean the number of combines is the only thing that looks high on a trailing 12 basis.

I would say it's in the large equipment, combines and some of the large tractors.

OK. And could you just help me out? You talked about having sales for the full year up 13 to 14 percent and you mentioned Challenger, you mentioned Ag-Chem, you mentioned the higher euro. If we take those things out--what I'm trying to understand is what is the -- what are AGCO sales in 2002 compared to 2001, if you hit your -- you know, if you hit the whatever it is -- 2885 is the mid-point of that. Challenger, and the euro.

About four percent.

OK. And then, when you look at the line of business data, why did we -- if I'm looking at this -- why do we show a loss in North America in the third quarter?

Well, if you looked at the third quarter, some of that loss is because we have losses in the Challenger business in the third quarter. That's the main reason why. Also, parts sales in the third quarter were softer than last year, due to some of the conditions in North America.

So, even the parts sales were up two percent that was worldwide, so they were down in North America?

That's correct.

OK. And how big was the Challenger loss?

It was about $4 million for the third quarter.

OK. And then, final question and I'll get back in queue. If we look at -- you're putting -- I mean, if you're building inventory, working capital of 125 million of Challenger, is that saying that your sales of Challenger to the dealers are 125 million this year, or is it more because there's some turnover?

It means that there's some more. We're expecting sales for the full year to be a little over $150 million.

OK. And then, the question is ...

includes production inventory, as well.

OK. But, 125 million of that will be -- or say, 100 million of that will be dealer inventory stocking?

At the end of the year, I would expect a little less than that, but that's pretty close.

OK. Then just use that as a round number. If your sales -- that means that if your sales are gonna go up to Challenger next year, you have to sell -- you have to have a throughput sale that's actually $100 higher.

Not necessarily, . You could still have $100 million of working capital, so you could sell -- let's say you sell 200 million next year. You could still have 100 million in receivables.

No. But, I mean, if you sold 150 million this year ...

Right.

... and 100 million of that went into the dealer inventories and 50 million of it went on through.

Right.

So, in other words, if you're gonna -- so, with sales of 200 million next year, then you're really going from 50 million this year to 200 million next year. Because, in other words, you have that dealer inventory. You're not gonna build any dealer inventory next year.

You're picking out the performance of this year on a six month basis where we're filling the pipeline, and now we have to go for a turnover rate of a lot higher than what we can show in six months.

Well, Bob, then let me ask the question. In your plan, what are you planning you sales of Challenger to be next year?

We haven't set the plan next year, but one would expect that if we could sell 150 in half the year, we ought to be getting up over 250 next year.

OK. Thank you.

And once again, if you would like to ask a question, please signal us by pressing the star key, followed by the number one on your telephone.

If you have found your question has been answered, you can remove yourself from the queue by pressing the pound sign.

And we'll now take a question from JoAnna Shatney with Goldman Sachs.

Great quarter.

Can you just talk about what production is going to look like in the fourth quarter? I know that we overproduced a little bit more than we thought we would in the third quarter. Does that come up somewhat out of the expense of the fourth and we end up the year at flatish levels?

In what area?

Production, overall.

Overall?

Yeah, you said it was up 16% in the third quarter. I think I was looking for like 14 to 15, so it's --

Sales will be 5, 6% in the fourth quarter, excluding Challenger, that will be down probably 6 or 7%.

OK. And then, your inventory got a little high in combines and I guess they're all right and tractors and then hay tools, so do you expect to product in line with retail demand next year? Or do we need to underproduce to keep inventory, you know, taking out Challenger?

I think, as I've said before, I think we want to lower our working capital levels, some of those models to combines and large tractors. So, we're bringing some of our production down in the fourth quarter, but also we anticipate that our plan next year will have a selling retail higher than what we are putting in, in terms of production.

OK.

Our next question will come from with Bear Stearns.

Thank you, very much. Just a couple of very, very quick question. Basically, just for the carrier, you're essentially assuming a flat year over year for next year, so on that basis you see essentially working capital sort of worse case scenario being relatively flat, and along that line I was just wondering, when do you anticipate, I may have missed that earlier on, the cash charge for the Coventry restructuring to actually hit the cash , and do you really, actually end up having a leverage target, which is probably by the year, tail end of next year?

We would expect cash expenses relating to the closure to be for the most part in the first half of next year. That's about $35 to $45 million. In terms of your other question, in terms of leverage, I, once we have the Sunflower acquisition, we believe we'll be at about 45% debt to capital ratio end of this year. I don't expect to have that deteriorate next year. We would hope to have it improved with generating some cash flow to reduce our debt levels.

Great, thank you very much.

Our next question will come from Mike with Salomon Smith Barney.

Yes, a couple follow-ups. One is on the Sunflower acquisition, the purchase price that you mentioned, was there, in terms, in addition to the cash, was there any debt assumption or any liability assumptions with that?

Well, we did not mention a purchase price.

You said 35 of cash.

But, well, we're buying 35%, 35 million in net assets. The majority of that is receivables and inventories. We are assuming some payables and normal operating crude liabilities but we're not assuming any debt.

OK. I guess what I was trying to get at was just how much cash out the door.

Well, we have an agreement with SDX to not disclose the purchase price of the company at this stage.

OK. No, that's fair enough. That was my question. Thank you.

Our next question will come from Tom with Credit Suisse/First Boston.

Hi, it's actually Jeff Brown for Tom . Just a couple of quick questions. In North America, obviously, kind of, through most of the year and even into last year, kind of had a lot of things going against you with the farm bill and commodity prices. Now, those have kind of recovered recently. Obviously the Farm Bill got through and commodity prices are coming back. Is there any, and things are still kind of struggling, I guess in North America. Is there anything there that would be, you know, what's kind of the catalyst to force, or to allow North America to really start to recover?

Well I think that you have the dynamics of a lot of things that are beginning to come into focus and that we related to earlier in the sense that commodity prices have just recently improved, because of drought situations. And you do have to remember that in a drought, some farmers don't make any money, so they aren't necessarily customers.

On the other hand we also have the new Farm Bill, which is beginning to kick in this last period of the year, albeit, I think we'll see more effects of that next year than we even will see in the near term. But there should be a little pick up in the fourth quarter, because of the Farm Bill.

The other key element is the increase in exports of commodities, which is really the support function for the commodity prices and that has been picking up all year long, so we would expect that to continue into next year.

The catalyst that everything stays the way it is and we don't have any disruption that we could think of to those three very important items, which we didn't have a year ago.

Right. And I guess, specifically back to North America again, is there a, you know, operating income obviously fell down a little bit and that seems to be the result of the Challenger. Was the rest of the loss I guess essentially just volume? Kind of, what was the, what were the sales I guess, ex Challenger for the quarter, because I'm assuming that boosted third quarter sales in North America.

Challenger sales were about $40 million.

OK.

So excluding that would have been down.

OK. I guess another question really on, is there any, in addition, it looks like the smaller tractors are doing well, kind of the mid-size or flat and the larger ones are also falling down. Is there anyone market that you sell into more and also that might provide you more margins, so the fact that the smaller, the larger ones are doing poorly, does that hurt you more, because maybe you sell more of the larger ones versus the smaller ones.

Forty-five percent of our revenue comes from Europe. So that's where we make a lot of many. And we also make a lot of money in South America. So the diversification of the company through geographic regions has supported us through this negative period in North America very nicely.

As far as specific markets in North America, quite frankly, yes, the compact market is larger than any place else in the world. It also has small margin supply to it. So it isn't just numbers that really help you there.

I think the key area for us as far as margins in North America would be combines and hay tools.

OK.

And they always have been.

Got it.

Our market share, by the way, in hay tools continues to grow year-over-year and become stronger as a result of the fact that we have taken a lot of market away from Case who was our partner at HFI. So the Heston product is gaining share rather, more than average in North America.

Got it. One last question. On, full restructuring, what's the full cash portion, I guess this quarter, if there was any and this year for a restructuring charges?

There was very little cash spent in the quarter as more of the expense that you see on the income statement was an accrual for expenses that we expect to pay out next year. For the fourth quarter, we would expect the amount of restructuring expenses to be pretty level with the third quarter and then have next year about another $11 million of expense relating to the Coventry closure.

So this year's cash costs from restructuring?

Cash costs from restructuring would be probably less than five million.

OK. Thank you very much.

Moving on, we'll take our next question from Michael Harris from Deutsche Banc.

Good afternoon. Just a quick question on the cost saving efforts you have underway. Anything new to report there? Are you on schedule with plan?

Cost reductions, Mike, is that?

Yes.

Yes, we're pretty much on plan. We, you know, we have significant programs there and things are moving well for us.

But no surprises either way, negative or positive? At this stage.

No negative surprises. I mean, it's a constant battle, you know, every day to deal with cost reductions. But, no, we don't have any significant negative surprises.

OK, thanks a lot.

And we'll take a follow-up question from David Bluestein with UBS Warberg.

Good afternoon, again. Does the fourth quarter mean that another--that shares should go up another three or four hundred thousand shares in the fourth quarter, all other things equal? Is that about right?

Yes, that's about right.

OK. I hate to ask this, but what does at the high end of $1.10 per share mean? Does that mean real close to it, but just under? Or just slightly over it?

No, we had previously give guidance of $1.05 to $1.10 and what we're trying to say there is we're comfortable with $1.10.

Got it. OK, thanks.

And moving on, we'll take a question from John McGinty with Credit Suisse First Boston.

Big question, David, I'm with you all the way. Just a couple of questions. On the Coventry start-up costs that you refer to as an expense, not a non-recurring, could you kind of talk to those, the size of them this year, any carry-over next year? Is that just simply starting up in Brazil and then starting up next year in France or could you kind of explain that?

Sure, John. What we're talking about in the fourth quarter, we do have to start building some labor in France and also add to our purchasing efforts in South America to get the supplier base in place for those new products. This is the main thing that we're talking about. And the order of magnitude is $2 to $3 million of additional costs there that we'd incur in the fourth quarter. We may have some in the first part of next year, as well, as we get things ramped up.

Some in the first part of '03?

Right.

But, given the benefit that you talked to from the closing coming in--I mean, what do we look at the full year benefit in '03 to be from Coventry--the Coventry move. In other words, you talked about the resulting savings of 20 to 25 million to be fully realized in '04, but clearly that's a run rate. Do we get some of it in '03 or how should we look at what you're doing in Coventry in '03 relative to '02? I mean, clearly, '04 you get the 20, 25 million, but what happens in '03?

Right. We would expect to get some of those savings in '03. I think somewhere at half or less than half would be a good estimate right now.

But, now that -- is that less than half -- you know, before we add 10 million, do we also have to take effect that there may be another two or three million negative in the first -- of the startup, build-up costs in the first or second quarter of '03?

I think that would make sense, yes.

OK. And then, on the earnings per share, either the both the third quarter -- in the third quarter earnings per share -- let's do it that way -- what was the impact of currency on the earnings per share?

It was slightly better -- probably about a penny or so.

So, it added a penny?

Yup.

And for the $1.10 -- what does it add -- I'm assuming you hit the $1.10.

Oh, on the $1.10? It's ...

Three or four cents, or ...

Yeah. That's right.

OK. And then, given the 14 million of in the fourth quarter, does that mean that the is now done? In other words, if the stock continues to go up, are we done having to worry about that? Or, does the program -- I'm just trying to figure out where the breakpoints are.

The program -- we consider this number three. This is the third one we've had, and there are five tranches in each program. The fifth tranche of three was earned yesterday, so there is no four currently approved by the board at this point.

So, then it is, in fact, a non-recurring, because it's over. We're done with it.

That's correct.

So, there will be no more ?

No, I didn't say that. I said the board has not approved number four yet.

That means that you're asking the board to approve number four?

The compensation committee of the board is looking at an four program.

So then, should we assume that you're gonna continue to have these charges like this on going forward basis?

Well, they're kind of irregular charges, . We don't know when -- they can be achieved from time to time, but I think at the present time, with all of the external advice we're getting on incentives, we believe this is a program that is fully expensed and upfront with everybody and our shareholders, and the benefits that they receive from it. And it's quite likely that we will have another program, but it's also quite likely we will not have any more stock options within AGCO.

But then, help me out. Andy, the $1.10 -- what will the total per share cost of the per share cost of the be -- given the 14 million in the fourth quarter -- what will the total charge be in 2002?

Well, we are at -- year-to-date, the is $28 million, I believe.

So, that would be 42 million?

Right.

At a 36 percent tax rate?

Yeah. About 24 percent.

So, it's like, 34, 35 cents for the year?

That's right.

Yeah, but , keep one thing in mind. The program has been running for almost three and a half years, maybe four years.

Well, I know. But, I mean in the old program, we used to subtract it every quarter, and we, in essence, looked at earnings, you know, after the charge.

Well, the problem with that issue -- and let me just explain that for a moment -- that was when if vested. So that the earning point -- the shareholders at the point of earnings got the benefit of the growth, and the ones that owned our shares when it vested two or three or four years later got the expense and our shareholders told us to change the program so that the expense and the earnings coincided at the same point.

Would you expect the charge to be approximately the same in 2003 as you visualize the year?

No, I don't. but boy, wouldn't that be great?

OK. Thank you very much.

That would mean that the stock would have to double from its current prices if you follow the same pattern. That would mean that the market cap would then go from slightly under 2 billion to 4 billion dollars to incur that level of expense because again, it's all tied to share price.

So it would have to double from the current levels in order to get another 35 cents.

Well, it depends on the program that the compensation committee puts in but that's essentially what we have --

Yeah, the program pays off by only by the stock increasing in increments of 20% until it doubles itself. That's the 5 so, this program that maxed out yesterday started at about $11. So we've been able, in this program, to move from 11 to 25 and in that period of time if you measure out the increase in market cap value and also what this costs, and then divide it out over the period of time, which is irregular, we don't have, it's not every month. It is something that we expense when it occurs.

Thank you.

And, once again, if you would like to ask a question, please press *1. And we have a question from JoAnna Shatney with Goldman Sachs.

I know I've asked this question before but I just want to try to get at it a different way. Can we just, we've got a lot of different programs going on at the same time. You've got the Challenger business that starting to take off next year and that, I guess is going to be a neutral impact to earnings next year from dilution in '02. I've got a number of cost reduction programs, which you talked about already. Europe, I guess is going to give us between 10 and 15 million of savings, but can you talk about what level of cost reduction you can get from '02 into '03 or another way, volumes are flat for the industry, what can your earnings numbers be just out of cost reduction and some of these programs?

JoAnna, we've already said we don't have the 2003 figures to give you and certainly this is something that we are assembling at this time. Our forecast of hitting $3 a share in 2004 is still good. So, you know, it's somewhere between the $1.10 whatever that is and $3. So we would expect to be moving upward in the period of 2003 towards that objective.

OK.

We have initiatives and that carry us into that 2004 target. We have not timelined them accurately enough to give you that number today.

OK. That's fair enough and Challenger is not in that $3 number, so that is incrementally to that, right?

That's correct.

And so is volume, right? When the North American business comes back, whenever that is, if it's next year or the year after that, that does not, that's not included in the $3 number?

Correct.

Great. Thank you.

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

Well, as usual, we really appreciate the attendance on the conference call. It's getting a little larger each time and your interest is appreciated. If you have any specific questions of any of us please don't hesitate to give us a call and unless there is no further comments, we'll be talking to you in January.

That concludes today's conference. Thank you for your participation.