AGCO Corp (AGCO) 2002 Q4 法說會逐字稿

Please stand by. Good day everyone and welcome to today's AGCO Corporation 2002 Fourth Quarter Earnings Announcement. Today's call is being recorded. At this time, I'll 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 and good afternoon everyone. I am sorry for the slight delay. We were waiting for the calls to get in. Welcome to our Fourth 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 Securities 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 I would now like to summarize our financial results for the fourth quarter and the full year. Net sales for the fourth quarter of 2002 were $843.7m, compared to $772.9m in the prior year. For the full year, net sales were $2.9b, which was approximately 15% above the prior year. Operating income for the quarter, excluding restricted stock compensation expense and restructuring expense, was $54.4m, compared to $50.8m in the prior period. For the full year operating income was $190.8m, compared to $116.8m in the prior year. Diluted earnings per share; excluding restricted stock compensation expense, restructuring expenses, and a non-cash deferred tax adjustment; was $0.34 for the fourth quarter compared to $0.39 in the prior year period. Full year earnings per share in 2002; excluding restricted stock compensation expense, restructuring expenses, a non-cash deferred tax adjustment, and a cumulative effect in accounting principle; was $1.17 per share, compared to $0.52 per share in 2001. Free cash flow for the year was a source of cash of [$18m], compared to a [$185.5m] in 2001. In the fourth quarter, we recognized a non-cash income tax charge of $91m related to increasing the valuation allowance for certain United States deferred tax assets. Due to the down turn in the U.S. farm economy that began in 1998 and the resulting restructuring actions taken by the Company, AGCO has accumulated tax losses in the U.S. Even though AGCO has generated taxable profits during the mid of 90s and have up to 20 years to use the losses incurred, the recent trend of losses is considered an overriding factor for purposes of accounting rules, and we determined a write-down of the tax asset was appropriate. While these tax benefits were reduced for accounting purposes, the tax benefits are still available, should AGCO generate profitability in the United States. AGCO is optimistic it can realize these tax benefits in future years, due to identified strategies and initiatives to improve the profitability in the United States. Excluding the charges outlined in our release, our 2002; operating results were highlighted by margin improvement, sales growth, and the benefit of cost cutting initiatives. We anticipate further growth and cost cutting initiatives in 2003 and are poised to show improvement in our 2003 results. Now I would 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 units of tractors during the full year of 2002 increased approximately 8/10ths of 1%, 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 horse power segment. AGCO's retail unit sales of tractors increased over 10% in 2002, with increases achieved in all tractor segments when compared with our sales in the prior year. Industry retail unit sales of combines were approximately 20.3% lower in 2002, compared to 2001. AGCO's retail unit sales of combines in 2002 were higher than the prior year period, partially due to a more normal combined production schedule in 2002 compared to 2001. We are optimistic about 2003 sales performance in North America considering the initial response to the new Challenger and the anticipated introduction of new products. In Western Europe industry retail unit sales of tractors for the full year of 2002 were 4.2% 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. Continued to strength of our Fendt tractor line, growing recognition of our Massey Ferguson high horse power tractors, and significant new product introductions should favorably impact 2003 sales in Western Europe. In South America industry retail unit sales of tractors increased approximately 16.2% for the full year 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 helped to support strong demand in 2002. Although financing may be less favorable in Brazil in 2003, we project continued strong performance in South America as we take advantage of our leading position in the market. In the rest of the world, AGCO's net sales in dollars for the full year of 2002 increased approximately 22.3% compared to the same period in 2001 with growth in most markets. In sprayers industry retail sales of sprayers in North America declined approximately 16% in 2002 compared to 2001. AGCO's retail sales of sprayers also declined compared to 2001. While we do not expect an industry recovery in 2003, we will focus on cost reduction and productivity improvements in this segment of the business. Andy will now cover the financial results.

Thank you Don. Reported sales were 9.2% greater than 2001 for the fourth quarter, and 15% higher for the full year. Ag-Chem generated net sales increase in 2002 over the partial year in 2001 of $78.9m. Challenger generated net sales of a $108.3m and Sunflower generated net sales of $4.1m during 2002. Excluding the impact of all three acquisitions, net sales were approximately 7.9% higher than the prior year. During the fourth quarter, currency translation positively impacted net sales by $16.2m, primarily, due to the strengthening of the Euro offset by weakness of the Brazilian Real. For the year currency translation positively impacted net sales by $17m also, primarily, due to the strengthening of the Euro offset by the Real. Excluding the effect of the Ag-Chem, Challenger, Sunflower acquisition and currency translation; net sales in 2002 compared to the prior year were approximately 7.2% greater.

On a regional basis, excluding the impact of acquisitions and currency translations, net sales for the fourth quarter and full year of 2002 compared to 2001 were as follows. For the quarter; North America down 19%, South America up 37%, Western Europe up 4%, Rest of the World markets including Central and Eastern Europe, Asia-Pacific, Africa, and the Middle-East -- up 14%. For the full year; North America down 4%, South America up 31%, Western Europe up 7%, and the Rest of the World markets up 17%. Wholesale sales were lower, particularly, in the fourth quarter in North America; although retail sales in North America were higher than 2001. We lowered our dealer inventory levels in the fourth quarter to respond to the software industry demand. In addition, sales in the North America in the fourth quarter 2001 were unusually high due to the AGCO Tractor line introduction and production issues in Hesston, which delayed shipments until the fourth quarter of 2001.

Part sales in the quarter were $126.1m compared to $123.1m in 2001, excluding the effect of acquisitions and currency translations part sales in the quarter were 2% below the prior year period. Part sales for the full year 2002 were $494.9m compared to $472.2m in 2001, excluding the effect of the acquisitions and currency translations, part sales in the full year of 2002 were 1% above the prior year period. In the fourth quarter, our gross profit margins compared to 2001 increased from 17.6% of net sales to 17.8%. Gross margins for the full year of 2002 were 18.2% compared to 17.1% in the prior year. Our gross margins improved over the prior year due to the addition of higher margin Ag-Chem sales, cost reduction initiatives, and higher production levels. In addition, production cost and efficiencies at our Hesston plant, in the first three quarters of 2001 of approximately $7.9m were eliminated in 2002. Gross margins were negatively impacted by low margins on Challengers Tractors due to the initial mix of models sold and higher discounting in the fourth quarter to reduce North American inventory levels on certain older models.

During the full year of 2002, AGCO incurred $44.1m restricted stock compensation expenses, primarily, related to the first and fourth quarter awards earned under the company long-term incentive plan. The charge related to the fourth quarter was approximately $15.6m, approximately $24.4m as a full year expenses is a non-cash expense. In December, the Board of Directors approved a new LTS plan for senior executives. The plan allows for restricted shares to be earned over the next five years if AGCO stock price increases above the base price established in the plan of $23.75. Additional compensation expense would be incurred, should any of the levels under the plan be earned. AGCO stock price would need to reach a price of $28.50 for the first level to be earned and would have to reach $47.50 for all levels to be earned. The company recorded restructuring and other infrequent expenses of $42.7m for the full year of 2002, which included $40.2m and expenses related to the plant closure of the company's tractor manufacturing facility in Coventry, England, which was announced in June 2002. The Coventry expenses included a $11.2m non-cash impairment charge related to the write down on machinery and equipment to estimated fair value and $29m related to severance, retention payments and other facility closure costs. Restructuring cost in 2003 related to the Coventry closure are expected to be approximately $10-15m. Cash payments for restructuring in 2003 are expected to be approximately $45m, primarily related to severance payments. Losses on sales receivable, primarily under our securitization facilities, which is included in other expense net, was $3.7m for the fourth quarter compared to $4.9m last year. 2002 full year discounts on sales receivables for 2002 were $14.8m compared to $23.5m in 2001. The full year 2001 amount includes $4m of costs associated with initial funding of securitization facilities in Europe and Canada, which were completed in 2001. Other expense net for the fourth quarter of 2001 also includes a gain of $5.2m related to the sale of the minority interest investment.

Moving on to the balance sheet. Accounts receivable and inventory combined were $175.3m higher than at the end of December 2001. The increase includes approximately $164.9m of receivables and inventory related to Caterpillar, Challenger, and Sunflower acquisitions. The remaining increase in inventory receivables is due to currency translation and transition inventory increases related to the Coventry closure. Funding under accounts receivables securitization programs was $423.9m at the end of December 2002 compared to $402m at the end of December 2001. This increase is due to a $6m increase in funding in Europe and the impact of exchange on the European portion of the funding. In North America, our dealer inventory month supply, at the end of December, on a trailing 12 months basis was as follows. Approximately 6.5 months for tractors, which is lower than the prior year, 7.5 months for combines, which is lower than the prior year. In addition, our dealer month supply of [hay] equipment is approximately 8 months, which is leveled with the prior year. Our debt-to-capital ratio was 47% at December 31, 2002 compared to 43.6% in December 31, 2001. Free cash flow for the year was -- source of cash of $18m compared to $185.5m in 2001. Cash flow was favorably impacted by increased securitization funding of approximately $6m in 2002 and $145m in 2001. Excluding these items, free cash flow was approximately $12m in 2002, compared to $40m in 2001. Cash flow in 2002 was impacted by the increase in working capital related to the Challenger product line introduction of approximately $110m. EBITDA, excluding restructuring expenses, was $59.8m for the fourth quarter compared to $73.4m in 2001. For the full year of 2002, EBITDA was $225.3m compared to $197.4m in 2001. Unit volumes for worldwide tractor and combine production during the fourth quarter were 8% higher than 2001 levels. But the majorities increased attributable to our South American and Spain's facilities. On a full year basis, inner production was roughly 10% than the prior year. As stated in our press release, AGCO's 2003 earnings estimate assumes the relatively flat worldwide industry demand. Despite no improvement in market conditions, AGCO expects to continue to achieve earnings growth from sales growth and margin improvement. Sales are expected to grow approximately 8-10% with increases resulting from the Challenger product line introduction, Sunflower, new product introductions, and foreign exchange. Net income per share, excluding restructuring charges, is projected to improve to between $1.60 cents and $1.75 cents per share. In addition AGCO has established a target to generate between $75-100m of free cash flow to reduce debt in 2003. For the first quarter of 2003, AGCO projects net income per share, excluding restructuring expenses to be between 10-20% above the 21 cents per share earned in 2002. Well that concludes our formal comments. Operator, we are ready to open up the conference call for questions.

Thank you. The question-and-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 "1" on your telephone. We will proceed in order that you signal us, and take as many questions as time permits. Once again, if you do have a question, please press star "1" now and we'll pause for a moment. Our first question will come from Andy Kay with Prudential Securities.

Good afternoon. Hi. Just a question in terms of 1Q. Is that being impacted by an underproduction versus retail, and how much further do you want to go in terms of inventory month of sales? Thanks.

It's impacting our North American business somewhat in the first quarter, that's correct. We are going to try to reduce our inventories receivable levels in North America by approximately $40-50m in 2003. That and some other working capital adjustment would have us produce under retail by approximately 1-2% next year -- this year 2003.

Thank you.

Our next question will come from Steve Walkman with Morgan Stanley.

Hi. Just a follow-up by [inaudible] quickly, in the first quarter Don what kind of underproduction we're looking at?

It would be probably about 2 or 3%.

Okay thanks. So gave us an update on Challenger in terms of, you know, folks that are signed up. What type of working capital build might we need for Challenger, if there is any additional in '03? And, whether have any sense of the retail pull through by a margin, I assume we have been 10 or so in the channel so far?

Robert J. Ratliff Well first of all, we would anticipate that as we have guided you before that we would sign about 55 distributors in North America. That number has changed down to about 53 because there have been consolidations in those distributors, but the same coverage is anticipated with the 53 distributors. We also would anticipate by the end of 2003 to assign about 45 distributors outside of North America, which would represent a round number of about a 100 distributors worldwide. The signing of the overseas entities has been a little slower because of the distance, and so forth. But the certainly the enthusiasm for the product is every bit is great, if not more so in some of our overseas locations. The sales in 2002, of course, were really on a pretty restricted basis. The Track Tractors were only available for about 6 months. The rest of the product line, which as, you know, is quite significant to the margin contribution that we are looking forward in this brand, was on a very scheduled throughout the last half of the year. And even as we speak, we have still not introduced all the product that will be in the Challenger line, the Combine is to be introduced in the next 60 days, and certainly several more models of the rubber tire tractors and so forth. So there are many new products yet to come. On the working capital side, Andy.

Yes, on the working capital, we are not projecting a significant increase. Any increase that we have or expecting to offset with reductions in another parts of business, particularly in the North America -- rest of the North American business, but we don't expect any significant increase and what's on a full year basis, there maybe some increase on a seasonal basis but not at the end of the year.

Okay great, what you are looking forward Challenger sales in '03?

We looked for an increase by probably $120-130m over the 110 we did this year.

Thank you very much.

Goldman Sachs' Joanna Shatney has our next question.

Hi, guys. Good quarter. Could you just talk about the cost reduction -- how you get from the $60 from '02 -- maybe $70, $75 for '03? By how much do you expect the Challenger business to contribute? How much of the Coventry savings comes in '03? And then, what the rest of the pieces might be?

Hi Joanna. In terms of roll [port] our EPS, the Challenger -- what we are attempting to do with Challenger and what our forecast are to make it modestly profitable this year. This year, it was at a loss position. Though we can, we will pick up approximately 15 cents relating to that business. Cost reduction, we are looking at the between the rest of our business and our Ag-Chem business roughly about 35-40 cents per share there, and we also expect to get sales volume improvements from new products and that's worth probably about 10 cents per share. We have offset to that from our pension costs, we are going to go up about 10 cents per year and exchange is benefit of the little, as well.

Okay, great and Don I don't know, if you are the right I am answer this. Can someone just provide us, kind of, an update on what your dealers are seeing in terms of market demand by region? Or are they feeling optimistic about North America or is December something that means something for the spring selling season here in North America? And then, in Europe -- one of the guys I talked to in Europe don't think that CAP reforms are going to have any significant impact. Could you just talk about why that was important and not show up in the press release?

CAP reform.

[inaudible] that's European government financing?

Let me just say that the dealers in North America, we just finished our interface meetings, which means open meetings with our dealers all over North America. The attitude of our dealers is extremely strong. They are really very optimistic more so than the forecast of the industry would indicate, it should be, but they feel as though they have some very competitive products, good pricing structure, and good terms to go with that. So that they would expect to continue to improve on their market share as we go forward. From the other areas, we see a pretty steady performance going on in Europe, nothing to indicate any negative change there from CAP reforms or anything else. I think, it was a more of a problem a year ago -- anticipated problem a year ago, because of the admission of the new countries into the union, but that has been modified with some compromises. We don't think that's a negative at this point. There will a -- we anticipate a slight reduction, perhaps, in South America that we've plan for because as you rightly call the support system there was a subsidy from the government for retail financing of farm equipment. The FINAME program is in place and will be throughout 2003, however there was as sister program to that by the name of [Porta Forma].

[Inaudible] it's a modernization program.

Very good, Don. It's a modernization program. That was for 2-3% and that has not been renewed but the word we have, is it will be before the year is over. So, we feel as though, there are couple of quarters that will be short some of that subsidy and we don't see that as a major negative, but we are just being conservative to say that could be down slightly. As far as the market in the Asia-Pacific area, of course, they were very severely hit with the drought in Australia last year, and they are very hopeful that will turn around but it's a little too early to tell.

Okay and last question, I will get back in queue? When are we going to know how successful the Challenger brand is? Are we going to know that in the spring selling season or do we have to wait for the full product lines out and available, we will look at on a full year basis?

Oh, it absolutely got at least be a full year basis. We couldn't judge that by just this spring at all, because we don't have the full line out there. And quite frankly, I realized that there are a lot of speculators out there that don't think this is going to work or that might not be as successful as may be we forecast. But there is no lack of confidence here. We are very confident that it will work. The dealers that have signed those contracts have committed heavily and they are very, very confident they are going to make the major impact in the agricultural equipment market. How big it will get is really the question, not whether it's a success or not.

Great thanks, guys.

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

Hey, Bob how are you?

Good John, good to talk to you.

Good. Couple of questions. Could you -- Andy just reviewed the key elements of your cash flow to get to the $70-100m, you have already said I think $40m on cash on restructuring on '03 but an offset of what $40-50m positive working capital, was that for the year or was that just North America?

Not that's for the whole business. So our goal would be to offset the cash that we have to pay out on the restructuring with working capital reductions. However, we are looking for that to be relatively unchanged for 2003.

And CAPEX is still going to be around $50-55m?

$55-60m this year, because we have a lot of new products coming out this year.

And depreciation and amortization?

About 55.

So than, alright. So basically what you are looking at is your earnings minus whatever the deferred taxes are, essentially to get to your level of the $75-100m?

That's correct.

Okay. The off-balance sheet financing -- in other words did I get that number right that it's $423m, that's what the off balance sheet debt is?

That's right.

Does any of that have to come back on under these new changes in special -- whatever I don't even know what it is [inaudible], or whatever that is to. Any of that going to have come back on to the balance sheet?

Well we have one portion of our facility. We do use the lines in [SPE], about 250m of it. [inaudible] just out and we are evaluating those, so it's all too early for me to comment on what will happen with those. But I think in my opinion that can be restructured, if necessary. But the focus for us with those securitization programs is more the low cost of funds they provide. And so regardless of on or off balance sheet, they are a great financing alternative for us.

But it does raise your debt-to-capital at 62%, if you add that 423 back into your debt?

that is correct.

Okay and than on the LTIP, the first trash of the LTIP or the first kick in or whatever the terminology is, 28.50 would be what it has to hit in order for the first portion of that to come in?

that's correct.

And what would the earnings impact be if the stock were hit that level?

Well the stock price would have gone up over $10. But that earnings level would be about 10% of the shares out there that are [gramps]. Andy, you have the exact figures.

It would be approximately $3.5m of expense.

$3.5m of expense, were you at that level and how long is it have to stray there?

20 days.

20 days. Okay thanks very much. I get back in queue.

Our next question will come from Jeffrey Brown with Credit Suisse First Boston.

Quick question on Challenger in the fourth quarter. What was the fourth quarter sales impact on operating earnings? It looks like in North America you've lost on an operating earnings basis, you know, it's pretty thick last year 12.6 positive, this year of loss. I am assuming a lot of loss is related to the Challenger, it spurred up on the cost?

That's correct. We had about $60m in net sales. But we lost about $7m of Challenger in the fourth quarter. So that did contribute. The other issue in North America was we were in a process of reducing dealer inventories in the fourth quarter, and so our sales were much lower in 2002 compared to 2001. In 2001, as I mentioned, in our earlier remarks, we had AGCO product line introduction in the fourth quarter of last year. We also had a lot of products that didn't get released out of our Heston plant until the fourth quarter of last year. So our sales were unusually high last year and this year they are low, because of inventory reduction.

Got it. And I guess a more general question. Given that, you had mentioned that dealers seem pretty optimistic in North America, is there -- is that related to the Farm Bill and the higher commodity prices? Because it seems that you are trying to keep inventories low. Are they fearful or they optimistic given that if you think it's better [inaudible] maybe build inventories little bit if between, North America is going to be a great year? Or you're just kind of staying conservative?

No we don't want to build inventories, regardless of whether the market gets strong or not; we want to turn them over faster. So our position there to reduce inventories is to be more efficient and we don't need 15 of everything, just to be in the marketplace. We can supply that product much more rapidly then the cost of having it on hand. So that's a business strategy that we have instituted. As far as the dealers being optimistic, I don't know as we could lay that on anyone issue. Certainly I think the Farm Bill is got in too much attention as being a non-positive issue. It is a positive issue. A very positive issue that provides the farmer with confidence in making financing arrangements for large pieces of equipment. The fact that lot of them have said they haven't seen the money yet, I think depends more on the farmer you are talking to. If he is in a drought area, he hadn't got to spend the money anyway. So we think the Farm Bill is still a very positive factor. We think commodity price is there a positive factor. We think the export of commodities around the world, resumption of exports, the reduction of surpluses; they are all positive factors. And certainly if one listened to the President's speech the other night on the state of the union, the conversation of increased exports of food as part of the 8 program certainly didn't miss my ears as being a positive for agriculture in the United States. I think there are a lot of factors going forward that will benefit agriculture in 2003. And Farm Bill is just one of them.

And I guess, I'll ask a lot technical question on EBITDA. In that calculation, you've said for the year that total number was about 225. Does that add back the cash and the non-cash cost associated with the LTIP or just -- is it adding back the whole LTIP or just the non cash with the cash portion?

It wouldn't include the non-cash portion, but it would include the cash portion.

Right. So if you add it all back, it's close to kind of to low 240s or something?

That's correct.

Okay. Thank you very much.

Thank you.

Barry Bannister with Legg Mason has our next question.

Gentlemen hi, how are you?

We are fine.

Got a cold as you can tell. Let me ask you a couple of questions. You accounted for $7m of loss in Challenger and $60m of sales, that was $110m sales. What was the loss in other $50m during the year?

The total loss was about 15m.

Okay. And you are bumping up on just about having used up the securitization line, any chance of an increase there in other line?

Well, that should be the amount we have available. We have additional receivables available if we wanted to increase those facilities, I don't think that would be an issue. The decision whether we would increase those is more of a capital structure issue and whether we would lock to put more reliance on that type of facilities. So at this point in time we don't have any thoughts about doing that.

You said something earlier about a special purpose entity then you said something to John about 423m coming back on, and I think the figure you gave on the [SPE] was 250. What was he talking about versus what you were talking about?

John was adding back all the securitization facilities into our debt to calculate a debt-to-capital ratio. But he is just counting them all as debt. Some -- a lot of the banks do that as well. So we would get our debt-to-cap with and without.

Quickly the Sunflower brought on about what $45 of accounts receivable in inventories?

That's about right.

And then lastly you have got [27 something] liabilities in accruals. Could you tell me why that's a [inaudible] figure and if it's a significant one and what those are?

Well those accruals include a number of things. Warranty, discount reserves, accrued benefits, or employees and things like that.

Nothing immediate.

What, excuse me?

Nothing immediate.

Well, some of them - lot of them turned all the time. They're just normal timing issues with -- between cash and accrued accounting. But one of the reasons why it's up is because of the accruals for the severance cost associated with [Coventry] closure. Also they are up because of foreign exchange -- the strength of the Euro -- that's the main reasons besides from some of the acquisition we had -- also had accrued expenses that we picked up.

Thanks, for that summary on [inaudible]. Thanks.

UBS Warburg David Bluestein has a next question.

Good afternoon. First of all, what's your best guess as to the timing of the decision by the [inaudible] Court in England related to pensions?

It will be late summer.

All right. And second what type of tax rate should we expect for 2003?

Again the tax rate does depend on our income in various jurisdictions, but our assumption is somewhere in the 35-36% range.

Okay. Terrific. Thanks.

Thank you.

We'll now take a follow-up question from Steve Walkman with Morgan Stanley.

Hello again. Question on I guess [looks] like a gross margin -- I am just trying to get a sense. Andy may be you can tell us if you had kind of your core business, ex-challenger and the other acquisition and so forth. What would the gross margin have been like in the quarter, I am just trying to make sure that we are making progress on that with the cost cutting and so forth?

If you exclude challenger out of the fourth quarter that was about -- a penalty of about 100 basis points. Excluding that we would be up about 120 basis points.

Okay, and then I guess may be one for Bob I mean - are we still on track with the target of $3 for '04?

Absolutely. No change.

Thank you.

We'll take another follow-up question from John McGinty with Credit Suisse First Boston.

Yes, I just wanted to comeback on this -- try to understand this footnotes on the UK. If the court rules against you and the pension liabilities go up to 55m-60m. Do you -- is there any -- do have to again take the charge against retained earnings and then it says the liability would be $6.5m per year, is that something that hits earnings or cash? Or could you just explain that to us?

Sure, the 55m-60m has increased in the liability if we were to loose the appeal, we would record that as an expense and it would be reduction-retaining earnings at that time. The cash associated with that increase liability would be paid out fairly evenly over the next 10-year period. So you have to take as an expense immediately, but the cash impacts really spread over probably a 10-year period.

But the cash impact of 6.5m a year -- it would be a cash impact but it would not be an earning impact?

That's right, you have already taken all the earnings impact.

Okay. I just want to make sure it wasn't double accounting on that. Second question, where are we in our negotiations. Are we totally done in the negotiation with the French in [Boway] and everything or because obviously you're closing Coventry but this -- is there anything else that needs to be done or is that totally nailed down, buttoned up, and everything else?

We are in full production in [Boway] today. We've stopped production in Coventry at the end of December as exactly on plan. The only thing going on in Coventry today is CKD shipments that will continue through the first quarter for some major orders that we had received right at the end of year. Then the other thing going on in Coventry is the Transaxle production, which will seize in June and then the whole facility will be totally closed by July as scheduled. So as far as tractor build up tractor production that is going on today as planned in [Boway]. There is nothing else to do there. There are no loose ends; no open switches; everything is go. We also would suggest you that the products transferred to Canoas in Brazil also are in production today and we are already doing CKD shipments from Canoas. It's just a major order that is still being done at Coventry.

So what's being finished at Coventry, if it had been either late or order been received later or it has been perhaps smaller. It all would have been done at Brazil; it was a just matter of what you could get done in short period of time.

That's correct.

But those CKDs will all come out of Brazil, going forward.

Absolutely.

Okay. And then one question over on the challenger -- what you are going to do about some of the larger dealers that have not taken on the contract, the Michigan's and the Virginias. Are you going to be given other CAT dealers those territories or have began to assign those territories to other than CAT dealers, or is that have you made up your -- made a decision on that?

The challenger product will only be sold by CAT dealers in North America. Those territories as you mentioned that might still be open, though either be signed by the CAT distributor in that area within the next 90 days or it will be assigned to an adjoining or nearby CAT distributor. We can report to you that all open areas have been asked for. So we know we have a 100% coverage, either by the existing caterpillar dealer or the neighboring caterpillar dealer.

But you haven't yet awarded any of the open slots to the neighboring dealers?

Not yet that I'm aware of. None of them have been finalized, but there has been excessive discussion. And there is only -- John, there is not that many. There is only about 4 or 5.

Okay. All right. Thanks.

Yes.

Once again, if you do have a question, please press star "1". We will take our next question from Goldman Sachs Joanna Shatney.

Can I just [inaudible] something with you guys. Can you just help me out with North America was down a lot in '02 and how you are still able to get the earnings up a bit? Just that you are able to re-deploy the shipments to other regions of the world that were doing better.

Well, I think the number of things happened in the fourth quarter, Joanna. One we did flex our production a little bit. Some went to other areas. Some were reduced, as far as the unit productions. That's one of the reasons our sales were a little less than we liked in the fourth quarter or particularly in December. But on the other hand, we are also accelerated the shipment of products to customers in the fourth quarter and on a full year basis as was indicated by the share growth in North America. Know that -- and the already one of its reported that while the total industry in North America was only up 8/10th of a percent, AGCO was up over 10%. But I think I really can't miss the point of being a little bit more specific. In compact tractors, while the industry was up about 6%, AGCO was up almost 30%. In the 40 or 100 with the industry down 8/10, we were positive 5/10. In the 100 and up, of course, we are not considered the high [inaudible] group, we really believe so here. With the industry down almost 15%, AGCO was up 20%. In combines, with the industry down 20%, AGCO was up 40%. So a lot of that inventory moved into the hands of users and it was done through an outstanding sales, effort of our dealers, and our company people.

And that's just AGCO brands excluding challenger, right. It's not the challenger -- that is taking -- taking some share.

Challenger is in involved there, but it's a very small piece and it's in the articulated tractors.

Thanks.

We'll take a now another follow-up question from Jeffrey Brown with Credit Suisse First Boston.

Hi. Just a quick question on working capital. It seems as if it wasn't as big as it used to that I had originally anticipated. Looks like working capital, of these inventories is given up about a 119m and then [AR] giving you about 43m. Is that -- I just -- is only as why I thought it was associated and I think with the challenger build up. Is that why [inaudible] to build up or they just talk on what I thought the build up is going to be?

I am not sure what your assumptions were. But the challenger build up was that what we said. We said it was going to be about 110m-120m and that is right exactly where we ended up. You know, we had the Sunflower business coming in the fourth quarter. In the European working capital actually came down a little more than we had originally predicted. And so that didn't help us. As long as well as with our reduction in dealer inventories in North America helped us to exceed our cash flow targets that we had communicated earlier.

Alright. Okay. Thanks.

Barry Bannister with Legg Mason has a follow up question.

Hi guys. Just a follow-up. When I look at the margin in North America excluding Challenger, it looks like it was about 1.2%. Did you say that Sunflower contributed in profits?

No, Sunflower was very small for this portion of the quarter that we had then. That was not contributing.

And just two quick conceptual questions. One, Deere has a new so called infinitely variable transmission tractor going to be introducing in Europe, have you seen any signs of that in the market? Does it have any impact at all on your Fendt share? And then secondly, North America -- to be able to get your margins up to your goals, so it really requires it to be done, it looks like on the back of the Challenger introduction in its very first year. Are you more optimistic than, perhaps, I am on the North American X-Challenger margin in '03, given your production versus retail and other factors?

First question on the variable transmission. We are very-very familiar with the introduction that John Deere is making in Europe. We have tested the unit and we are very familiar with the concept they have used. We feel extremely comfortable that the Fendt CVT is a superior product and after all we have only introduced over 10,000 of them successfully into the marketplace and they are, kind of, late coming on with the product. But, nevertheless, we don't feel as though that's a threat, but I wouldn't -- at the same time have to admit that there are good John Deere uses that are going to buy that product until they find out whether it works or not. We expect them to introduce it here in North America as well. So, they are trying it at on the Europeans. As far as the margin improvement going forward and your focus upon the Challenger business, as the key leverage to get to our target, it is not necessarily the only piece of improvement that we have to talk about. We do expect Challenger margins to improve but we couldn't get into a profitable position that we already reported to you. As a fact of that margin improvement is in two areas; one is in lowering the cost of the tractor that we have been building. We think we have some good opportunities there. But the most significant contribution to the Challenger business or the other related products that you are more familiar with like the rubber tire tractors, the combines, the compacts, the hay tools, and so forth, which have excellent margins and since most of that business is incremental to the manufacturing process of AGCO; we would anticipate that those margins would even be higher than what we generate today in the traditional North American other brands. So, yes, the margins will improve to Challenger, but it's when we get the complete package out there and that's what we have said from the very beginning; we have never changed that story. We still think that's quite possible. As far as the real margin improvement that we anticipate, it's not on the backs of Challenger at all. It has been, as we have stated for a couple of years now, based upon a flat industry assumption and I would like to emphasize a flat industry assumption. That if that were the case, we could get to the $3 per share by 2004 through cost reduction initiatives within the company, the introduction of new products, and utilizing if we might say that better efficiencies within our operating expenses. All of that is an internally managed situation. It has nothing to do with the size of the industry or how robust any one market is over the other. And so we would anticipate that the major margin improvement really will come from the traditional part of the company and that Challenger will be added to that. That's what we have said.

Right. In addition, Bob, the company made big portion to sprayers about a year and half ago. Could you tell us if the acquisitions were accretive in '02?

Yes it's accretive, but the industry went down 16% in '02, which is certainly a top issue for us to [inaudible] and we had to adjust some of our sales business to that. We are not giving away margins but it is profitable and it will be a major generator to the company.

Thanks.

We have another follow up question from David Bluestein with UBS Warburg.

Hi Bob. Do you have similar market share data for the European region and potentially Latin America?

No I do not. In Europe, it's against the law. They are the only ones who can produce it and, I think, it's "do out right now," David. It's done by some government agency or the union, I don't know which, but we make projections but the projections are not what I would consider final. In South America, we do have market share but it's in a total tractor or combine category. It's not broken down by the elements like we discussed earlier and we can tell you, though, that in South America we do have number one market share, in Brazil, Argentina, and throughout the total of South America.

All right. Terrific. Thanks.

And Mr. Ratliff there are no further questions. I will turn the conference back over to you.

Thank you very much [Sarah]. We appreciate everyone's attention to our conference call and your interest in the company. Please free to call any of us at any time for further clarification of our release or any of the details of the company. Thank you very much. We will now close the fourth quarter conference call for 2002. Good bye.

That concludes today's conference. We thank you for your participation.