AGCO Corp (AGCO) 2003 Q1 法說會逐字稿

Good day, everyone. Welcome to today's AGCO Corporation 2003 First Quarter Earnings Announcement. Today's call is being recorded. At this time I will turn the conference over to Robert Ratliff, Chairman of the Board, President and Chief Executive Officer for AGCO Corporation.

Good afternoon, everyone, welcome to the AGCO First Quarter Conference Call for 2003. I have with me today Donald Millard, our Executive Vice President and Chief Operating Officer, Andy Beck our Senior Vice President and Chief Financial Officer and Molly Dye, 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 will make forward-looking statements, including some related to future sales and earnings. We wish to caution you that these statements are predictions and that actual events or results may differ materially. We refer you to the periodic reports that we file from time to time with the Securities and Exchange Commission, including the company's form 10-K for the year ended December 31, 2002. These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our forward-looking statements. A replay of this call will be available on our corporate web site for the next 12 months.

With that, I would now like to summarize our financial results for the first quarter. Net sales for the first quarter of 2003 were 757.2 million, compared to 619.9 million in the prior year. Operating income for the quarter, excluding restricted stock compensation expense and restructuring expenses, was 45 million in the first quarter of 2003 compared to 39.2 million in the prior period. Diluted earnings per share before a cumulative effect of accounting change, excluding restricted stock compensation expense and restructuring expenses, was $0.23 for the first quarter, compared to $0.21 in the prior year period. Our first quarter results were highlighted by sales growth due to incremental sales of the new Challenger product line and the acquired Sunflower brand, as well as positive currency translation impacts. First quarter earnings improved over 2002, despite challenges with our manufacturing initiatives and relatively soft market conditions. However, we anticipate we will meet our 2003 earnings targets. Now I'd like to turn the discussion over to Donald Millard, to discuss the industry and AGCO's condition in each of the regions.

Thank you, Bob. First in North America, total industry unit retail sales of tractors during the first quarter of 2003 increased approximately 6%, when compared with 2002. Industry unit retail sales were higher in the compact tractor segment, relatively flat in the utility tractor segment, and moderately lower for the high horsepower segment. AGCO's unit retail sales of tractors increased in the first quarter of 2003, when compared with our sales in the prior year.

Sales of AGCO's new Challenger product line introduced in 2002 contributed to AGCO's unit retail sales results. Industry unit retail sales of combines in the first quarter of 2003 were 21.4% lower than 2002. AGCO's unit retail sales of combines in 2003 were higher than the prior year, due to favorable response to new combine models introduced in 2002. In Western Europe, industry unit retail sales of tractors for the first quarter of 2003 were. 1% lower than 2002. AGCO's unit retail sales of tractors were also depressed compared to 2002. Market results were mixed, with moderate increases in the United Kingdom, France, and Italy, offset by declines in Germany and Spain. In South America, industry unit retail sales of tractors increased approximately 2.2% with the first quarter of 2003 compared to 2002. The Argentine and other South American markets experienced increases, while the largest market, Brazil, experienced a slight decrease in demand. The Brazilian government's subsidized retail financing program, FAMNAMI (ph) continues to be available during 2003 but at lower levels than at 2002. AGCO's South American unit sales also increased in 2003 compared to 2002.

In the rest of the world, AGCO's net sales in dollars for the first three months of 2003 increased approximately 24.8%, compared to the same period in 2002. Sales in Eastern Europe were particularly higher than the prior year period. In sprayers, the industry unit retail sales of sprayers in North America declined approximately 20% in the first quarter of 2003 compared to 2002. Industry unit retail sales were impacted by higher fertilizer prices and dry conditions in certain key areas. AGCO's unit retail sales of sprayers in North America also declined in 2003 compared to 2002. Although market conditions in the first quarter of 2003 were weaker than 2002 in most markets AGCO expects worldwide demand to be relatively flat for the full year. Andy will now cover the financial results.

Thank you, Don. Reported sales for the first quarter were 22.2% greater than 2002. Acquisitions and currency translation contributed 16.7% of this increase, with Challenger generating net sales of 60.9 million, Sunflower generating net sales of 8.4 million, and currency translation positively impacting net sales by 34.8 million, primarily due to the strengthening of the Euro, offset by weakness of the Brazilian Real. The remaining 5.5% increase in net sales in the first quarter can be broken down on a regional basis as follows. In North America, no change, in South America, up 61%, in western Europe, up 1%, and in the rest of the world markets, including Central and Eastern Europe, Asia-Pacific, Africa, and the Middle East, up 10.9%.

Parts sales in the quarter were 105.9 million, compared to 97.5 million in 2002. Excluding the impact of currency translation, parts sales were 1.4% higher than the prior year. In the first quarter, our gross profit margins compared to 2002, decreased from 18.9% of net sales to 18.5%. This reduction in margins was a result of production and efficiencies and startup costs associated with our manufacturing initiatives, negative currency impacts on European exports, and sales mix resulting from the growth of lower margin Challenger sales. The company recorded restructuring and other infrequent expenses of 7 million during the first quarter of 2003, primarily related to the planned closure of the company's tractor and manufacturing facility in Coventry, England, announced in 2002. Losses on sales or receivables, primarily under our securitization facilities, which is included in "other" expense were 2.9 million for the first quarter, compared to 3.7 million last year. The decrease primarily relates to lower interest rates in 2003 compared to 2002. Interest expense net for the first quarter was 15 million, compared to 14.1 million in the prior year. Interest expense increased due to higher debt levels, offset set by lower interest rates in 2003, compared to 2002. The company's effective income tax rate was 50% for the first quarter of 2003, compared to 36% in 2002. The increase in the effective rate is due to the company not benefiting first quarter losses in the United States. Based on our current forecast, we anticipate that this higher rate will be offset in subsequent quarters, with our full-year effective tax rate in the range of 35 to 36%.

Moving on to the balance sheet, accounts receivable and inventory combined were $252.2 million dollars higher than at the end of March, 2002. The increase includes. $190 million of receivables and inventory related to the Caterpillar, Challenger, and Sunflower acquisitions. The remaining increase in inventory and receivables is due primarily to currency translation. Funding under accounts receivable, securitization programs was 428.8 million at the end of March, 2003, compared to 386 million at the end of March, 2002. In North America, our dealer inventory months supply at the end of March, 2003, on a trailing 12-month basis was as follows. 6.5 months for tractors, which is lower than the prior year, nine months for combines, which is in line with the prior year, and dealer month supply of hay equipment was approximately eight months, which is lower than the prior year. Our debt to capital ratio was 51.6% at March 31, 2003, compared to 47.2% at March, 2002, due primarily to higher debt levels used to fund Challenger working capital needs and the Sunflower acquisition. EBITDA, excluding restructuring expenses of $7 million was 58.2 million for the first quarter of 2003. EBITDA excluding restructuring expenses of 0.9 million was 39.6 million in 2002. The increase includes the elimination of $12.4 million dollars of cash payments associated with the first quarter, 2002 awards earned under the company's LTIP program.

Unit volumes for worldwide tractor and combine production during the first quarter were flat, compared to 2002 levels. Excluding production volume at the DeKalb facility, unit volumes during the first quarter were down. 3%. For the full year of 2003, net sales are projected to increase approximately 9-11%, primarily due to the Sunflower acquisition, sales growth in the Challenger product line, new product introduction, and the strengthening of the Euro. Net income per share for 2003, before restructuring expense is projected to be in the range of $1.60 to $1.75. In addition, AGCO expects to incur restructuring expenses of $0.13 to $0.17 per share, related to the Coventry and DeKalb closures. Second quarter net income per share excluding restructuring expenses is expected to be in the range of $0.43 to $0.48 per share. Restructuring expenses for the second quarter are expected to be $0.07 to $0.09 per share. We expect earnings improvement in the second half of 2003 to be generated by the elimination of Challenger startup losses incurred in 2002, cost saving benefits from the Coventry closure, and new product introductions.

Thank you, Andy. That concludes our comments. Operator, we're ready to open up the conference call for some questions.

Thank you. The question and answer session will be conducted electronically today. If would you like to ask a question, press 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 you do have a question, please press “star” “one”. Our first question will come from Stephen Volkman with Morgan Stanley.

Good afternoon. Can we talk a little bit more about Challenger? I guess I was looking for a little more sales in the quarter from Challenger. There was a comment you made, I think in the release about lower margin Challenger sales. I'm wondering if that's just a timing issue or if you've changed your view of the profitability of that business line, and any comments you could make regarding your view of the sell-through into the retail channel for Challenger?

Challenger always seems to be an exciting subject. We have not changed our view of the project, nor our estimates. I think you have to recognize, as we've told some of our investors in the recent months, that we still have new products coming out, and even in April, we're just now introducing the combine into the Challenger brand, and we still have some rubber tire wheel tractors that will come out later in the year. So all of the products that are designated to be in the Challenger line haven't been introduced yet, and they will be introduced later in the year. The volume for the first quarter is about what we expected. It's on plan, and certainly we're seeing some sell-through, beginning that's commensurate with the normal sales of other products in the market share report. So we're beginning to make some impact in that area. Andy, you want to add to this?

Yes in terms of the margins, I think we talked before about how the tractor margins on the product that we bought from Caterpillar were relatively low, and we had our work cut out to improve those margins so we can get those to be a better contribution for the company. One of the actions that we took in the first quarter was to announce the closure of the DeKalb facility and move that production into Jackson, Minnesota. That should really help us improve our margins on these track tractors. The other factor is, as Bob pointed out, we're still getting some of the complimentary products to the track tractor, still being introduced over the course of this year, and as the mix of sales of the Challenger business changes over from just track tractors to combines, hay equipment and rubber tire tractor, we'll also see our margins improve, but it did have a negative impact this quarter on the mix effect, and did reduce our margin its as a percentage of the total sales.

Okay, great, any update on the number of dealers signed up or the working capital outlook for the Challenger build-out?

The number of dealers has not changed. We still are focused on 55 in North America, and 45 in the international markets. The international -- the North American portion is almost totally in place at this point. The 45 in the international market will be completed by the end of the year.

And in terms of working capital, Steve, we still are on track and project that we will have minimal increase in our working capital needs on a full year basis relative to Challenger business.

Thanks a lot.

Our next question will come from David Bluestein with UBS Warburg.

Good afternoon. On the UK pension plan appeal, when in May do you expect to hear from the court of appeals?

That is when the appeal is being heard in May. We would not expect to hear the outcome until maybe July.

All right, and on 2004, in addition to the 8 million from DeKalb and 25 million from Coventry, could you walk us through the other pieces that help you on your way to $3 a share?

Well, I think the balance of that's going to be two areas, sales volume improvement from additional new products, and from additional expansion of the Challenger business. We will expect to continue to move towards our goal of $500 million of sales by 2005 in the Challenger business. A lot of that growth should be in the other products, combines, hay equipment, rubber tire tractors, which carry strong margins, so that should become a better profit contributor for the company in 2004. The other piece of it is in cost reduction in terms of reducing our material costs buy through resourcing, going to low cost countries, consolidating our buy on a worldwide basis, also through trying to reengineer products and components to make them more common across the entire AGCO manufacturing footprint, and working on new products. The new products will certainly have better margin its as they've been engineered to reduce costs, as we introduce those in the end of this year and into next year.

And Andy or Bob, I know when you made that initial target of $3, you mentioned in a flat market, has the market been flat or has it been worse than that, and you know, if we were to get a flat market from today's levels, is the $3 still the right target?

Well, the market has really not been flat. It's been flat in most parts of the world except North America, and certainly as you know, that was down about 20% last year, and it's not started much better than that this year. So sprayers also are down pretty heavily. So in that sense, they're off, but we haven't changed our forecast.

All right, thank you.

Prudential Securities, Andrew Casey has our next question.

Good afternoon. Question on the margin compression in both Asia-Pacific and sprayer division. Is there anything other than volume going on? Well, Asia-Pacific probably some mix. Can you help me kind of work through what happened in the quarter?

Okay, on the sprayers, it's a little mix of product. The bigger equipment was some of the reason; some of the sales shortfall more dramatically was in the big equipment, which carries higher margins. Also, just pure volume reduced the margins in that area. On the Asia-Pacific, I think what you're seeing is a little mix, as you say, some currency impacts from the strength of the Euro, and some of the costs coming out of our plant that we talked about, some inefficiencies are getting allocated down to the products down there as well.

Okay, thanks, and then when you talked about the working capital accounts receivable and inventory in the call, you did not mention any of the manufacturing efficiencies having an impact on the inventory. Was that just a non-issue in the quarter or did the manufacturing of inefficiencies have an impact on inventory, and will that come back in the next couple quarters?

Clearly, the manufacturing inefficiencies did have a cause to or look to increase the inventories during the period. We had some disruption in some of the supply base as we rotated out of Coventry and into Bovay and into Canoas. We are working through that and expect to see that improvement over the next several quarters.

Thank you.

We'll now hear from Gary F. McManus with J.P. Morgan.

Good afternoon. The tax rate, you know, when I look a year ago, you had a loss in America and a normal 35, 36% tax rate. I don't understand why it was high at this time. Secondly, what was your second quarter tax rate assumption that's embedded in your earnings guidance of $0.43 to $0.49?

Okay, well, effectively, as you know in the fourth quarter, we wrote off a significant amount of tax assets, and that was relating to the losses that we had in North America, based on our review with our auditors and our review of the requirements under the accounting rules, we felt like it was a point in time where we needed to write-off those assets. Certainly, they're still there and the tax credits are available to us if we can become profitable in North America. So because of that position that we took in the fourth quarter, now we are taking a position that we should not further add to the tax assets relating to the United States. So as we have losses in this first quarter, we did not take a benefit, and for that reason, you see the higher tax rate. Our assumption in the second quarter is that we will, at a minimum, break even in North America, so that it will not effect our tax rates. So our assumption is the tax rates, a more normalized 35- 36%.

You expect a more normal tax rate for the full year, right?

That's right.

So I mean, at some point, you've got to have a lower tax rate in one of the quarters to get to a 35% full year. Will that more likely happen in the fourth quarter?

Probably so.

Secondly, your sales forecast rode [3.9] to 11%. You had 22% first quarter. It suggests a much slower revenue growth going forward. I'm wondering, if you could, you know, it's kind of implying 6 to 7% growth for the remaining nine months. I assume you still expect to get some currency benefits through the remaining three quarters, and some Challenger benefits as well. Can you kind of go through the revenue forecast?

Sure can. The currency benefits are going to be front-end loaded, as the Euro strengthened throughout last year. Though our projection now is that foreign currency should benefit sales fort full year by roughly $90 million, and I would say that you'll see it was 34 million in the first quarter. That will continue to decline over the course of the last four quarters in terms of the benefit. In terms of Challenger, if you recall, there were very minimal sales in the second quarter, no sales in the first quarter of last year and in the third and fourth we started having some normalized sales. So the increase year-over-year is going to be more in the first half than the second. So our projection, again, as to increase our sales of the Challenger product line by 110 to 120 million for the full year but as you can see, we had about 60 million in this first quarter, and then we would expect that the sales increase in the second quarter would be somewhere in the 40 to 50 million range and the rest of the sales increase would be in the back half.

Okay, and last, Andy, at the end of your prepared remarks, you had pointed to three areas that would help margins the rest of the year, absent the Challenger costs, cost savings from Coventry and new product introduction. Can you quantify, you know, what kind of impact you expect to have from those three areas?

Well, in terms of if I look at the full year in terms of our gross margins, we're looking at about $40 million of cost reduction, and that would include the new products that we have, and so that should contribute heavily to margin improvement over the course of the year, and then this mix situation with the Challenger line corrects itself to some extent as our margins improve in Challenger and we have year-over-year comparisons of that improvement. It's still somewhat penalizing our margins for the full year but not to the extent it did in the first quarter.

Okay, thank you.

Our next question comes from James Croom with Morgan Stanley.

Good afternoon. Could you go back and revisit the working capital for a bit? I know you said the Challenger working capital needs would be flat, but I was wondering in the past, you talked about sort of overall business cash flow generation for the quarter and it looked like you used a fair amount of working capital in the first quarter. So I guess could you review that for the year?

Okay, well for the full year, again, we have a use of cash in the cost of the restructuring programs and the closures that we have associated primarily with the Coventry business. That is going to be a cash requirement of about $40 million for the full year, and our target is to, as best we can, offset that with working capital reductions, and other parts of our business. In terms of Challenger, we don't expect that to be much of a requirement, but the main focus is to get our working capital down, particularly in the North America market to achieve that in a way of breakeven working capital position on our cash flow so that we can achieve operating cash flow of about 140 million to 160 million and free cash flow of about 75 million to 100 million.

Thank you.

Credit Suisse First Boston, John E. McGinty has our next question.

Andy, just two follow-up questions. Did you say on an annual basis, working capital would about be a source of funds of about 40 million, is it would offset the 40 million restructuring, those two would wash or are you saying it was zero for the year? I thought it was supposed to be a source of cash for the year.

That's correct.

So the 40 million or so is still the proper number

That's correct.

If I can get back to Gary's question, I'm not sure I understood your answer, because you said the second half benefits, the Challenger startup's gone, the Coventry benefits, and the new product introductions. You said in answer to that you get on a full year basis the gross margin 40 million of cost reduction including the new products. Was that -- I mean, was that the answer to all three of those or just the new products? I mean, what about Coventry and Challenger?

Let me address that another way. In terms of Challenger, we had losses in the prior year in 2002 on a full-year basis of about $15 million.

Before taxes.

That's right. About 15, $0.13 a share. Our projection is to at a minimum, break even and in that operation this year.

So we pick up $15 million from that?

Right, and with the DeKalb move to Jackson, Minnesota, we would expect to get some of that benefit this year. So I think our, we would expect to really show a profit now in the Challenger operation.

And have you quantified the DeKalb to Jackson?

Yes, it's on a full year run rate $8 million.

We get two or three this year?

That's about right. The Coventry closure, the full year run rate's 20-25 million. We'll have the plant closed by the end of June, and so we're projecting of that 40 million, a cost reduction I talked about, somewhere in the $10 million range would be the savings that we would get in 2003.

Okay, and then the other -- in other words, the other 10 million of the 40 million or the other 30 million?

The other piece is ongoing -- as I went through before, the other cost reduction initiatives we have relating to purchasing new products, things like that.

But the Challenger, the 15 million or 17-8 million swing in Challenger is not in the 40?

That's correct.

Sorry, I just wanted to make sure. The sprayers, you know, the historically when you first bought the sprayer business, because it didn't quite close on time, you didn't get the first quarter, which is obviously, as we saw last year the big profit quarter. If we look at last year, sprayers over the balance of the year just earned a couple million dollars after earning almost 15 in the first quarter. The decline that we saw in the first quarter this year, do we get any of that back or should we still look at sprayers over the balance of the year to be just a marginally profitable with, you know, the second, third and fourth quarter?

Our projections, John, are that we will get better contribution in the last three quarters of the year relating to the sprayer business. I think the season's been a little later this year. Which could help us a little. And also, we do have a lot of cost reduction programming that we're working on last year that's taking hold this year and should improve the margins of that business. The offset is that the market's down. But we would expect to be profitable at a much higher level than we were last year over the last three quarters.

So that sprayer business which earned 16.2 last year that might do something close to that this year, even though they're down 3.5 million in the first quarter?

I think we would expect to exceed that for the full year.

Exceed last year?

Yes.

That's impressive. The currency wasn't clear to me in the first quarter all in, the currency impact on earnings, I mean, you talked about sales and everything. You talked about some impacts on the gross margin negatively. If we put everything together, what was the currency impact in the quarter?

From a translation standpoint, just purely converting our foreign operations to dollars, it was, you know, with the sales being up 34 million and everything, we thought that the benefit was about $0.02 a share, but we had offsetting losses relating to higher costs because of the exports of European product in North America and some other foreign exchange losses where it really offset that. On kind of a [ inaudible ] basis pretty flat, no impact.

Would you assume that is the case for the balance of the year or was there anything that was either unusually positive or negative in the first quarter with regard to that?

Our assumption for the full year is that translation would benefit us by about $0.06-$0.08 a share, and the offsetting higher costs associated with the strong Euro would probably penalize us $0.03-$0.04. So net would probably be up over last year by about $0.04 a share.

Okay, and then the final question, Bob, or any of you, as you look at the North American market, your thoughts on what's going on in terms of the fact that we've got somewhat higher prices? We've got Farm Bill, albeit confusing and a really lousy market out there. We heard New Holland (ph) saying the first two weeks in April had shown no change. What's your read on the marketplace out there?

As you pointed out, John, all of the economic factors that we normally look at for the equipment purchase industry are very, very positive, compared to where we've been over the last five years. There's really -- it's hard to find a negative.

It's why I'm asking.

The only thing I could come up with that I think has affected everyone in the United States has been the activities in Iraq and they certainly created uncertainties, and people are tending to sit on their wallets a little bit until they see how this thing works out, but we feel that the quick conclusion to the hostilities has caused people to relax a little bit. We know the farmers are back in the fields. They're out there cultivating and planting and the season has started. They're not waiting to see if they're going to go to the fields. So the business is in place, and we really believe that, before another quarter finishes, that the activity level will increase. Now, I'm looking for it never to be higher than last year's number at that point, but we think it will come back from certainly the depressed levels of the first quarter.

From what you can see, and listening to people over the first two weeks, how to AGCO's North American sales look in the first couple weeks of April?

I don't have an accurate count on that, John, but I can relate to you, we had a dealer meeting just at the end of March and these were our top dealers, about 300 of them, and there wasn't a complaint in the whole group about the industry, and that surprised me, because I figured that we would get a little moaning and groaning, but there was no indication that they wouldn't continue to be upbeat and meet their plans for the year.

Wow.

That's our top dealers.

Thanks very much.

Up next to, Joanna Shatney with Goldman Sachs.

Good morning, guys.

Hi.

Can we just, just so can I get a feel for how the quarter is going to sequentially play out by these one-time things, not one-time but ramping up, I guess, how much is Challenger actually hurting your earnings performance in the first quarter?

Challenger was a slight loss of about $1 million for the quarter.

Okay, and then can you talk about, you've kind of talked about the manufacturing inefficiencies and the likes of the first quarter, but can you talk about how quickly you can get, you know, how much did it actually cost you and how quickly you can recapture that to get to the full year being unchanged?

We estimated that it would probably cost us around $3 million, about $0.03 a share for the quarter from where we wanted those plants to be in terms of productivity and performance. I think that we'll still see some spillover, and to the second quarter as we get some of these issues in terms of our supplier shortages, and other issues sorted out, but I think our objective right now is to get those sorted out by the end of second quarter and be hitting our targets in the second half of the year.

So we can throw $0.03 into the second half. And where did you make up the difference? Because you made your number, even though you had some of these inefficiencies?

Hard work.

I think the sales were better in South America than we had expected. The market in Argentina was very strong, and actually Brazil was better than we thought, at least our performance was better than we had expected, and that it provides some offset to some of these other issues.

We also were up in the all other, if you will, the rest of the world, and a lot of that is CKD shipments, and there's good margins in that business.

Okay. Could we just go through the pluses and minuses Andy? $0.15 from "Challenger," $0.04 from currency, pension actually costs us $0.10. New products helps us $0.10 and then we get around $0.35-$0.40 from cost reduction?

That's right.

Did I miss anything?

I don't think so. Currency about --

$0.04.

That's right.

Okay. Can you just talk about what kind of feedback you're getting from the CAT dealers, when I did my dealer survey in the fall, they kind of complained about the warranty stuff. I know that's completely cleared up. Are they happy with how differentiated the product is? Are they putting it next to their bulldozers? Are they starting new dealerships? What are they doing? These guys are pretty smart guys. and could you just mention, if that ability to make those guys pay for the receivables within 30 to 90 days is sticking, where the industry average is farm closer is closer to nine to 12?

Let me say to you so far, those little issues like the warranty and so forth were handled last year. We have no problem in these areas. The dealers here in North America that you may have surveyed, I think, all in all have represented to us that they're enthusiastic about representing the product line in their areas, and we certainly have seen dramatic participation by CAT dealers that were not previously CAT-AG dealers under Caterpillar. An example in Atlanta, a CAT dealer here who was not one of their AG dealers before has become very aggressive and begun to sell a lot of product. So we're seeing that happen in several areas of the country. For the most part the inventory they're ordering, yes, in some cases it's right next to a bulldozer, but most of them are having dedicated facilities either converted from some of their construction business or even building new facilities and putting that inventory on a dedicated site. At this point, we believe that the program is going along just as we had anticipated, although probably, I'd have to say we anticipate it might be a little slower than we had expected over say a three-year period, and the reason for that is, they're very deliberate. They make their plan. They invest very wisely. They're not in a rush to make a mistake, and we've been very impressed with the business-like approach they've had to the business. Last night, we were with one of the dealers from Australia. He's putting in two new facilities. He also handles China, and his appraisal of the opportunity was far greater than anything I could exaggerate.

And Joanna, in terms of the terms to the CAT dealers, the terms that we've had all along are that the products are on six-month terms, and if they are retail in advance of that, they become due immediately. We have not changed those terms, and not aware of any issues associated with those.

We also do not have floor plan for used equipment with the CAT dealer, and that is holding. That is firm. They accept that.

Okay. Great, thanks guys.

We'll hear from John Emrich with Brecular Capital.

Earnings forecast for the year still intact?. Are we still expecting free cash flow of around 75 to 100 million after 60 million in CAPEX?

That's right.

And that kind of works out to about converting 85% of net income to free cash flow. Do you think that kind of ratio or relationship will still exist when you guys earn $3?

Well, I think in order to earn $3, we're going to see some sales growth.

Right.

And I think that will require some working capital. I haven't worked out what proportion that is. We want to keep that proportional or even better than we are today, but I can't answer that specifically, but there will be working capital requirements if we get further sales growth, particularly in the Challenger business. As we said, we're holding that working capital this year, but further growth in that business will require some working capital, but it will be proportional to the sales. It won't be, you know, a dramatic one-time increase like we had last year.

Okay. And I apologize if you addressed this already. I had to take a call in the middle of this. The decrease sequentially in accrued expenses, was that from cash payments on restructuring reserves or what caused that cash out-flow?

A number of things. That's part of it, the restructuring payments. We had also some larger tax, income tax payments that we made in Europe in the first quarter than we had in the prior year. Those are the main items.

Okay, and lastly, you've done some bottoms up talking about the path from here to $3. Just from a bigger picture, in getting there with a "flat market," does not assume flat sales, because you've got new products and you have got goals for "Challenger," just kind of order of magnitude, how much higher would the sales level be from here and what operating margin? If you gave me one of the two I could figure out the other, but to get to the $3, what does it look like?

Again, the Challenger business is one of the key growth requirements to do that, and we've said that our sales in 2003 will be in the $220-230 million range and we'd expect that to grow sequentially to our goal of 500 million in '05. We're looking for additional sales volume, some of the other product lines from new products, so we would require another 3-5%, something like that, increase year-over-year, excluding other factors, to be able to achieve some of these targets.

Okay. Thank you.

We'll now hear from Barry Bannister with Legg Mason.

A couple questions. Just to add more color on Challenger, when I look at the Challenger business, you're selling a much better track type road crop than the old Challenger, but presumably you're selling to some of the customers who bought the old equipment. I'm wondering if you have had trade-ins, if you're holding on to currently any used inventory, what has been the resale price experience of those used equipment and would you have losses associated with that if they don't hold up well on the retail resale secondhand market?

As I just pointed out, we do not have any floor planning for used equipment. So therefore, we don't have any used equipment with the Caterpillar line. That product is a Caterpillar product and we did not buy of that business or any of the liabilities or anything with that, but I can refer to the fact that there are CAT dealers who have traded in some of those units, and they have adjusted their values, as you would on any used piece, depending upon its age or hours of use. I don't know as there's an overwhelming demand for that used item, but I think they are flowing through the system much like anything else is at that this time with, you know, the whole industry is a little slow. I had one dealer tell me that he thought there would be an opportunity to really improve the sale or the liquidation of those units in the construction industry, particularly the road construction industry began to see some improvement later in the year, and we believe that that's possible as well.

But just looking at the dynamics of the business, if the trade-in values are not holding up well for the old Challenger, it might impede some of the top line growth expectations for the new Challenger --

That's your assumption they re they're not holding up. I'm not saying that. I'm saying they're the same kind of values that they'd put on a track tractor coming in at John Deere or Case or anyplace else.

You've tracked that closely and you're not seeing any of that weakness?

I don't track that closely. It's not our exposure. I couldn't tell you exactly what it is.

Okay, and then just real quickly, the 7.5 months of combines, a year ago, excuse me, in the fourth quarter of '02 it looks like nine months now. So is that more a factor of the denominator falling away, the soft market?

No, that's seasonal. We had nine months a year ago, and actually, we're probably in better position than we were a year ago at that time because we have some new products, some new combines that were introduced late fourth quarter of 2002. Some of them are models that we did not have or participate in that segment of the market, and so we have some inventory that we're starting to shift to dealers that don't have any prior sales history, and so that's affecting that month's supply, but we would expect to get our combine month's supply down over the course of the year and be better than last year by the end of the year.

Also, our combine sales have been pretty good. We're running considerably ahead of the prior year, while the industry is down, we're up, and we've almost doubled our mark share on a year to date basis.

Thanks.

Bear Stearns, Scott Graham (ph) has your next question.

Good afternoon. I have two questions. The piggybacks, the first on the last question, to the extent that we have these month supply. I would think that at this point we'd have at least an initial reading on what the early Challenger sell-in dealers are doing on sell-through. In other words, their reorder rates, and I was wondering if you could shed some light on reorder rates of Challenger from at least the early dealers.

Well, the early dealers, the only product they could get was the track tractor, and we had delivered quite a few of those, and we are getting reorders on them. We're also getting a shift in the mix from the 700 series to the 800 series. So those are positive trends, and certainly supports the plan that we had. You have to remember, we didn't get the wheel tractors to them until about October/November-- haven't had them very long and we're getting pretty good order support on all of that. We are on our plan for the Challenger brand at that this time, both in orders, billings to dealers, and settlements.

Okay. As far as Europe is concerned, characterizing that market right now, I know you gave the total industry number and you gave us some of the numbers by countries at least directionally. Would you be able to give us a feel for what the high horsepower tractor and combine segments are doing in Europe and how you're fairing in that market?

I don't think we have the data for that information. It's very difficult to get the market share number its out of those areas. You have you to do a lot of estimating. It's a year-end number and that's the reason we report it at year-end. Based upon trends and so forth, we know that there's a shift. The German market's down a little, and markets are up in the UK and so forth. That's the basis upon which we said that Europe industry looked flat to us. But inside of that, you're correct, there is still a trend change to larger arms and higher horsepower equipment. We know that our order bank is pretty strong on the high horsepower, both at Fendt (ph) and Massey for European distribution but I can't give you an accurate number on that right at the moment.

That's fine, but it's fair to characterize your business mix in Europe as favorable?

Yes, it is.

Okay, thanks.

We'll now hear from Tom Clampot with Credit Suisse First Boston.

Good afternoon. To continue on Europe, your number's still look like you're up substantially even when you strip out, I think the currency on a revenue side anyway. What part of the market is up, I guess?

Well, that also includes other markets, Tom. That's the Europe, Africa, Middle East, and you know, we were up in Western Europe, but a lot of that other growth was in markets like Eastern Europe and in the Middle East.

Okay, so your commentary earlier about the European market being down is more Western Europe, I guess?

That's correct.

The LTIP stock compensation, for the full year, where do you expect that to be versus last year?

Well, we won't have any expense to speak of in 2003 unless our stock reaches a price of $28.50. If it does, and averages that for 20 days, we would have the first level of stock expense associated with the LTIP plan, and that would be about $3.5 million of pre-tax expense.

Okay. So we'll think about that a little later in the year, I guess. And the revolver utilization, the revolver availability, I'm sorry, ads of 3/31?

About $50 million.

Great, thank you.

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

Sorry if I missed it, what was the restructuring cash spend in the first quarter?

In the first quarter, the cash spend was about $6 million or $7 million.

And I was still writing down the tax stuff when you went through the balance sheet items, the inventories and receivables. Can I trouble to you run through that again?

Okay, for what period?

At the end of March, you went through how much of the build was from Challenger and so on and so fort. We'll do it offline. Thanks.

In terms of year-over-year increase, I think we said in the prepared comments that the increase year-over-year in receivables and inventory was due to exchange and due to the Challenger and Sunflower acquisitions. If you excluded those, we would have been flat year-over-year.

Terrific. Thanks.

As a final reminder if you would like to ask a question, please press the “star” key followed by the number “one”. If you have found your question answered, you can suppress press the pound sign. We follow up with Andrew Casey with Prudential Securities.

A follow-up to John E. McGinty's question where he talked about the trends so far in April for North America. Could you do the same with South America and Western Europe if possible, thanks?

South America is still going along strongly. It's up 2%, I think was the number you gave, Andy, and that's holding firm at the moment. The FINAMI or subsidy programs on retail financing are in place at the moment and we would say that will carry through to June at least. So the second quarter will have the full support of those subsidy programs in South America. And we think that 2% rise is probably about it. I don't think we'd go any higher than that. The European situation, we indicated was flat, and that's what we're seeing there at the moment. We don't see any other change in that over the next quarter.

Thank you.

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

Andy, the asset securitization, accounts receivable securitization you said was 428.8. Do you expect that to come down at the end of the year or is that as good a guess as any? What's your thought on that?

Is it should be about that level. Some of the fluctuations you're seeing are the fact that some of it's denominated in Euros, and so that's moving with the currency. But the assumption should be that it's about that level for the full year.

Okay, thanks very much.

And we'll hear from Barry Bannister with Legg Mason.

Yes, could you give us production versus retail, what you're expecting first half versus second half?

Okay, production versus retail, we were probably, produced over retail by about 5% in the first quarter, and it should be, we should probably produce under retail in the second quarter, and on the full year basis, we're looking to produce under retail by about 2% for the full year.

Would you evenly space that out and could you "X" out the Challenger effect?

I don't have all of that in front of me, but I think what you'll see is the third quarter will probably be, again, some building of inventory, and then the fourth quarter will come back down.

Okay, thanks.

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

Thank you, Sara. We're going to conclude the conference call. We appreciate your interest and attention to AGCO. We look forward to talking to you again at the end of the next quarter. Thank you very much.

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