AGCO Corp (AGCO) 2003 Q3 法說會逐字稿

Good day and welcome to today's AGCO Corporation's 2003 Third Quarter Earnings Release. Today's call is being recorded. At this time, I will turn the call over to Mr. Robert Ratliff, Chairman of the Board, President and Chief Executive Officer for AGCO Corporation. Mr. Ratliff, please go ahead sir.

Thank you. Welcome to the AGCO Third Quarter Conference Call. I have with me today Mr. 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 this content. During the course of this conference call, we will make forward-looking statement including some related to future sales and earnings. We wish to caution you that these statements are predictions and that actual event or results may different materially. We refer you to the periodic reports that we file from time to time with the SEC including the company's Form 10K 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 result for the third quarter.

Net sales for the third quarter of 2003 were $800.3 million compared to $689 million in the prior year. For the first nine months net sales were $2.5 billion, which was approximately 18% above the prior year.

Operating income for the quarter excluding restricted stock compensation expense and restructuring and other infrequent expenses was $41.4 million compared to $38.5 million in the prior period. For the first nine months operating income was $148.3 million compared to a $136.4 million in the prior year.

Diluted earnings per share excluding the stock compensation expenses and restructuring and other infrequent expenses was 24 cents for the third quarter compare to 22 cents in the prior year period. Year to date earnings per share excluding restricted stock compensation expense, restructuring, and other infrequent expenses and a cumulative effect of a change in accounting principle was 85 cents per share compare to 84 cents per share in 2002.

Although improved over 2002, our third quarter results were negatively impacted by inefficiencies and production delays and/or above France manufacturing facility due to the transition of production from our Coventry England facility. These inefficiencies offset third quarter sales improvement and currency benefits. We are focused on aggressively identifying and executing corrective actions in Bovae to fully eliminate these costs in 2004. Now I would like to turn the discussion over to Don to discuss the industry and AGCO's condition in each region.

Thank you Bob. First in North America, total industry unit retail sales of tractors during the first nine months of 2003 increased approximately 19.3% when compared with 2002. Industry sales were higher in the compact tractor, utility tractor, and high horse power segments. AGCO's unit retail sales of tractors increased in the first nine months 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 nine months of 2003 were 4.2% higher than 2002. AGCO's unit retail sales of combines in 2003 were higher than the prior year. In Western Europe, industry unit retail sales of tractors for the first nine months of 2003 were approximately 2.9% lower than 2002. AGCO's unit retail sales of tractors also decreased compared to 2002. Results were mixed with significant declines in Germany, Spain, and Italy.

Unit retail sales in Germany are 8% below the prior year with more significant decline in the high horse power sector. In South America Industry Unit retail sales of tractors and combines increased approximately 4 and 32% respectively for the first nine months of 2003 compared to 2002. AGCOs South American Unit retail sales of tractors and combines also increased in 2003 compared to 2002.

The Argentine market experienced strong increases in both tractors and combines by the largest market Brazil experienced a decline in demand in tractors but an increase in combines. Increased (inaudible) approximately 12.1% compared to the same period in 2002. Sales in Eastern Europe and Australia were higher than the prior year. In sprayers industry unit retail sales of sprayers in North America were flat in the first nine months of 2003 compared to 2002. AGCOs unit retail sales of sprayers in North America also were slightly lower in 2003 compared to 2002. Andy will now cover the financial results.

Thank you Don. Reported sales for the third quarter were 16.1% greater than 2002. Acquisitions and currency translation contributed 11% of this increase consisting of challenger sales growth over the prior year of 6.6 million, sunflower net sales of 10.8 million and favorable currency translation of 58.3 million.

Reported sales for the first none months of 2003 were 18.1% greater than 2002. Acquisitions and currency translation contributed 13.9% of this increase consisting of challenger sales growth over the prior partial year 96.3 million. Sunflower net sales are $27.5 million in positive currency translation of 166.1 million. The remaining 5.1 and 4.2% increase in net sales in the third quarter in first nine months respectively can be broken down on a regional basis as follows.

For the quarter North America up 3.1%, South America up 56.1%, Western Europe down at 6.2%, rest of the world markets including central and Eastern Europe, Asia Pacific, Africa and the middle east, no change. For the first nine months, North America down 1.3%, South America up 61.5%, Western Europe down 2.1% and the rest of the world market down 2.3%. Part sales in a quarter were 144.9 million compared to 134 million in 2002 excluding the effect of currency or sales in the quarter were 0.5% above the prior year.

In the third quarter our gross profit margins compared to 2002 decreased from 18.1% on net sales to 17.8%. Gross margins for the first nine months of 2003 were 17.9% compared to 18.5% in the prior year. Our gross margin deteriorated versus the prior year due to production inefficiency, the prior issues and start up cost associated with various manufacturing initiatives as well as negative currency impact on European export and sales mix.

The company recorded restructuring and other pre-point expenses of $27.8 million for the first nine months of 2003, which included 12.2 million in expenses related to the closure of the company's tractor manufacturing facility in Coventry England, $12.4 million in expenses related to litigation regarding the company's UK pension plans and $1.9 million on expenses related to the closure of the company's track tractor facility in DeKalb, Illinois.

Loses on sales receivables primarily under our securitization facilities, which is included in other expense net were $3.7 million for both third quarters periods ending 2003 and 2002. Year to date discount from sales receivables were $10.8 million for 2003 compared to $11.1 million in 2002.

Interest expense net for the third quarter was $15.6 million compared to $13.7 million in the prior year and $45.7 million for the first nine months compared to $42.2 millions in the prior year period. Interest expense increased due to higher debt levels in 2003 compared to 2002. The company's effective income tax rate was 42% for the third quarter compared to 32% in 2002.

The effective income tax rate was 45% for the first nine months of 2003 compared to 34% in 2002. The increase in the effective rate is due to company's not benefiting 2003 loses in the United States. Based on our current forecast, we anticipate that our tax rates for the fourth quarter would be approximately between 36 and 37%, which would reduce our full-year effective tax rate in the range of 40 to 42%.

Moving on to the balance sheet. Accounts receivables and inventory combined were $225.4 million higher in the end of September 2002. The increase include approximately $31.2 million of receivables and inventory related to the sunflower acquisition and $44 million of receivable inventory related to the consolidation of our transactual joint venture call GIMA.

The remaining increase in inventory receivables is the primarily a currency translation seasonal requirements and higher inventory levels due to production delays. Funding under our account receivables securitization program was $407.3 million at the end of 2003 compared to$388.8 million at the end of September 2002.

In North America, our dealer inventory must supply at the end of September on a trailing 12 months basis was as follows.

Approximately six months for tractors, which was lower than the prior year, eight months for combines which is also lower than the prior year. And in addition our dealer must supply hay equipment at approximately 8 months, which is higher than the prior year. Our debt to capital ratio was 48.2 % at September 30, 2003 compared to 46.4 % at September 2002.

EBITDA, excluding restructuring and other infrequent expenses are $1.6 million was $57.7 million for the third quarter 2003. EBITDA including restructuring and other infrequent expenses of $9.7 million was $52.4 million for the third quarter of 2002. For the first nine months of 2003, EBITDA excluding restructuring and other infrequent expenses of 27.8 million was 192.1 million. For the first nine months of 2002, EBITDA excluding restructuring and other infrequent expenses up $33.3 million was $165.5 million. The increase includes the elimination of $12.9 million of cash payment associated with 2002 awards earned under the long-term incentive plan program.

Unit volumes for worldwide tractor and combine production during the third quarter was (inaudible) 2002 level. During the third quarter, the company - has passed the interpretation number 46 are consolidation of variable interest entity otherwise, noted Zen-46 (ph).

As a result of the adoption of this statement, the company determined it was the primary beneficiary of one of its joint ventures GIMA or transactual manufacturing joint venture with RINO. Therefore as of July 1, 2003, the company began to consolidate the financial result of GIMA into its consolidated financial statement. The effect that consolidating the results of GIMA had no effects on the net earnings of the company. The impact of consolidating GIMA into the companies result were as follows.

An increase in net sales of $10.5 million a reclassification of engineering expenses from cost to sales of $0.9 million. An increase in account receivable of $13.5 million, an increase in inventory of $30.5 million. An increase in property plant and equipment of $28.8 million and an increase in accounts payable on infrequent expenses of $65.4 million.

For the full year of 2003, net sales were projected to increase approximately 16 to 17%. Primarily due to sunflower acquisition, sales growth and the challenger product line in the South American market and the strengthening of the Europe. Net income per share for 2003 - restructuring and other infrequent expenses is expected to be in the range of $1.17 cents (inaudible) including restructuring and other infrequent expenses net income per share is expected to range from 91 cents to $1.04 for the full year 2003. Fourth quarter income per share excluding restructuring and other infrequent expenses is expected to range from 32 cents to 45 cents. Including restructuring and other infrequent expenses fourth quarter net income per share is expected to be in the range of 30 cents to 43 cents per share.

Thank you, Andy. That concludes our comment. Operator, (inaudible) request the conference call for questions.

Thank you very much gentleman. The questions-and-answer session will be conducted electronically, if you would like to ask a question, please do so by pressing the * key followed by digit 1 on your touch-tone telephone. If you are using a speakerphone, please make sure your mute function is turned off to reach our equipment. We ask that you limit yourself initially to one question. If you have additional questions or follow-up questions, please re-queue. We will proceed in the orders they received (inaudible) and we will take the any questions (inaudible) once again * 1 to ask her question. We will pause for just a moment to allow everyone an opportunity to signal for questions.

We will take out first question from Stephen Volkmann with Morgan Stanley.

Hello, good morning.

Hello.

You had made some comments obviously about what is going on in Bovae and I think you said about something about having that being done largely behind you in 2004. I am not sure if that is a change and that we are sort of thinking this would be behind this in '03. Can you just give us a little more color on how things are going there and what the outlook is?

I think to clarify your comment was that we would have it repaired if you will so that there would be a bit of impact in the year 2004. May be that did not come across clearly but that was the statement, actually we think we will have it cured this year and therefore there will be no carrying forward of that situation.

OK, great. Is there any kind of metrics you can give us to help us get comfortable with the progress you are making there?

I am going to ask Don to cover some of that here. We have some data that might give you support.

Thank you Bob, hello Steve.

Hello.

We have made substantial progress, I think we talked at the last call the facility shuts down for substantially all of August and when we returned in September, that is when while we had put some place prior to the shut down we started to experience again additional problems primarily related to the supply days meeting the schedule of new product released is coming on in the balance of the year and so we put those things in place.

We reduced as you recall from the last call we reduced our production down into the 50 unit per day range and at that time I will give you some weekly number here, but we were in a situation in early September where we were producing roughly 300 to 350 tractors per week but we were only finished about 250 tractors per week.

So, we made substantial progress in terms of building that up and now here in October I can tell you that we are up to producing about 330 tractors per week, but we are actually finished some of those that were unfinished greater, so we are up to around 400 per week that we are actually finishing, so we are building say 350 and finished 400 or so plus so we are working down that inventory of unfinished products.

One thing that we focus on is the products that we build the right first time - coming off the line and we are making substantial progress there say an excess of double reflects the number of products coming off first time. We are in September now here in October and then as we also reported to you at the last call the number of products that were not completed right first time had a number of parts missing and if you go back to September that could have been as many as nine or ten parts missing off of those tractors whereas now a very high number of those products that are not completed are only missing one part and that is many as referred to the tractors that are not completed.

So, I consider that substantial amount of progress and also a built rate per day said that we were in the 50 to 55 and we are up to 75 a day, which was what we had forecast that we would be at this point. So, John Lee who is our site manager there and our team that we put together to really focused on this, just making substantial progress and I fought them for what they are doing and also their ability to forecast these improvements and to need those forecast.

In the September or October time frame, we had identified approximately 50 suppliers that we called problem suppliers. They were either behind and unable to meet the schedule or had some capacity restrictions. We have had per month we have a day where we have those suppliers come in, we have one in September, one in October, we made substantial progress with that group and were down to under 20.

At this point, we have also increased the team of expeditors that the Bovae operation we are currently studying the capacity of our suppliers and are already move into supplement that supply base with other suppliers were necessary and we have also increased the number of production engineers that we have on site with the more challenged suppliers to assure the product flow as is needed.

So, again substantial progress in that area and I would concur with Bob our goal is to solve these problems during the last four of 2003 such that we had a 2004 with these behind us and a good team build (inaudible) the amount of product right first time from January 2004 on. Probably more do you want to know Steve?

Our next question comes from Andrew Casey with Prudential Acuity Group.

Good morning.

Good morning,

A question on challenger if I heard Andy right it was 6. Something million incremental in the quarter, is that on plan or is that slightly behind plan and if it is behind plan, can you describe how you would change things to meet your goal, thanks?

It was for the most part on plan, I think where we missed our plan was in some of the market outside of North America. We were still in the process of finding dealers up and that progress is somewhat hard to forecast in terms of when they are ready to take product, but we were substantially on at that level that we expect it.

Thanks.

Moving on we will hear from Gary McManus, JP Morgan.

Good morning, I just can answer (inaudible) this question down, I am a bit confused with some of these numbers Millard, I thought you said in your October 3rd in a pre-announcement (inaudible) that we are going to lower Bovae production, but now you are suggesting you are doing 350 a week which seems to me more like 70 days, it is not working on weekends. So I just wondering have you now made so much progress in dealing with these issues that you are not going to reduce productions to the degree that you talked before.

Now, Gary, our production was originally scheduled for 90 plus units a day and so we have taken it down and then we took it down to that 50-55 units. In order to get things right and then you will probably also stretched out some of the new product releases. So, we did not have so many of those punched up.

Those the product releases are coming on into a wide schedule and we had always planned to take the production up as long as we were building appropriate number right first time and as long as we were blowing or completing working down the inventory and not experiencing other problems, so we had planned to get up to this 75 unit a day, that is where we are.

We really work, we have a short day on Friday, so we have four full days and then a short day on Friday and that's where we are, but we do not plan with the balance of this year to take it up to the 90 or 95 range.

OK. And just in the -- you know look at the first time yield in the October, you know pre-announcement conference call. I think Bob you were saying 70% first time right yield up. I'm wondering what that number is now and you also said that is the part shorts per number of tractor per day was like a half and now you said in your remark that it is down to one part missing, so and then hard time reconciling both of that.

Yes, that's again is different, different terminology. I think you could say right for sign is still in that 70 a day range then for that they refer to the product that were missing parts were down to well, I say, half of those or one part that is missing, so we made a substantial progress from where we were.

In terms of the actual math, I had have to go back and try and reproduce my figures from that October and November to give you a number of track you know the parts for total tractors produced for day of a week. That was kind of an average number and it's a bit of moving target as the number of tractors are produced increases per week and then as the number of missing parts come down.

I read to that in October, this is the other call we were running shortage of 15 parts per tractor, that was unblewed. If you mix that with ones that are blewed, that number changes, but at this point of the ones that are unblewed were down to one part per tractor.

For major portion of

Right first as you said earlier.

Again I can't remember how we got that half apart for tractor on the average produced but now would be may be third of a part or 25% of part or kind of give you some method of calibration.

Moving on with UBS, Blue Scott

It's actually Dave Bleustin. Can you tell me for an update on Voltra (ph) on the potential financing?

Well, we of course signed the agreement and then the next piece of that is to proceed with obtaining the regulatory approvals in the EU in Brazil and so forth and we have files and that process is ongoing prior to financial side of the situation end year results let you develop that one.

We are progressing with our plans in terms of working with our banks and other investment bankers. We have met with the reading agencies and are now awaiting some feedback from them in terms of finalizing our financing plan, which again is a set before would be a mixture of this and equity, and with attempting to maintain our credit ratios and criteria, so, but we, until we get some more feedback from the rating agencies I don't think we are in position to give anymore specific detail at this time.

Thanks, the follow-up question with Bovae issues likely added away by 2004. Can you give us some sense for what you believe next year's restructuring and or other non-recurring issues are going to be?

At this point in time I am not aware of any restructuring costs that we have next year.

Well, we would have any on the current business, but we got follow-up for the next year there would be some and we have already indicated earlier that would be a very small amount. I don't know what number was, but it's less than $4 million.

OK, terrific. Thanks a lot.

Moving on, we will hear from John Enridge Collier (ph) Capital.

Thanks, the FIN 46 disclosure I thought would make great progress on receivables and its even a little better. I think when we take (inaudible). We stated historicals right.

That's correct.

Inventories not as good as we know also not as bad as it works when you take this into effect. We had extra $30 million from FIN 46?

That's correct.

With that said - FIN 46 did not impact the cash flow statements. Is that correct?

The only impact that has is that there is slightly more operating term probably $2 or $3 million and 2 or $3 million as additional capital expenditures.

OK.

The only difference.

In the October third call we talked about being (inaudible) be in this quarter, but the bulk of it achieving a year target in the fourth quarter. That didn't happen in this quarter. I do notice that the problem you concern about $18 million just paying down payables and expenses, which I guess you might be able does not do in some big cash flow for the quarter. Could you please reconcile for me that the guidance from early in October we are going to be cash flow positive or little bit this quarter that we (inaudible).

Well, I think you are right, the numbers I have are that we for the third quarter -- did not have positive cash flow for the quarter and in terms of where we thought we would be we are pretty close with exception of little lower than the as you said in terms of payables and some inventory levels we though we have a little lower -- making some progress probably in terms of cash flow so far this month and is measured as reduction in our depth levels. We generated about $30 million in cash so far this month.

OK, great. And two quick follow-ups, as you noticed a little higher than -- expected with higher (inaudible) with just poor predictor of that trends?

No, it was in line with what we expected as it complicating aspect as for an exchange probably and as the Euro strengthen that increases versus (inaudible) and so for the third quarter exchange impact on expenses was about $5 million.

Great. Lastly, can you just clarify the foreign force that come out in the last couple of days big capital and frank (inaudible) those issuance's of options for your performance or with those purchases -with those assurances of options for there performance all with those disclosures?

Oh I am sitting here and wondering (inaudible), we have just employed two new Senior Vice President to the management team, Frank Lucas is the Senior Vice President of manufacturing and we took an other task at this time and separated material management, purchasing, logistics out of responsibility of manufacturing in place and individual in-charge of that on an equal level, his name is David Capline and he is the Senior Vice President of material management. The both of gentleman are on board and we think that will strengthen that part of our management team. In doing this they become eligible for LTIP that is the Long Term Incentive Plan program and they would just been registered on for their grants of the LTIP program they haven't earned them, yet is merely establishing the base number for their point forward and lets say earned them that they will be only as a results of improvement in the stock price so the (inaudible) is to stock appreciation.

And Joanna Shatney with Goldman Sachs, please go ahead.

Good morning and your company's (inaudible) reconsolidated numbers, rest of world numbers -- in South America we just found. Did my expectation, I am not quite sure, where I was of -- on Asia Pacific I guess you back on everything you said - rest of world was kind of flat, how does that reconcile with the basic 50% of greater increase every year with rest of our sales?

For the rest of the world sales were -- for that quarter was flat, but in terms of Asian Pacific they are pretty significantly of about 30% for the quarter though the balancing is that we did see some fairly significant declines in some of the middle eastern markets and in the third quarter.

And in South America -- just this kind of the same question it is was there any timing issue here that -- a huge increase and I know you had a good increase in the second quarter 02 of about 50% that this number -- is kind of the charges is there anything one time in there -- just the industry coming back?

It is not anything unusual like that, it is the return of the origin market quiet rapid improvement and dramatic improvement in the combined business as well.

And now with Bear Stearns, Scott Graham.

Good morning, a couple of questions, the US business was once again not profitable and the European margins look like they were essentially slight and have to score. So all the sales you know look good you know some of the operating issues in Europe bit also just you know it looks like structural issues in the US are getting in the way of you know bringing that down to the bottom, can you talk about what the plans are to make the US business sustainably profitable and may be stand some of the margins decline in Europe?

Well on the North American market first of all sustainably profitable something that we do have a plan to achieve about one of the burdens that we carry for some time is for that load a or a heavy part of that load for the rest of the world and that has impacted on net income in North America, but obviously our market share in North America is considerably less than it is through out the rest of the world and we have been aggressively seeking the addition of new distribution we are introducing new products and have this year and tractors and combined. We certainly think that the real measurable success that will occur in North America is the challenge of business. And as such we have a pretty good a pre pound (ph) attack at growing our participation and our profitability in North America.

I would say that we also encounter much higher cause in doing business in the North America then we do any business in the world because of fore planning and so forth so making profit that makes more difficult and at the same time the aggressive of our two major competitors and their discounting practices make it extremely difficult to gain very much in the way of margin through pricing action, which should be taking place as the industry strengthens.

As far as Europe is concerned the margins were severely impacted as we pointed out for the inefficiencies in our Bovae factory and the significant decline in our major market of Germany, as we indicated to you that industry was down about 8% most recently and even worse than just being offers in industry number as more severely impacted high hoarse per tractors.

Now, this is our most significant market of Europe where we sell the Fen tractors (ph), which also generates the highest margin contribution to the company, with market down that is our strong impact in negative impact of the company and the inefficiencies at Bovae are served to destroy a lot of the margins that we normally achieve in our Massey Ferguson products and UBS as well.

So, those two factors have been the major cause, as we look forward to 2004 we think the inefficiencies as we already indicated will be eliminated. And to the market in Germany and Spain and some of the other areas that were devastated by the draught of this year we cannot protect the weather, but we do anticipate that those markets will come back with not from the second half of next year, I don't look for the final income that be an adequate level in the early point of 2004 to have a stimulating recovery just because the anticipate good weather.

On the manufacturing, thank you for that -- that was a good answer thanks Bob on the new products casual that being pushed back in Bovae, you know obviously, some of these new products were a primary cause for these supplier issues, so I am wondering may be this question more for Don what steps were taking now to insure that new products have delighted to next year till have the same problems as they did this year.

Well as we said earlier what we have done is we have stretched out the new product relations and that there is an offer launched so we are introducing only one new product in a week and we have the eighth week sort of shake down improves if you well on times to deal with the issues that are identified as we release that product work backward to suppliers, our engineers to get the adjustments in the parts in the components before we are actually running down the line.

Additionally we have taken, what we call our P2, which is a final bill before we actually introduce it into the assembly line with building off of assembly parts and we have moved that P2 off to a separate line. I feel that its not going down the full line, which allows us to run that a little slower and not impact the bills of ongoing products and that written process of doing that right now and that's also eliminated some of the congestion on the line.

So, while it has had some impact in our sales here in the fourth quarter by not having those new products, we feel that the new schedule will give a much more controlled environment. It is already demonstrating that for us and then we will with more time we release throughout 2004, we will start to make that some of the loss sales here in the fourth quarter.

Proceeding onto the next question, John McGinty with Credit Suisse First Boston.

Good morning. Question and clarification, in fact the question is the guidance on the 3rd of October was 17 to 22 cents or mid point of that 20 cents and at that point that the shortfall was said to be about equally between the impact of the drought and the impact of the production difficulties.

You come in four cents better than expected three weeks later obviously something was a lot better than you have thought that it was going to be or you are just being out of conservative. I guess the question was that the production difficulties cost you with the drought was left, what cause the difference between three weeks ago and which side of the house was it on?

John, now there was not any change in the outcome of production or sales in Western Europe, you know, we had that information at that point in time, I would tell you that what came in a little better than we had expected were things like finance, company and some operating expenses were slightly lower than we had anticipated and then just the overall mixed sales and the margins were little better than we thought. We just offer few things here and there and nothing too specific.

So that is why you did not change the full year guidance even though you are at least portions, but at this point.

That's correct.

And then, if I could just follow-up back to join Anna's question of the fact that retail sales in South America according to Don's totals are up 4 and 32% between tractors and combines. Your sales as reported are up to 75% South America and (inaudible) as currency acquires acquisition are up 56%. Is that strictly apples, in other words, to what extent if any are the higher levee South American sales benefiting from stuff to transferred from Coventry down to Brazil or is in fact is dealing that much market share, that you can that much out perform the retail sales figures down there.

Well, I think it's not that there is apples and oranges, I believe that the some of the differences this substantial price increase that have occurred down in South America this year as a result of higher inflation and so that these to be factored out. Other than that we have gained some market share and the percentages. I think on a dollar basis or different than on a unit basis primarily because of the numbers were so small in Argentina last year until it's very hard to (inaudible) those percentages accurately between dollars and unit.

John, another point and that is the business that we moved down there from carpentry, if that is exported to one of the other regions where the sales end up in the region where it is exported to, so the fact we gets no credit for that except for the overhead absorption which could improve our cost base in our margin.

Barry Bannister with Legg Mason, go ahead sir.

Yes, good morning, I just had a question about US business in a two part sent. One Challenger was supposed to be around 210 to 220 on the prior guidance in U.S. and this year sales with a slight profit and I wanted if you could update us on that and then the second part of the question is, Bob you in the very first executive in the farm equipment industry, back in 98 to warn us about the downturn which ended up being down 50% and some high volts power categories. So what I am wondering is if your product name plated is around third or fourth on market share, then, if you were the first to feel the downturn, would you be the last to feel the upturn in '04?

First question.

I will answer for the question. In terms of the Challenger, our related backlog is somewhere slightly above $200 million or the full year, Challenger net sale with the majority of the decline from what we have previously set being in market up side of North America in terms of timing and sign outs of dealers and lower combined sales and we had originally anticipated in North America. From income standpoint, we now expect to be, let's say slightly unprofitable, but substantially improved over the last year.

For the second part, I think we were started reporting even last year that we were on the upside of the trough and these were because of indications we had not only in the general economy or the agricultural economy, but what we were seeing in the market place, our dealers today are continuing to report to us much better retail activity here in North America than they had in a number of years.

They are very, very pleased. Nevertheless, I do not know whether we would feel it first, last or second, but we know it is happening, it is not as robust of course in the high volts power or the mid range as it is in compact and we must be very careful to carve out the size of the compact business, because that's not in our business, that's not a major entity for us nor is that a major profit contributor in anybody's business.

But for that matter, we look at the medium and heavy and high volts power that we see, the trend is up, that positive, but certainly I think there is something else to be considered when you recognize that the downturn initiated in 1998. Here we are five years later, the business has also changed in that period.

We now have even more corporate firms, dealer smaller firms and this is trending towards dealer equipment, dealer piece of equipment but with higher horse power, so you really cannot just look at the units for units, year to year. You got to anticipate the trends that are recurring in agriculture. So, whatever that helps you with that questions I am glad to listen with new products.

We will take our next question from Jeffery's and Companies. Joseph Von Meister

Hello, I am wondering whether you could extend your guidance on the earnings while into the EBITDA was, for the full year 2003.

Sir for EBITDA, we are expecting, this would be excluding of restructuring.

Right

Expenses somewhere in the range of $260-270 million.

And 2003 were for.

We are not given and guidance on that yet.

And how about a breakdown in your current debt position. You revolved borrowings at quarter end.

At quarter end our revolver was at $277 million.

Yes, I got pretty close to that, and availability on the credit facility.

That will be about 75 million.

75 million on incumbent.

That's correct. Give or take a few million for some letters of credit that we have, and it is said that our debt is at revolved balance is now down to 240 range right now.

Now you know given the fact that you have had to consolidate the sanity under change or the telling requirements, where do you see your working capital trending perhaps you know on a day's out basis or even on a, you know, on an aggregate basis percentage of revenues.

I do not know what would be the easiest way for you to give that, but certainly you know since you are making acquisitions a dollar basis applies you know over the long run, it doesn't really apply, so I am really more interested in where you would like to see your AR days out and you inventory days out, you know going forward.

From an impacted (inaudible) they have about $40 million of receivables and inventories. I believe that fairly consistent with what they run. It does not have any other impact to our cash flow and that we have always been through pain for the component then funding that operation anyway so that there should be the additional working capital funding requirement just because we had to consolidate them for accounting purposes in terms of metric to give you.

I do not have one specifically to say, except for that from my cash flow basis our objective was to reduce receivables and inventory by the end of the year and we are still targeting to do that in generating cash from that standpoint and as we go forward we will be looking at ways and strategies to continue to reduce our receivables and inventories in our business. I do not have anything specific to apply for you today.

As we continue with our questions, we will hear from Bob Rhytus (ph), Bear Stearns.

Yes, I just have a quick question. I am looking at the analysts (inaudible) for next year and they were not finished with this year and they have grown 6% on the top line and that about 75 next year and I am going to ask you to reaffirm or say that will you guy (inaudible) to what I am (inaudible) about is, do you see business picking up to that kind of level just top line because of the things that you no one because of the macro factors or, I am just curious?

Of the sales line probably, did you say 15%? I think its 6% probably reasonably worldwide, but the things that we have going on strategically and not including the execution of Vault.

OK, and do you see the farm in economy improving so that we could see a pick up world wide or do you see a, are you optimistic about that for next year?

Yes, I am optimistic, particularly here in North America, I think this market is going to heat up. We now farmers beginning to receive the subsidies even from the 2002 subsidy required, and they are not getting the cash, they are getting this year, there are a lot of sign up problems so forth, but that's starting the flow through at this point. So we think that's going to continue in the next year, none of us still wants that where this going be, but from early prices of how reasonably well interest rates has still low, they are probably going to pick up through out 2004, but that may also be stimulus for farmer as to acquire the equipment they need before the race gets to hard.

We do have a follow up question Gary McManus of JP Morgan.

Hey Chris, come to things. You may look at the cash or working capital was the use of about more $200 million year to date. I was just wondering what kind of cash you would expect from working capital into the source from the fourth quarter, to what degree it was all the indexation (Ph) fees that's full day. Normally I think working capital have source (inaudible) fourth quarter any way. Can you give some sense on what that would be in the fourth quarter?

I guess you are very much be looking to reduce our receivables and inventories by about $160 million-$170 million in the fourth quarter. Majority that comes out of inventories, as we are, our production level are lower and what happens from our retail sale through standpoint and so we do already for the generate cash.

We also have the extra inventory or higher inventory that we should in above 8 plans, with this unfinished tractors and our objective is to get a number of unfinished tractors down to very low level by the end of the year, which should reduce inventory as well.

So that $160 million-$170 million excludes the Bob-Ware (Ph) or that like a know our number and obviously I think payables will be going down in the fourth quarter as well. Some of you forget the net number for working capital?

Now that inventory number all-inclusive. From our payable standpoint, we are actually anticipate that there might be going up slightly in the fourth quarter and accrued expanses which they really flat in the fourth quarter.

And I just want to ask thing on a - of about questions on South America with the strong performance there, I mean what do you see in terms of sustainability of that market, obviously is driven of financing and so forth mean. What would be your kind general stance over next 12 months in terms of industry condition and ability to hold this kind of profits there?

We have indication that even though Phenomenon is being reduced and its impact is being down and somewhat of an orderly manner and that curtail continued growth of the Brazilian market. It may even decline slightly. We haven't come out with those service numbers yet for 2004, but it is something to be considered.

The most booming factor of South America is Argentina and this is where huge growth is coming in that total continent. So, we expect that to continue. We don't see any change in that, that's in dollars and it's meeting an overwhelming kind of demand. So we think that will continue. So, I guess that kind of covers it until we come out with the forecast for Brazil for 2004.

OK, thank you.

We have another follow-up question from John McGinty with Credit Suisse First Boston.

Just one the follow-up. Andy on various questions. If you look at that the profitability in South America received its spaces. We have only, I think for the last 6 years that you have been providing it timely, but typically the first quarter profit is added about where you have been and your third quarter was like a - unbelievable impress of $18.8 million. Embedded in the full year guidance that you are giving us, do you have the fourth quarter in line with the third or does it fall off from that 18.8?

Our expectation that is the decline slightly and fourth quarter that is not substantially. Sales declined from the third quarter still substantially higher than the last year.

OK, if you take a mid point of you are talking about $50 million, I mean more than $50 million, which is almost twice that you have ever earned here. I just ask Gary's question in a different way. Is that level of profitability even phoneme Brazil brings down, if we get Argentina back or what ever the issues currency prices not withstanding is that $50 million a sustainable level in 2004 going forward or in your opinion it is nothing unusual or non-recurring in there?

I think it is pretty steady John.

It gives so much higher than anything in the past Bob as -- I must think it is the reason it is almost twice, you know 30 million the year before and 22 million the year before that and over 50. It is heck of an increase and so you are saying you had a new sustainable level profitability level there?

That's why we moved the plant down there. We have increased that facility as the largest track facility we have got in the world.

Could you say the all the (inaudible) has begun and not really as there is some increase in overhead absorption. I think that that is $20 million?

No. But it earned saying that we have really made that plant quite profitable and we are now getting the volume and if we can sustain that volume level this year we would expect the same kind again, the same kind of performance next year. Not gain but performance. So is it sustainable if the volume stays there? Yes it is.

And we will take our final question from Scott Graham with Bear Stearns.

Yes, I have a couple of follow-ups. Andy it sounds me like free cash flow of $40 to $50 million, which is in the previous guidances no longer guidance?

I target still about $40 million. I think what we have set our projection levels in order to get that number of that amount with capital expenditures of about 65 to $70 million and operating cash flow of about over and about $100 million and so what we had an operating cash flow of about well over a 100 million and so what we have to do is achieve our retail sales forecast for the balance of the year to achieve that and get the inventory levels down in Bovae (inaudible) will determine what our cash is for the full year, cash flow for the full year, but our target is still somewhere close to that $40 million range, that's the number we are going for.

There is some deferred tax reversal or something in there because even that your 160 to 170 of working capital cash, I am not getting my model.

Now there is no reversal or anything like that from - no we don't. I think you know what we said is fairly consistent that we would expect payables and accruals to go down via -- use of cash because of the closure of Coventry in production level of somewhere between 50 to $60 million and an offset with reductions and receivables in inventories and other items offsetting that -- to arrive at those cash flow numbers that we have been talking about.

OK.

Operator we will take one more question.

And if anybody does have a follow-up question or a first question *1 to ask. One moment we will see if anybody else would like to signal. At this time I show nobody have signals for that final questions. So I will turn you back to Mr. Ratliff for any concluding remarks.

Thank you very much and thanks to all of you for participating in our conference call. As always please do not hesitate to give, Andy or Don, or I R call, or Moley, as there is anything we can do to provide you with more clarifications to the information we have shared with you this morning. Thank you very much. Bye-bye.

That does conclude today's AGCO conference call. We thank you very much for your participation and have a good day. At this time, we ask you to please disconnect.