AGCO Corp (AGCO) 2003 Q4 法說會逐字稿

Good day, everyone. Welcome to AGCO Corporation fourth quarter and full year earnings conference call. 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 fourth quarter conference call. I have with me today Don Millard, Executive Vice President and Chief Operating Officer, Andy Beck, our Senior Vice President and Chief Financial Officer, and Molly Dye, our Vice President of Corporate Relations. I would like to begin the call with the following statement regarding its contents.

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 results or results may differ materially.

We refer you to the periodic reports 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 website for the next 12 months. With that, I would now like to summarize our financial results for fourth quarter and the full year.

Net sales for the fourth quarter of 2003 were 1 billion 35.1 million, compared to 839.9 million in the prior year. For the full year, net sales were 3.5 billion, which was approximately 20% above the prior year.

Operating income for the quarter, excluding restricted stock compensation expense and restructuring and other infrequent expenses, was 63.4 million compared to 54.4 million in the prior period. For the full year, operating income was 211.7 million compared to 190.8 million in the prior year.

Diluted earnings per share, excluding restricted stock compensation expense and restructuring and other infrequent expenses, was 40 cents for the fourth quarter, compared to 34 cents in the prior year period.

Full year earnings per share in 2003, excluding restricted stock compensation expense, restructuring and other infrequent expenses, a non-cash deferred tax adjustment, and accumulative affect of a change in accounting principle, was $1.25 per share, compared to $1.17 per share in 2002.

Although improved over 2002, our 2003 results were negatively impacted by production issues related to our plant rationalization efforts, as well as poor market conditions in key European markets due to the drought conditions experienced during the course of the year. These negative factors were offset by improved market conditions in North America and South America, and namely, in the Argentina market.

As previously reported on January 5, 2004, we completed the acquisition of the Valtra operations from Kone Corporation, a Finnish company. Valtra is the market leader for tractors in the nordic region of Europe, and also has significant presence in the Latin American tractor market. Valtra also produces off-road diesel engines sold under the Sisu Diesel brand.

We are pleased to add Valtra and Sisu Diesel to the AGCO group of brands, and the companies have started the process of integrating Valtra in our operating plans and strategies, as well as identifying opportunities to exchange technology and leverage are combined distribution.

Now I'd like to turn the discussion over to Andy Beck to discuss financial results.

Thank you, Bob. Reported sales for the fourth quarter were 23.2%, greater than 2002.

Acquisitions and currency translation contributed 13.7% of this increase, consisting of a decrease in Challenger sales over the prior year of 1.8 million, Sunflower sales growth of 6.5 million, and favorable currency translation of 110.4 million. In addition the consolidation of [GIMA], the joint-venture in France, contributed 1.7% or 14.4 million to the increase in sales over the prior year.

Reported sales for the full year of 2003 were 19.6% greater than 2002. Acquisitions in currency translation contributed 14% of this increase, consisting of Challenger sales growth of the partial prior year or 97.9 million, Sunflower sales growth over the partial year of 34 million, and positive currency translation of $276 million. In addition, the consolidation of GIMA contributed .9%, or 24.9 million, to the increase of sales over the prior year.

The remaining 7.8% and 4.7% increase in net sales in the fourth quarter and full year respectively, can be broken down on a regional basis as follows: for the quarter, North America, up 17.4%; South America, up 39.4%; Western Europe, down 1.3%; rest of the world markets, including Central and Eastern Europe, Asian Pacific, Africa, and the Middle East, up 8.2%. For the full year, North America up 3.6%, South America up 55.7%, Western Europe down 2.7%, and the rest of the world markets up .4%.

Part sales in the quarter were 136.1 million compared to 126.1 million in 2002. Excluding the effect of currency translation, part sales in the quarter were 1.1% lower than the prior year period. Part sales for the full year 2003 were $542.5 million, compared to 494.9 million in 2002. Excluding the effect of currency translation, part sales in the full year 2003 were .7% higher than the prior year period.

In the fourth quarter our gross profit margin decreased from 17.5% of net sales in 2002 to 17% in 2003. Gross margins for the full year 2003 were 17.6%, compared to 18.2% in the prior year.

Our gross margins deteriorated versus the prior year due to higher manufacturing costs due to production inefficiencies, unfavorable sales mix, and negative currency impacts on products manufactured in Europe and South America and sold in other markets.

The company reported restructuring and frequent expenses of $27.6 million for full year 2003, which included $12 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 U.K. pension plan, and 2.5 million in expenses related to the closure of the company's tractor facility in DeKalb, Illinois.

Losses on sales receivables primarily under our securitization facilities, which is included in other expense net, were 3.8 million for the fourth quarter, compared to 3.7 million last year. 2003 full year losses on sales to receivables for 2003 were 14.6 million, compared to 14.8 million in 2002.

Interest expense net for the fourth quarter was 14.3 million, compared to 15.2 million in the prior year, and 60 million for full year 2003 compared to 57.4 million in the prior year period. Interest expense increase due to higher debt levels in 2003 compared to 2002.

The company's effective income tax rate was 38% for the fourth quarter of 2003, and 42% for the full year of 2003. Increase in our effective tax rate from prior years is due to the company not benefitting 2003 losses in the United States.

In the fourth quarter of 2002, we recognized a non-cash income tax charge of 91 million, related to increasing the valuation allowance for certain U.S. deferred tax assets. And during 2003, we continued to take the position that we should not benefit further losses in the U.S.

Moving on to the balance sheet accounts receivable in inventory combined were $151.2 million higher than at the end of December 2002. The increase includes approximately 43.3 million of receivables in inventory related to the consolidation of our transaxial joint-venture called [GIMA]. The remaining increase in inventory receivables was due primarily to currency translation and higher inventory levels, primarily in South America.

Funding under accounts receivable securitization programs was 448.4 million at the end of December 2003, compared to 423.9 million at the end of December 2002, with the increase primarily relating to foreign exchange translation.

In North America, our dealer inventory month supply at the end of December on a trailing 12 month basis was as follows: approximately 6.5 months for tractors, which is level with the prior year, 7 months for combines, which is lower than the prior year, and dealer month supply of hay equipment was approximately 9 months, which is higher than the prior year.

Our debt to capital ratio was 44.2% at the end of December 2003, compared to 47% December 31, 2002. EBITDA, excluding restructuring and other infrequent expenses, was 86 million for the fourth quarter of 2003. EBITDA excluding restructuring and other infrequent expenses of 9.4 million, was 59.8 million for the fourth quarter of 2002.

For the full year of 2003, EBITDA, excluding restructuring and other infrequent expenses of 27.6 million, was $278 million. For the full year of '02, EBITDA, excluding restructuring and other infrequent expenses of 42.7 million, was 225.3 million.

The increase includes the elimination of 19.5 million of cash payments associated with 2002 awards earned under the company's long-term incentive plan program.

Unit volumes for world-wide tractor and combine production during the fourth quarter were approximately 1% higher than 2002 levels. On a full year basis, unit production was 3% lower than the prior year.

As previously reported, during the third quarter of 2003 the company adopted [FASB] interpretation Number 46, consolidation of variable interest entities, or [Fin] 46.

As a result of the adoption of this statement, the company determined it was the primary beneficiary of one of it's joint-ventures, [GIMA], our transaxial manufacturing joint-venture with Renault. Therefore, as of July 1, 2003, the company began to consolidate the financial results of [GIMA] into its consolidated financial statement. The effect of consolidating the effects of [GIMA] had no effect on the net earnings of the company.

The impact on consolidating [GIMA] into the company's results for the second half of the year are as follows: an increase in net sales of 24.9 million; a reclassification of engineering expenses from cost of sales of 2.4 million; an increase in accounts receivable of 14.9 million; an increase in inventory of 28.4 million; an increase in equipment of 35.4 million, and an increase in accounts payable and accrued expenses of 74.2 million.

Turning now to our outlook for 2004, we expect to increase adjusted earnings per share by 20-30% in 2004. This growth is expected to be achieved from the impact of new products, cost reduction initiatives, and the elimination of production inefficiencies experienced in 2003.

Reported earnings per share are expected to grow by 50-60% during 2004, due to the reduction and restructuring and other infrequent expenses related to plant closures that were incurred in 2003.

For 2004, the addition of Valtra is expected to be dilutive only after the impact of non-cash amortization of purchased intangibles. AGCO also expects to generate free cash flow, defined as operating cash flow less capital expenditures, of 75-100 million in 2004. Capital expenditures are expected to be 90-100 million during 2004.

For the first quarter of 2004, AGCO's earnings per share is expected to be negatively impacted, relative to 2003, by the addition of Valtra's seasonally low results, and one-time costs related to the acquisition and debt refinancing.

As a result, AGCO's first quarter adjusted earnings per share is expected to be between 10 and 15 cents per share. Reported earnings per share is also expected to be between 10 and 15 cents per share. Bob?

As I'm sure you saw in our press release, we recently received an informal inquiry from the SEC. We had not had any prior communications with the SEC on these matters, and did not expect to receive the letter of inquiry. We described in the press release the information requested by the SEC. We have responded to the SEC inquiry, and are now waiting their response. Our audit committee is aware of the letter from the SEC, and our response.

We are hopeful that the SEC inquiry will be wrapped up shortly, and in the meantime we will be cooperating fully with them. That concludes our comments, Laurie. If you'll open up the conference call for questions, I'd appreciate it.

[Operator instructions] Our first question today will come from Greg McManus with JP Morgan.

Gary McManus, JP Morgan. In your outlook for both the first quarter in '04, can you tell me what assumptions you're making in terms of stock issuance dilution from the Valtra deal, and improved efficiencies at Beauvais?

In terms of the -- we did assume in our outlook that we would issue approximately $250 million of equity in the near term. We assume that Valtra's earnings would be slightly dilutive, but to the extent that we have amortize some of the purchased intangibles relating to the acquisition.

In other words, instead of having all goodwill, some of the intangible assets are specifically identified, and we will be amortizing those over their estimated life. That amount of amortization should be in the $13-15 million range on an annual basis, so that non-cash expense is what we are estimating to cause Valtra to be dilutive by some portion of that expense.

In terms of the outlook from our cost reduction, we do expect to recover all and even more of the cost reduction -- the cost inefficiencies that we experienced in 2003. Our estimate is that for 2003, we add a penalty in terms of higher costs from our Randers facility as well as Beauvais facility of about $20 million, and we would expect that we would see an improvement of somewhere between $20-25 million in 2004 from recovery of those situations.

Most of that improvement is in the Beauvais facility. We are expecting to see some improvement in Randers, but not really recovering the full extent of what we were down in 2003, and that is because our production volume is expected to be lower and we are still building out some of the final units from our OEM joint-venture arrangement, and those are produced at fairly low productivity levels. And so that still will effect us in 2004.

Just as a follow-up. On the first quarter guidance, you talk about Valtra being seasonally weak in the first quarter. Can you talk about what dilutive impacts you expect in the first quarter from Valtra? And also, you talk about one-time costs related to acquisition and debt financing; can you quantify what that is?

The one-time costs should be somewhere in the $3-4 million range, and that primarily relates to debt refinancing costs, where we had to write off the final portion of some unamortized debt costs that were still on the books relating to previous debt issuances.

The Valtra -- the remaining dilution that we are speaking of relates to Valtra, and that the business without Valtra should be relatively flat, from an earnings per share basis to 2003.

Okay. Just one last thing. The 3-4 million, you say, is that pretax or after tax?

Pretax.

Pretax. Okay. Thanks.

With Bear Stearns, we'll now hear from Scott Graham.

Good afternoon. I was hoping that you'd be able to shed some light on the SEC informal inquiry a little bit more than you have. Specifically, can you tell us the elements of the inquiry relative to each of the components that they're talking about? What exactly are they questioning and what were your responses?

Well, we did tell you what the areas were in the press release. They asked actually four questions, but they focused around revenue recognition, which relates to the will-call situation where we bill it and hold it for a limited period.

There was an inquiry as to our policies on sales returns and allowances, and we provided those policies. The personal use of the corporate aircraft was a question, about what policy does the company have on that. We have provided them with the policy and with the usage of it in those instances.

And the last item was our procedures for accounting for plant and facility closing costs and the reserves associated therewith. We have provided them with the answers to this last Friday I believe, and that will be followed up with a discussion with them next week.

I understand that's what was in the press release. I appreciate that, but what I'm asking is specifically, did the SEC ask you specifics about these accounts in any particular quarter or any particular year, or was it more of a loose-ended, open-ended type of question, what are your policies and you responded in kind with those policies.

We responded to their request, which was for policies and procedures that were in use for the periods of 2002 and 2003.

Okay. My follow-up question is on the U.S. business, actually, let's define it as North America, there was another operating loss recorded there. And a quarter ago when I asked this question, you indicated that you just needed to get to a certain volume level for that business to turn profitable, and it does appear that you're assuming that business to be profitable in 2004.

But with the very strong U.S. sales growth, or North American sales growth, I would have expected a much better result on the profit line for this business. And I'll ask you again, as I did last quarter, is there something structurally that you guys need to consider here to make this business much more profitable, pull it out of a loss position over the let's say the intermediate to long-term.

Is there something that you need to do in the next six months to pave the way for a better next couple of years?

Well, let me answer the first question in terms of the financial information. The one thing that you have to keep in mind when you're looking at North America is majority. All of the tractor volume that we are selling into the U.S. market is coming from Europe.

And due to the strong increases in the euro relative to the dollar, that is deteriorating our margins on those products. And the way we are showing our information, that reduction -- the increase in cost and the reduction in margin is reflected in the North America results.

So that has been a major impact, particularly in the fourth quarter as the euro did strengthen quite heavily and we started selling units in the fourth quarter that really carried higher exchange rate costs associated with the unit shift out of Europe.

I'll turn it over to Bob to answer the second part of the question.

Well, Andy, you might cover the debt load that we carry in North America.

That's below operating income.

Well, basically I think the big factors are there with the tractors. We still have a ways to go in gaining the kind of share in North America that we'd like to have. And there's no fundamental problem, other than what Andy has referred to, that we can change quickly to alter those results, but we're getting very close. We improved quite a bit over the prior year.

Our next question will come from JoAnna Shatney with Goldman Sachs.

What?

Hi. Could you guys --

Can't hear you. Laurie, are you there?

And her line just disconnected. We'll move to our next question with John McGinty with Credit Suisse First Boston.

Good afternoon. Just a clarification. I wasn't sure, the tax rate in '04, which one are you assuming or what are you assuming for that?

Somewhere between 36-37%.

Okay. And can I just ask you, Bob, to just kind of maybe put a little more meat around the outlook for the markets?

In other words, down slightly or higher? Can you put a little more quantification? And then specifically, I don't think you forecast -- and maybe I just missed it here --but the sales gain that AGCO is looking for, and could you kind of give us the composites of that? In other words, production relative to retail, addition from Valtra, addition to Challenger? But could you just kind of flesh out -- you're pretty specific on the earnings forecast --can you kind of build the sales forecast up for us?

Well, as our information on Valtra has already shown, it's almost $1 billion of sales revenue in U.S. currency for the year 2003. So we should be looking at similar amounts coming into 2004.

Okay.

The other components that you're just looking at, our expectations on sales. We do believe that there will be some translation for benefit in terms of sales levels if the euro is maintained at this current level. That should be somewhere about $120-130 million.

We also would expect to see increases in Challenger sales over there. They have about 200 million in sales this year. We are expecting an increase of 20-25% on those sales. And then the balance of our increase is about 3-4%, and that includes pricing as well.

Would pricing be 1 or 2% of that?

Probably about 2%.

And would you be producing at retail?

Yes.

Okay. And then the follow-up would just be, could you talk about the 20-25 million increment from the absence of the Beauvais is somewhat lower than I thought wha you had been talking about before.

At one point, you wer up to the swing being 30-35. Is that because the other facility, the [Brammer] facility is still problematic?

That's partly it, yes. And we are not to our full year target savings as it relates to the Coventry closure. Most of that savings was to be achieved as it relates to the benefits getting from the Beauvais facility.

We still think that on a full year run rate that we can be more improved than we expect to show in 2004, so there's still benefit there. We are doing much better in Beauvais, but we're trying to be realistic about the amount of improvement we can see from month-to-month.

Secondly, there was also benefits to be achieved in other markets, specifically our production in South America and our business -- our kit business -- that we're moving from Coventry into South America. And the benefits there we have not achieved at this point.

It's not as much due to how we are executing our plan, but due primarily to offsets of currency and inflationary costs that's now being reflected in the currency of Brazilian real, and so we're seeing some higher costs coming out of that on any export product.

We now will move back to JoAnna Shatney with Goldman Sachs.

Sorry about that. Can you just talk about what the expectations are for Valtra in your outlook? What kind of revenue growth you're assuming, and what kind of operating margin assumptions you're making? And also, were there any synergies or cost savings or what do you have in there for incremental benefits from you guys inquiring them in '04?

As Bob pointed out, our expectation for revenues is slightly above $1 billion, and from an operating margin standpoint, we expect operating margins before the amortization of the purchased intangibles to be somewhere in the 6.5% range going forward.

In terms of synergies, we do not have a very significant amount of synergies expected in 2004, and that is not included in our assumptions.

Are there synergies that you are trying to highlight as you guys have a little bit more time to look in at the company? Are there benefits that you can see, and how long will it take to get them?

As you know, JoAnna , when we do an acquisition we make an assessment of what synergies could be, and we have done that in this case as well.

Now that we own the business, we are going back and defining those precisely, and really creating projects one at a time that we can implement. The point that is different with these synergies versus prior acquisitions of other companies is this isn't a situation where we have to close places in any big numbers, or look for rationalization like we have in say AgCam or things of that nature.

This is really synergies that come about as a result of the contributions that we can receive from Valtra within the AGCO company. And those items generally will require product engineering, and that will require some time. So we're having to space the timing on these synergies into a two and three-year time frame.

There will be some the first year, but they are kind of a the low-hanging fruit. It will be easy, like merging your parts businesses and things like that. But the long-term, or second and third year, is when more synergies will come on.

We've identified at this point approximately 25 million in synergies, and we think that that can be achieved during that long-term period. As we go forward, we're going to define even more synergies, but we're not willing to reveal that number yet.

Okay. And can you guys just give us what the number of shares is, or the price that you've assumed on that acquisition, just so we can assess what the risk is as the stock moves around?

Well, the assumption that I made was the price that we've been seeing over the last few weeks prior to today.

So over $20?

Right. Somewhere between $19-20.

Thanks.

Don Emrich with [Brikeler] Capital has our next question.

Follow-up to the first JP Morgan question. The $1.50-1.63 in adjusted EPS guidance is after deducting about 11 cents of the intangible amortization?

That's correct, yeah.

And the reported EPS guidance works out, after using your growth rates, to $1.47 to $1.57, implies about a nickel a share in the kind of non-recurring type noise that we've had in the past, but for the full year?

That's right. We anticipate having some restructuring costs associated with Valtra integration. We really haven't identified anything specifically at this point, but we believe there could be some cost possible this year. But we don't think they'd be that significant.

And very small relative to recent history, anyway. And the last question, what was kind of the negative variance, if you will, in gross profit, if you know it just from Beauvais in the fourth quarter?

The negative impacts in the fourth quarter related to Beauvais, maybe $3-4 million is our estimate of the cost there. And we also had about half a point penalty, as it resulted on our gross margin, resulting from the currency impact of exporting product out of Europe and selling it in other markets, particularly the U.S. and Canada.

And lastly, you said this right up front, Andy, I apologize. Sunflower and Challenger in the quarter, were those numbers the increase year-over-year or was that the actual revenue from those groups in the quarter?

That's the increase.

So plus 6.5 and plus 10 was it?

1.8. The Challenger sales were effectively flat for the quarter, and Sunflower was up 6.5 million.

Right. Thank you, guys.

Next we hear from Steven Haggerty with Merrill Lynch.

Good afternoon. Can maybe, Don, you can answer, or someone can answer. What were the jobs per day at Beauvais as of the end of December? I think in the third quarter results, you were talking about how you had gotten production per day up to 75 units. Where did you close the year out?

We finished in that mid-70 range at the end of the year, and so that was a significant production increase from our low point, which was in the 50 a day, as I recall, sometime during the third quarter.

I can report to you also that here in the beginning of the new year that we're in the 70-78 a day. I would think we're probably averaging at 74 or 75 a day. And first time is improving. We're still making progress at Beauvais. We've got a ways to go, but the worst is behind us.

And the target is closer to 100 jobs per day, though; isn't it?

I don't think we ever go over 100 a day. I think our goal is in this mid-70 range really through July or when we shut down for the holiday, and then we move up after that into the 80s and get to the mid-80s in the fourth quarter.

You may have heard me say that we wanted to be able to build 100 a day, and we did do that in December as a test run. So we know what the constraints are and so forth, if the market heated up, how do we keep up with it.

So you have tested it and been able to do 100 a day?

Yes, we did.

We can flex up to that, what you can do on a sustained basis.

And then just a follow-up. When would you say, either Don or Bob, when does Beauvais go away as negative?

You got a continuous battle in terms of working with your suppliers. We have some issues that are a little bit longer term, in terms of the information systems that we have there.

We've made short-term fixes. We would expect to see next year, 2005, in the normalized contribution from them. We have still this year a number of new model releases that have come online but that's --

I think it's not a negative right now. As we go forward, we would expect to improve it, but we don't consider it a negative today.

Now with Prudential Equity Group, we will hear from Andy Casey.

Good afternoon. Two questions, one on the quarter and I guess a follow-up on the outlook questions.

On the quarter in South America, Andy, if I heard you right, you said I think 39% year-over-year growth. That's a little bit different than what I have. Were you talking about constant currency growth?

Yes.

Okay. Can you help me with the buildup to the 76.5% growth? For the last few quarters, you've really done well, and it's a little confusing how strong this one is fourth quarter was given that I think your retail volume was down a bit. So if you could help with the components, I'd appreciate it.

Well, the major increase that we're seeing is an increase in the Argentina market, which was virtually nonexistent in 2002, but rebounding quite strongly. We've also seen large increase in combine volume this year in South America, Argentina and Brazil, and the markets are both up there.

And then also, because of the relatively high level of inflation that we're experiencing in Brazil in 2003, we had fairly significant pricing, probably averaging about 20% over the course of the year. So those are some of the reasons why you see such dramatic increase of sales.

Okay. And then on the outlook, you mentioned some negative variance on gross margin in the quarter.

Given the dynamics of where the euro versus the dollar, and where presumably the U.S. production has gone or U.S. demand is going versus European demand, is there any concern about the natural hedge that you have in place? Is it kind of in a short-term negative issue where this could impact the first quarter, or is that just totally overbluff?

I think it is going to impact us in 2004. You're exactly right, that there is a natural hedge between the currency translation benefit that we get when we translate our foreign earnings into dollars, and that will be a positive at this strong euro rate, but the offsetting negative is the higher cost associated with the product sold in outside markets like the U.S.

From a net standpoint, that benefit is either flat or slightly better for the most part, but we do anticipate that some of our costs in 2003 were really at lower exchange rates and that's starting to catch up with us somewhat. And the new inventory that we're getting in and selling now is at much higher exchange rates than we experienced in the first part of 2003.

And so because of that, we are seeing some more significant margin impact in North America in the first half.

Moving next to Stewart [Pulverant] with Axia Capital.

Good afternoon. Now one of the concerns that some of the people write about the company have talked about is depth of management given the resignation yesterday.

If you could just address and put some of those concerns at rest about who, maybe beyond certainly the top couple of people you have, and how you feel about your management team? Perhaps address the succession issue to some degree.

I certainly will. First of all, let me reiterate what we said in our release, and that was that maybe it wasn't very obvious to all of you, but after the tragedy we had of losing two senior executives in January of '02, we had to scramble a bit here and ask people to do some things that were over and above the normal situation. I needed some help.

And in that cause, I called upon others like Jim Seaver and most specifically Don Millard. And we have been going through a period, I think, running the business reasonably well,while our board has been very aggressive at concluding a succession plan.

We have asked them from a management point of view not to take a knee-jerk reaction, but to do a thorough, broad-based investigation of the talent that could be either found within the company or brought in from the outside. And they have done that. They are working on that.

I think we were remiss, perhaps, in not advising everyone of organizational changes that we made here the first part of January, which are at a little lower level, but we have changed some of the management structure within the company and we now have general managers over every brand in different geographical areas, which we never had before.

We now have a general manager of Massey Europe. We have a general manager of Valtra Europe, and a general manager of Fendt Europe, and we have the same thing in South America, and so forth.

And we have taken sales and marketing management, which was one person world wide, and split that job up. And we've added an individual as the Senior Vice President over all Europe/Africa/MidEast operations now located in Europe, which was a job we didn't have. And the rest of it is now the Americas, which also includes the Asia Pacific area. So we have gone about changing the organization. Another thing we've done is to create a total world-wide division of Challenger, and we've included the application or sprayer units into that division.

We have changed the organization so it could be managed more effectively. This is all in keeping with a long-term plan. I would anticipate that the board will implement the balance of their plan this year, the near term, and you will see that it has been well thought out, well structured, and that there will be depth in the management team going forward.

I realize, I hope you do, that I can't last forever , and as such I'm doing my best to make sure we hold steady during this period and we continue to grow profitably. And I think we've been doing that. The gains over the last two years in a workout situation of a tragedy, I think have been rather successful.

I can appreciate your interest in the future. I can assure you it's being addressed. And as a result of that, we will have more than just one candidate for succession in the future. We will have a choice, and I think you will see that choice comes from within from very experienced, knowledgeable people.

So trust me in the sense that it hasn't been overlooked and I think with that, I have to take this moment to share with you my personal feelings about the assistance that Don Millard has given the company over the last almost a year since we talked about his departure, and he has committed to stay with me and help in a very important role. He's made significant contributions and we are getting bigger all the time.

So, it is challenging. And I want to thank you, Don, while you're sitting there, for what you've done for us and it should not be misunderstood that anything about your departure has anything to do with, one, your performance, two, the SEC --I want to make that very clear it has nothing to do with that -- and certainly, that your performance here has been a major contribution.

Charlie [inaudible] with Langenberg Incorporated has our next question.

Yes, Bob, I wondered if you could talk about the Challenger program and how it's going along, vis a vis your expectations?

As Andy indicated a little earlier, it's over 200 million this last year and it continues to grow. We would like it to grow faster, of course, that's only natural.

I think one of the things we've learned about the Caterpillar dealer organization is that they are very sure-footed and don't make a lot of wild movements. They make it firmly with more than adequate investment, training, planning and execution. So in the last year while our business continued to grow domestically here in North America, we added a considerable number of distributors around the world.

We now have over 100 distributors out of their total network, and we also now have a full compliment of products. We didn't get our combine out to the Challenger dealers until the fall, we'll have that into position this year, and we expect it to continue to grow very successfully.

We are pleased with that, and we also as I indicated earlier, incorporated into the Challenger division the sprayer or application group, because we are signing up Caterpillar dealers to provide the parts and service or customer support for those products as well. So there's a lot of benefit moving over to the Caterpillar type dealer, and we think that's enhancing his interest in being a part of our organization.

Two follow-up questions. You had an express goal of getting to $500 million per year rate. I wonder if you could say when you think you'll get to that? Also is the Challenger program really your primary means to increase or grow share in North America?

Charlie, we said we would hit 500 million by '05 and I don't know whether that's ambitious or not but that's what we said. Other than that, that's our target. As far as whether it's our primary business to grow share, I have to be a little careful here. We have a lot of dealers that handle a lot of our very important brands.

They are all very important to us, in the growth of market share as well. But it's obvious that the addition of a different distribution network should be the easiest source for incremental improvement. So I guess it goes without saying as you look at it, they are in the best position to add to our share of the market.

We will next hear from [Scott Sheer] with [Clovis] Capital.

Two questions. On the Valtra acquisition, can you talk about the longer-term earnings potential for that business and what its peak margins may have been? And whether or not the 6.5% margins you are offering us for 2004 are peak, trough? Where are they in terms of what this business has earned historically? And then I have a second question, please.

Well one of the issue with that Andy can get into details, but you got to keep in mind that as we unfold synergies, some of those synergies will fall into the Valtra P&L, if you will, and some will fall into other entities of AGCO.

For instance, just give you an example of a possible situation. And that is, if we were to utilize the Sisu Diesel engine and the Fendt tractor, both of them would be helping AGCO. But in the long run, the profit may end up at Sisu and not show up at Fendt, but they would be the major contributor of taking that product to the market.

So that's the kind of synergies we are defining at this time to make sure we can exercise as much flexibility in using their assets. Andy?

In terms of margins, I think that their margins are, this is about where they have peaked. They've been growing their margins over the last few years as well as growing their sales revenue, and so about 6.5 is where they've been in the last year or so.

Can you help me then with --and I'm somewhat new to your story, so I apologize if this is a naive question -- can you help me with then, what makes this acquisition so incredibly compelling and so incredibly compelling at this time?

What I mean by that is that if you're going to pick up $60 million, $65 million, of EBIT and in order to do this deal you had to sell 60 million of converts, which could convert into 15 million shares, and now you're saying you're going to sell $250 million of equity, which at today's prices is another 15 million shares. So in theory you'd end up having to sell 30 million shares, which is about 20,30% -- I'm sorry --40% of your company, you've 75 million shares. You're going to issue an incremental 40% of your company. Your company, according to Wall Street estimates, was going to do 250 million of EBIT.

So, why would you give up 40% of your company in theory, between converts and the equity, for a company that's doing $260 million of EBIT to pick up 60 million of EBIT? And I know that's a naive question, and it's a simplistic question, but help me out because that math just doesn't work and maybe I'm missing something. Can you help me with that?

Well first of all, I think your numbers are a little off. We only did a $200 million convert and it's convertible at about $23 --

Okay. I apologize. So that's 10 million shares. Okay. So it's about 20-plus million shares, about 30% of your company. Okay.

-- from a numbers standpoint. I'll let Bob talk about the strategic benefits of Valtra.

It's not just a matter of what they've shown as I'm trying to explain to you, it's the synergies that come out of that that could increase the operating income of the business. But more importantly for us is that we must have an economy of scale to make a business survive the cyclicality of the industry as well as competitive pressures.

And at Valtra we found state-of-the-art manufacturing that is the leading edge in this industry of low cost production. We believe we can transfer that knowledge to our other factories and gain considerably. Maybe it'll be on the AGCO side of the ledger, but it will come from the resources that we have in place at Valtra.

In addition, I already talked about the diesel engines. Believe me, there is a huge opportunity of utilizing their engines in our products, and you'll see that unfold over the next year or two. It's a big number.

Can you quantify that?

I used an example before of Fendt. Fendt buys 10,000 engines today. If the seller, which is Deutsche, made $1500 an engine, that's $15 million right there that could go back into our pocket. And that's just one tip of the iceberg. There are engines used in other products that also would benefit us in a similar manner.

So it's not only that. We have the opportunity to sell CBT transmissions back through Valtra. That's from us to them. So this is a cross back and forth between the two companies that really reaches a much higher performance level than we as AGCO have been. I don't mean to say they're going to grow that much, but we're going to benefit more from this than I think you'll see from them.

Thank you.

We'll now hear from Barry Bannister. That line has been removed. We'll go to [ Garro Noriyen ] of State Street Research.

Hi. Can you hear me?

Yep.

I have two questions. First is just regarding the SEC inquiry. Could that in any way hold up the equity offering?

I think that we will definitely have to take that into account, and the underwriters that we'll be working with will have to take that into account. We'll have to assess where we are in that process and use that as part of our consideration on the timing of those offerings.

Okay. And then my second question is regarding the first quarter. Could you give me a flavor of what you expect industry volumes by region, year- over-year, considering that the drought in Europe really hurt the back half of last year, but might be tough comps in the beginning of the year?

That's right. That's what we expect in the first quarter. Europe, because of the drought, will look a little light in the first half of the year, and we're expecting that we can see rebound in the second half.

At North America, we expect to see improvement in the first quarter from an activity level. And in South America, probably flat to down, because they've changed some of the financing programs in Brazil, which is as we pointed out in our release, moderating demand somewhat because they have increased the interest rates on the financing subsidy levels in Brazil.

Great. Thank you.

And Barry Banister's line is back in the queue.

Can you hear me now?

Yes.

Sorry about that. Technology is not my strong suit, that's why I cover machinery. Let me ask you a question about the Valtra margins.

My understanding was that they had been doing about 65 million of EBIT on a 900 million sales base. Of course, there's a lot of currency flying around now, but now you're saying the margin's dropped to about 6.5 from over 7.

What is their potential if you go back in their history -- I'm assuming you did a due diligence -- in terms of past peaks, and where do you think you can take it?

Well, as we pointed out before, their margins have been growing over the last few years, so these are their peak margins.

One of the things that failed to mention in terms of margins that we expect is that we do, we'll have additional depreciation expense over and above the expense that they had in their historical numbers, because we have to reevaluate the values of their property, plant ,and equipment at the purchase date.

That includes the write-up, and so we'll have additional non-cash depreciation on the existing PP&E that we acquired. And so that may be pulling down the rates to some extent.

From their forecast that we have for them, we do not expect to see any margin deterioration from their base business that he had in '03 compared to '04.

Does the 6.5 margin that you referred to for Valtra base itself on an IAS standard whereby they would deduct good will amortization, or are you working off of a GAAP number there?

The numbers I'm providing you are GAAP numbers.

Thank you.

With TKI Capital, David Thurberg.

Hi. One of the other callers mentioned the equity offering. When exactly is that still planned for right now?

We don't have specific timing set for that. We'll look to evaluate the timing as we go forward. As I just said, SEC inquiry will have to be taken into consideration as well, but we want to choose the timing that we think gets us the best execution as possible.

Thank you.

And with Credit Suisse First Boston, Jeffrey Brown.

Hi. I don't know if I missed this earlier, what was the annual Challenger sales in operating earnings, and I guess did Challenger make money in the fourth quarter?

Challenger's sales for the full year were a little over 200 million, and we did not make money in the fourth quarter related to that brand. We had some additional costs related to some product issues that we made -- recognized in the fourth quarter, and we also had the issue with exchange relating to the products that were taken out of Europe and selling as well into the U.S.

So they ended up with a operating loss for the full year of somewhere in the $10 million range, which was about $7 million better than 2002.

Is that something you think you can get to break even? I know you were shooting for closer to break even this year. Is that what you think you can get next year?

That's our goal, yes.

Secondly, I know the problems at Beauvais, there was some issues with getting your products out and also getting your products to your customers already out there. Was there any market share loss there? Were there any customers that said, you know, I can't get your product and I'm going to have to go to somebody else, and is there issues with maybe getting them back? Is there any real impact there?

I think there was some market share loss. I'm not sure they went out and bought something else. But we did have difficulties in delivering, and you never know whether that customer waits for you --the total number. Some do and some don't. I would say, and my suspicion is we lost some business.

Get it back? We have experienced in the past that we can generally get back business in the following period that may have been lost not only for lack of delivery, but when other competitors are offering big discounts, we lose some business because we don't match them. But we get them back the next year.

With Bodrey Capital, Neil Jacobs.

My question has been answered, thank you.

We will now hear from [Matthew Swan] with TCW.

Good afternoon. Is the Board considering adding any Valtra management to senior operating positions at AGCO? Thanks.

Well, the general manager of Valtra will continue in his current position, and he is considered a part of senior management as such. And we think he is a very qualified person that has long-term potential with the company. Obviously, I think we've got to have some experience level for a while first.

Great. Thank you.

Next we'll hear from [Tom Wong] with [Oak Hill Advisors].

Hi, a question for Andy. Can you kind of break down the cash flow forecast giving us some indication, for example, on what you expect on working capital fronts, any progress made, and also in terms of cash taxes paid for '04 with Valtra?

Okay. We expect from a cash flow standpoint depreciation and amortization to be slightly over $100 million. Working capital to be somewhere between a use of cash of $20-40 million, and from a tax standpoint we don't anticipate much difference between cash and accrued taxes next year.

Thank you.

And we've got [Sid Avril] with [Manning Napier].

Hello?

Yeah.

Good afternoon. I had two questions regarding the SEC investigation. How do you account for the sales return? Do you reduce it from your net revenues or add it in [inaudible]? And secondly, in case of resolution of planned closure cost, et cetera., does it affect the debt covenant, et cetera?

Your first question, we accrue for anticipated sales returns--those are on parts return programs that we have outstanding, and those are shown as reduction in net sales -- reduction of sales into our net sales. And secondly on the closure, can you repeat your question?

My question is that in case there's a revision in the account or the debt -- the plant closing costs are revised, do the debt covenants -- are the debt covenants affected?

Well, our debt covenants allow us to add back the impact of any restructuring costs that we have.

Okay.

I guess that's the easiest way to answer that question.

All right. Thanks.

With [Pax Rowe Funds], Diane Keefe has our next question.

I just was trying to recall, was your original intention that the equity and the refinancing of the debt deals be a first quarter '04 event?

Yeah. We thought that we could achieve that in the first quarter, yes.

Okay. Thank you.

We have a follow-up question from Steven Haggerty with Merrill Lynch.

Hi. Thank you. Just a quick question. If you do extend or you postpone the equity offering and carry the debt loads into the second or third quarters, will that have impact on the covenants you have with Rabobank, the various loans that you have from them?

The only loan that we have that's not a permanent financing now is a $100 million bridge loan, and that bridge loan is outstanding for one year from the time we took it out at the acquisition date. So we're not looking at any issues relating to any of that debt until a year's time.

Okay. Thank you very much.

Our next follow-up comes from Andy Casey with Prudential Equity Group.

Good afternoon, again. Can you characterize the order activity related to the North American market you're seeing on both high-horsepower and utility tractors, and then secondly, right now, are you producing to orders at Beauvais or are you producing to projections, specifically related to North America? Thanks.

Just say relative to orders in North America we have just gone through an introduction of Massey products, Massey Tractors. And so we've gotten some pretty significant increases in orders as a result of that, so I'd say that's pretty good. And relative to -- Bob, you might want to --

Yeah, I think we did, but I got to be careful. We have an increase in orders because we have new product introductions. But if your question was to reflect whether that is a sold order, I don't think we could say that . That's a result of the market heating up. I don't see that yet.

We certainly have seen a stronger order bank at Fendt, and they are, for the most part, sold orders. t Beauvais, most of the orders, of course, they go all over the world, but I think from the European community, again, there's a mix between sold and planned units.

We're not seeing any overwhelming demand develop anywhere in the world at this moment.

And our next follow-up question comes from Scott Graham with Bear Stearns.

I'm sorry, but I don't mean to beat a dead horse on this, but I'd like to go back to the regional profit question. And Andy, if you could just take, if you don't have the numbers in front of you, maybe just give us your best estimate, if currency was flat, were to have been flat year-over-year in the fourth quarter, would you have posted a profit in North America?

I believe we would have, yes.

Okay. But then that would have been at the expense of Europe, right?

That's correct.

So the European margin this quarter reported at 65 is really all in using that type of way of looking at the numbers is really back down in the fives.

No, you don't look at translation from a margin standpoint, because it affects all the gross up or gross down of all the line items of your P&L. The margins are accurate, it's just either grossed up or grossed down depending on what the exchange rate. The dollar amount of every line is up or down, but the margin impact stays the same.

Our next follow-up comes from Stewart with Axia Capital.

Hi. This may be a small point given, everything else going on, there's a lot of metal in the tractor and steel and probably some nickel and things like that, and so have you seen increases in raw materials? Are they enough to concern you? And can you ever go to the marketplace with a price increase to cover any of that?

Yes, we are seeing some price increases on steel and some isolated components and things of that nature. And we do believe we can price for it and we intend to.

And would you say your competition is -- ?

They got the same problem; they're buying from the same people we are. And I don't see anybody out there ready to give up margin at this point. The market is as buoyant as everybody says it's going to be, why would you sit on price?

Our next question comes from John McGinty with Credit Suisse First Boston.

Andy, could you just give us what the impact all in of currency was in the fourth quarter and the year? In other words, the effect, did they wash out to a zero or are they plus or a minus?

Sure, John. In terms of currency for the quarter, it was pretty much a wash.

Okay.

But for the full year, I would estimate that we got a benefit of about 4-6 cents a share related to currency.

Okay. And when we're looking at Valtra with the money --the funding that you're doing, what weighted average cost should we use for that?

Well, the components of the debt that we've used to finance it are as follows. We have the convertible note, which is about $200 million that has a coupon of 1.75%. We have $450 million of term debt, and that term debt is at LIVOR plus 225, and the remaining balance is funded under a bridge loan, which was at around 8%.

Our next follow-up question comes from Gary McManus with JP Morgan.

Hi again. You said, Bob, that the inquiry will be wrapped up shortly. Are we talking days, weeks, months? Can you give a better sense on when you think it's going to get done?

I couldn't even begin to tell you when it's going to be done. You have to recognize, and I think Gary, maybe you and a few of the other sell-side analysts remember some period last year, I think it was you received a letter from a disgruntled employee at Heston.

This person has been writing anonymous letters for two years. We have no idea where all of this came from, but we suspect that, as you could tell from that letter, it's a pretty distorted claim against the company and that may be what is provoking the inquiry, we don't know.

We believe that through cooperation with them and an openness to discuss these items that they will be provided with whatever information they need in order to make a good decision. And we hope that that's done in an expedient manner. But I couldn't predict how long it will take.

So shortly, with just your kind of best guess, but you have really nothing to base that on, I guess.

We don't. We know that we try to find out what's happened to other people, because as you know, with the activities of that group, seems like a lot of companies are getting these inquiries. Some are handled more quickly than others, so we just don't know.

In knowing what things they're looking at or inquiring on, you're confident that this won't result in any kind of material restatement in the financials?

No, I don't think that's likely. It could happen ,but Andy can give you a little bit more of that rolling affect. If you just change one year sales to the next and so forth, it really is pretty immaterial. Andy, you want to?

That's right. I guess what I would like to add is that one of the questions were just basic questions about policies and procedures. We provided that information, and so we will see what further questions that they have. As it relates to the specific topic of bill and hold,

we have provided the amounts for the last two years, and you can see the impacts if you were to account for that in a different fashion.

Our next follow-up question comes from Jeffrey Brown. One moment. His line's been removed from the queue. We will go to John McGinty for a follow-up question, with Credit Suisse First Boston.

Just one more, couple questions. One cash flow question. Is there any cash restructuring in the cash flow in '04?

No, there's not. Very little.

Okay. And then getting back to asking Gary's question a different way, and I hope from the SEC's standpoint they got a better spelling on their letter than we did. Do you have any meetings scheduled for them? Is the ball totally in their court? In other words, did you just say, "here's my response", or do you actually have a series -- a next meeting set up?

I don't know whether you are aware of how this develops, but they send you a very nice letter. And they tell you it's an informal, non-public, confidential inquiry. And they even go on to say you shouldn't draw any negative conclusions from it.

You send them the information they've requested; we've done that. They will review it, and we will have a discussion with them next week, and then we'll see where it goes from there.

And we will now hear from Jeffrey Brown with Credit Suisse First Boston.

Hi. I guess the question was essentially answered by John. But what was the cash restructuring charges this year?

They were about $40 million.

40 million in cash?

Yes.

Okay. Thanks.

Mr. Ratliff, it appears that we have no further questions at this time. I will turn the conference back to you for any closing or additional comments.

Thank you very much, Laurie. Thank you very much, all of you, for participating in our conference call. We invite you to be in touch with us if you have further questions.

Under the circumstances, we want to disclose everything we can to you as quickly as it is available, and we commit to do so. So thank you again for participating. We look forward to talking to you next time. Bye.

Thank you, everyone. That does conclude today's conference. We thank you for your participation on behalf of AGCO and , we wish everyone a great day.