AGCO Corp (AGCO) 2004 Q2 法說會逐字稿

Good day everyone. Welcome to the AGCO Corporation 2004 Second Quarter Earnings Conference Call. Just a reminder, today's conference is being recorded. At this time, I will turn the call over to Mr. Robert Ratliff, chairman of the board, president and CEO of AGCO Corporation. Mr. Ratliff, please go ahead, sir.

Thank you and good morning, everyone. Welcome to the AGCO Second Quarter Conference Call. With me on the phone today is Martin Richenhagen, who is our president and CEO. I'm just the chairman, as some of you already know. Andy Beck is with us. He's our Sr. VP and CFO, and Molly Dye, our VP of corporate relations.

I would like to begin the call with the following statement regarding its content. During the course of this conference call, we will make forward-looking statements, including some related to future sales and earnings. We wish to caution you that these statements are predictions and that actual events or results may differ materially. We refer you to the periodic reports that we file from time to time with the SEC including the company's Form 10-K for the year ended December 31st, 2003. 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.

I am pleased to confirm that Martin Richenhagen has received his U.S. visa and the company has implemented his official appointment as president and CEO effective July 21st. As of that date, I will continue as chairman of the board and perform specific specified responsibilities that the position requires including the indoctrination of Martin into his new position through the end of the year. I can also report to you that he has spent the last four months deeply immersed in understanding the company, reviewing its assets, meeting employees, and making direct contact with our many customers. I am very confident he will make an outstanding CEO of AGCO. I would now like to turn it over to Martin to summarize our financial results.

Thank you, Bob, and good morning. Net sales for the second quarter of 2004 were 1.4b compared to 902.7m in the prior year. For the first six months, net sales were 2.5b which was approximately 52 percent above the prior year. Operating income for the quarter excluding restricted stock compensation expense and restructuring and other infrequent expenses was 104.1m compared to 61.9m in the prior period. For the first six months, operating income was 162m compared to 106.9m in the prior year. Diluted earnings per share excluding restricted stock compensation expense and restructuring and other infrequent expenses was .61 for the second quarter compared to .38 in the prior year period. Year-to-date earnings per share excluding restricted stock compensation expense and restructuring and other infrequent expenses was 92 cents per share compared to 61 per share in 2003.

Our second quarter results were highlighted by strong volume growth and improved margins as well as the addition of the newly acquired Valtra business to our results. We are very pleased with our first half results and look forward to continued earnings and cash flow improvements in the second half of 2004. Now, I would like to turn the presentation over to Andy to discuss additional financial information.

Thank you, Martin, and good morning. Reported sales for the second quarter were 55.9 percent greater than 2003. Acquisitions and currency translation contributed 35.8 percent of its increase, consisting of an increase of 280.8m related to the Valtra acquisition and favorable currency translation of 42.8m. In addition, the consolidation of our Transmission joint venture, GIMA, contributed approximately 18.1m or 2 percent of the increase in 2004. Excluding Valtra, GIMA and currency translation, net sales increased 162.6m or 18.1 percent over the prior year.

Reported sales for the first six months were 52 percent greater than 2003. Acquisitions and currency translations contributed 38.3 percent of the increase, consisting of an increase 506m related to the Valtra acquisition and favorable currency translation of 130.2m. In addition, the consolidation of our transmission joint venture, GIMA contributed approximately 35.8m or 2.2 percent of the increase in 2004. Excluding Valtra, GIMA and currency translation, net sales increased 190.8m or 11.5 percent over the prior year.

The remaining 18.1 percent and 11.5 percent increases in net sales in the second quarter and first six months respectively, can be broken down on a regional basis as follows. For the quarter, North America up 30.1 percent, South America up 49.4 percent, Western Europe up 6.9 percent and the rest of the world markets including Central and Eastern Europe, Asia Pacific, Africa and the Middle East down 4.3 percent. For the first six months, North America up 15.6 percent, South America up 53.7 percent, Western Europe up 3 percent and the rest of the world markets down 6.9 percent.

Part sales in the quarter were 188.5m compared to 155.7m in 2003. Excluding the effect of currency translation and Valtra, part sales in the quarter were approximately 2 percent higher than the prior year period. Part sales in the first six months were 333.8m compared to 261.6m in 2003. Excluding the effects of currency and Valtra, part sales in the first six months were approximately 3 percent higher than the prior year period.

Valtra generated net sales of 280.8m and 506m in the second quarter and first six months respectively, with operating income before the amortization of intangible assets of approximately 27.1m and 37.9m for the second quarter and first six months respectively. In addition, AGCO reported non-cash amortization of purchased intangibles related to the Valtra acquisition of approximately 3.4m and 7m for the second quarter and first six months respectively.

In the second quarter, our gross profit margins increased from 17.5 percent of net sales in 2003 to 18 percent in 2004. Gross margins for the first six months were 18.3 percent in 2004 compared to 18 percent in the prior year. Our gross margins improved versus the prior year due to the increased production volume and approved productivity but were partially offset by lower margins in North America due to the impact of the stronger euro and products exported from our European facilities and higher steel cost. Gross margins were also impacted by a $3.6m write-down of inventory associated with the Randers, Denmark restructuring plan announced earlier this month.

The restructuring and other infrequent expenses reported in the first six months of 2004 relate primarily to the first quarter gain on the sale of the company's Conventry, England facility of 6.9m on a pre-tax basis and a second quarter 2.0m gain on a pre-tax basis on sale of machinery and equipment, as well as certain reserve reversals related to the Coventry closure in 2003. These income items were offset by a second quarter $8.0m pre-tax write-down of property, plant and equipment associated with the rationalization of the Randers, Denmark combine manufacturing operation. The company did not report a tax benefit relating to the Randers charges. The restructuring and other infrequent expenses in the first six months of 2003 relate primarily to the closure of the Conventry facility. For the balance of the year, we expect to expense an additional $8m of restructuring expenses relating to the Rangers restructuring.

Losses on sales of receivables primarily under our securitization facilities which is included in other expense net were 3.8m for the second quarter compared to 4.2m last year. For the first six--for the six months of 2004, losses on sales of receivables were 7.6m compared to 7.1m in 2003. Interest expense net for the quarter was 22.6m compared to 15.1m in the prior year and 45.4m for the first six months compared to 30m in the prior year period. Interest expense increased due to higher debt levels in 2004 as a result of the financing of the Valtra acquisition. Interest expense was also impacted in the second quarter by approximately $3m due to costs associated with the repayment of AGCO's 8-1/2 percent senior subordinated debt.

The company's effective tax rate was 39.9 percent for the second quarter compared to 44.4 percent in 2003. The effective income tax rate was 41.5 percent for the first six months compared to 46.9 percent in 2003. Excluding the impact of the Randers charges, the effective tax rate for the first six months of 2004 was approximately 38.7 percent.

Moving on to the balance sheet, AR and inventory combined were $518.1m higher than the end of 2003--December 2003. The increase includes approximately 336.9m of receivables and inventory related to Valtra acquisition. The remaining increase in inventory and receivables is due primarily to seasonal inventory requirements and foreign currency.

Funding under AR securitization programs was 438.4m at the end of June 2004, compared to 448.4m at the end of 2003. In North America, our dealer month supply at the end of June of a trailing 12 month basis was as follows: approximately seven months for tractors which is higher than the prior year, nine months for combines which is lower than the prior year, and in addition, our dealer month supply pay equipment is approximately nine months which is lower than the prior year.

Our debt-to-capital ratio was 47.8 percent at June 30, 2004 compared to 44 percent at December 31, 2003. EBITDA, excluding restructuring and other infrequent expenses of $6m was 131.6m for the second quarter of 2004. EBITDA excluding restructuring and other infrequent expenses of 19.2m was 76.2m for the second quarter of 2003. For the first six months of 2004, EBITDA, excluding restructuring and other infrequent income of 6.6m was 215.3m. For the first six months of 2003, EBITDA, excluding restructuring and other infrequent expenses of 26.2m was $134.4m.

Unit volumes for worldwide tractor and combine production during the second quarter and first six months of 2004 were approximately 14.5 percent and 17.2 percent higher than 2003 levels respectively.

Now turning to our outlook for 2004, AGCO expects to increase adjusted earnings per share by 40 to 45 percent in 2004 from the achievement of sales growth and cost reduction initiatives. Reported earnings per share for the full year are expected to increase by 65 to 70 percent due also to the reduction of restructuring and other infrequent expenses incurred in 2003 related to plant closures.

For the third quarter of 2004, AGCO expects to improve adjusted earnings per share over 2003 by 35 to 45 percent. Third quarter earnings are expected to benefit from continued sales and margin improvement. Reported earnings per share is also expected to be approximately 35 percent higher than 2003. AGCO also expects to generate free cash flow which is operating cash flow less capital expenditures of approximately 100m in 2004. Capital expenditures are expected to be 90 to 100m during 2004. Bob.

That concludes our formal comments. Operator, we are now ready to open up the conference call for questions.

Thank you. The question and answer session will begin at this time. If you're using a speaker phone, please pick up the handset before pressing any numbers. Should you have a question, please press *1 on your push button telephone. If you wish to withdraw your questions, please press *2. Your question will be taken in the order it is received. Please stand by for your first question.

Our first question comes from John Mcginty with Credit Suisse First Boston. Please state your question.

Good morning, Bob and guys. I guess my first question is it's not 100 percent clear to me why this quarter was so much better than what your guidance. Was it sales, was it margins or where was it versus the guidance that you had provided for the second quarter?

Andy?

Yeah. John, it was more volume than anything else. We did see a little better margins but more on the volume side, again particularly in South America where the market continues to be strong and our performance is still very strong as well.

And then as a follow up, are you changing your forecast for the industry outlook in any of the particular regions versus what you had given us previously?

I don't think we're changing it too much. I think what we're looking at is what we've seen in the first half continuing on in the second half. So that suggests that Western Europe's going to be flattish for the full year. They're up slightly right now. North America is going to be up double digit. And South America will be possibly up a little, primarily due to the stronger markets outside of Brazil in South America.

And then as a final question, I'll get back in queue. Again, taking midpoint to midpoint, you're raising the guidance again midpoint to midpoint by about 18 cents, so in other words, 178's the midpoint up from about 160. Essentially that's already happened. In other words, the first--second quarter was about 17 cents higher than what you had been looking for. Why is there no follow through in the second half vis-à-vis what happened in the second quarter?

Well, I think certainly we've seen some good increases in the first half and certainly the guidance that we're providing provides for additional increase over last year, a fairly significant percentage increase already.

But not compared to where you were.

Not compared--well, but what we're saying is that if you really look at the number, you know, where we've seen some increase and what we really thought would happen was more in South America than anywhere else. And in the second half of the year, South America--second half of last year, South America, you can see the results really picked up. And so the comparables are much more difficult. So when we look at our second half, we're not looking for those dramatic increases in South America coming through but we will see fairly significant increases forecasted for the European business, primarily due to some of the issues that we had in the second half of last year. So I think the comparables are tougher in the second half in South America where we've seen a lot of the benefits. So I would suggest that we still have a fairly aggressive and strong improvement in the second half of this year.

All right.

You might want to just remember, John, that it is winter in South America now so it's their slower season.

Okay. No, I was just trying to understand, you know, you see a better--or you have a substantially better quarter than forecast and you really aren't changing anything in the second half. So you're saying really it was mostly South America. This was their selling--their harvesting season and now we're going into the slower period I guess is what you're saying.

In South America, that's true.

Right. Okay. Thanks. I'll get back in queue.

Thank you. Our next question comes from Scott Graham with Bear Stearns. Please state your question.

Yes. Good morning. I have two questions. One is housekeeping. Andy, if you wouldn't mind, could you split the Valtra, FX and GIMA contributions by region for us as reported in the segment data?

Well, on foreign exchange, the impact is primarily in the EAME, the Europe, Africa and Middle East business, not too much anywhere else. In terms of the Valtra business, they had sales, as we said, in the quarter of about $281m. From a sales standpoint, about a little over 70 percent of that was in the E-A-M-E, EAME business and a little over 20 percent in South America with the balance in North America in EPAC which weren't significant; EPAC, being Asia specific.

Okay. And GIMA, is that--?

GIMA is about, I think we said is about $18m for the quarter.

Okay. You alluded in your press release comments that you have some guarded optimism, and if I'm paraphrasing incorrectly, you'll tell me, about Europe in the second half of the year. Could you talk a little bit to that subject? It looks like from what your competitor, C&H reported recently that western European volumes actually increase in the second quarter which was a little bit surprising to me. Is that part of your optimism, what you're seeing going on within--within wholesale sales activity at this point or is there something more because, you know, in speaking with the dealers over there, there does seem to be a lot of uncertainty. Prices are up and crop conditions are good but at the same time, you know, we're also hearing this, you know, EU, large EU expansion and concerns over long term subsidy levels is continuing to impact the mindsets of farmers there. Could you talk about the second half in Europe and why there is some optimism there?

Well, Scott, as Andy said, this European business, we see more or less flattish he said. And I think this is a good expression. We have some markets which do better than others. So if you look at Germany, Germany is rather flat as far as we see it. And I think this is also a review of our competitors. And then you have other markets who do a little bit better. And the climate conditions, weather conditions are compared to last year, fine so the harvest normally should be very good. But we don't expect too much growth so that means we are slightly optimistic that it will be a little bit above last year.

Do you expect a good harvest this year to return its way to sales next year or are you still are sensing some of the things that I laid out as being concerns by the farmer?

I think the concerns you laid out are pretty much what also we--we are seeing the things but, of course, when the harvest--or if the harvest this year is good, then that might create a certain optimism again. You know how those farmers react in general, I'm a little bit more optimistic for next year.

Okay. Thanks very much.

Thank you. Our next question comes from Andy Casey with Prudential Equity Group.

Good morning.

Hi, Andy.

Hi, Andy.

The--Andy, if you could, could you run through the mechanics of the improvement in the balance sheet, specifically, net debt--excuse me, net debt to total cap from the end of 1Q dropped about 15 percentage points and you did a lot of stuff in terms of financing, but it looks like you might have done some other stuff. Could you help me with that?

The activity in the second quarter, we did complete the equity offering which raised approximately $300m. That's the big adjustment. We also completed the refinancing of our 8 1/2 percent notes which with euro debt offering at 6 7/8 so we improved our position there. And so those 8 1/2's are gone now. And also certainly in the second quarter, we had a good result from a cash standpoint--cash flow standpoint. Typically second quarter still is a period where we're from a seasonal basis, using cash and we did a good job certainly versus last year in managing that situation.

I would point to, you know, last year we started having issues in our Beauvais facility in the second quarter and were building up significant inventory levels there. And this year, those inventory levels are back down to normal levels. And so that's one of the reasons why we didn't have as much cash usage this year. So, all in all, we were very pleased with our balance sheet here at the midpoint.

Just as a follow up, would you expect inventory improvement versus last year in 3Q as well because of Beauvais?

Well, Beauvais inventory is about where it needs to be now so I don't think we're going to see any more improvement there. Typically, what we'll see from this point is the inventory level starting to come down. So in the second half, we will expect to generate operating cash flow in both the third and fourth quarter.

Thank you.

Thank you. Our next question comes from Andrew Obin with Merrill Lynch.

Yes, good morning.

Good morning, Andrew.

I have a question on guidance. C&H commented on their conference call that Europe is looking slightly better. Assuming that the outlook for South America has not changed that much, but in North America retail sales are just going gang busters, and particularly in combines where you guys do have operating leverage, retail sales have been strong. Have you taken any decisions about raising production in North America? That's the first question. And then going back to the guidance, given that it seems that the world looks better half point in the year, why we're not raising guidance more? It is do we have more still costs? Why are we so conservative?

Because we're profitable. We don't get carried with just one good quarter. We've tried to give you a good idea of what the future looks like and we do show you that Europe is up 3 percent when we called it flat for the year. We don't expect it to get much higher than that. And as we've even said last fall, as a result of their bad harvest last year, there would not be too much purchases in the first half and most of them would be in the second half. And that's the way we have our plan loaded. So we think they're going to fulfill pretty much what our expectations were in the second half. What somebody else forecasts is up to them. We see it as being solid and that's pretty good. We'll take it from that point.

But I guess is it fair to say, you know, the world is looking somewhat better now than it did a quarter ago, and yet the guidance is unchanged for the second half of the year? Can I draw a conclusion you just--guys are being--you're just being conservative?

Well, I think again, I'll reiterate what I've said. I think we had a pretty aggressive outlook for the second half of this year already in place and with fairly significant increases in place. And so, yeah, we did a lot better this quarter but we don't see anything that's going to drive it so significantly that we would change our second half dramatically at this point.

To your point about North America, we have increased production in certain product lines and so we are seeing some good activity there. And I think you'll also see higher sales and improvements in our situation in North America in the second half.

But so is it the steel cost in North America that are keeping it down a bit?

Well, they did impact us a little here in the second quarter. We have put some pricing in place but a lot of that hasn't really taken effect because you're still honoring past orders. But we expect to see some pricing coming in in the second half. And our expectation is that it will not create an issue for us in the second half - the steel situation.

And when did you guys make the decision to increase production in North America?

I mean, it's--every month we make changes.

We have a voting system, so to say, in sales and production, manufacturing people and purchasing are sitting together every month. And they--we talk about the order situation and we adapt capacities basically regularly during the year. We are prepared also to cope with growth which might show up in the future.

But we've raised production some time during the second quarter. Is that a fair statement?

Yes.

Thank you.

Thank you. Our next question comes from John Emerick [sp] with Berkovard [sp].

Thanks. Congratulations on one of the--I think the highest earnings quality quarter in several years just based on that. It's about $100m in free cash flow in the quarter, Andy?

In the quarter?

Yeah. Just cash flow from op plus cap ex?

Yeah. Hold on. In the quarter, we had free cash flow of about 100m, that's correct.

Perfect. In the "54 cent" P&L, what are the non-recurring expenses or charges in cost and SG&A, dollar amounts?

In cost of sales--well, in the--yeah, cost of sales is about $3m relating to an inventory reserve adjustment relating to the Randers--.

Right.

--Restructuring.

Right.

And there's nothing in SG&A.

Zero? Okay. And again, the goodwill amortization that's new this year, that's for the--from the implied full year forecast, that's about, what, 9 to 10 cents for the year?

That's about right, yes.

Nine to ten cents. And we talked about that.

Thank you. Our next question comes from Barry Bannister with Legg Mason.

Hi. Good quarter.

Thanks, Barry.

You know, just one clarification. I mean, I know there have been some analysts trying to recolor the second half outlook in a darker tone, but I recall that you've had two beats in a row. Your guidance last quarter was pretty tepid. Now you've had three beats with this quarter. Aren't you just naturally going to just be careful and not go out on a limb as far as full year guidance and you're going to take it a quarter at a time given the experience last year?

Yeah. Our long term strategy is to have 18 quarters in a row where we beat the estimate.

All right. Let me ask you questions related to margins. North American margins were a little bit light despite the strong sales. Was it Beauvais export currency or was it Challenger or what?

It's export currency impact which estimate for the quarter impacted North America by about $7m.

Okay. Great. And then South America, margins there were better than I expected and I thought Valtra would dilute the margins. It doesn't appear to be doing so. So how does Valtra's margins stack up to what you expected and what's the status of approval down there?

Let me--I'll answer the margin question and turn it over to someone else on that. In terms of margins for Valtra/South America, they are a little below what we have in our Massey business down there, but they were ahead of our expectations for the second quarter. But they are not diluting that margin that significantly.

On the approval process, let me make it very clear that we did apply as soon as we concluded the transaction last year and we have formally filed all the necessary papers and documents with the proper authorities. There are several of them. We have had no indication at any time from any official that there is any reason that this transaction would not be approved by CADE, which is the anti-trust group in Brazil. The process, as we said a long time ago, will take well over a year. That is a normal length of time, not abnormal. And so we don't expect a final answer until probably next year. In the meantime, we are often called upon to supply data, specifics. Our competitors are asked to provide data. And we're going through the process in a very orderly manner. The cooperation we have with the government is excellent and as well with our competitors. So we don't see any problem but we have nothing to announce in that and when we do, we'll be the first to tell you.

And Bob, does working with two separate brands and two separate plants help you out in that position?

Well, absolutely because, as you know and as people who know AGCO, we operate the business as separate entities in the sense that they do compete with each other and still provide the consumer as well as the country a source of competitive structure, there's competitive pricing and also it enhances our ability to export from that country to other markets of the world.

I would like to add something. I've been in Brazil last week and we talked to our lawyers and also to the local authorities, the governmental authorities and [unintelligible]. And my personal impression is that everything is going very smooth.

Good to hear. And then lastly and I'll get back in queue, Beauvais, now that you've fixed the production issues and you've got the second half drought anniversary, wouldn't you have better production and better absorption in the second half in Europe than what you experienced in the second half a year ago?

Absolutely. That's correct.

Thanks.

Thank you. Our next question comes from Joanna Shatney with Goldman Sachs.

Good morning, guys.

Morning.

Joanna.

Can you, Andy, just the tax rate looked like you came in a lot lower than you and I had talked about. Can you--and then I know there's a lot of moving parts. Can you just talk about what happened in the quarter and where that plays out through the rest of the year?

Well, the tax rate will be somewhere in the 37-38 percent range. The one impact that we see in the second half is the Randers charges which I said was $8m in the second half. We will be not--we will not record a benefit associated with that, so that will raise it above that level. So if you take out those charges, we'll be 37-38 percent. If you include those, probably right below 40 percent.

And was it lower in the quarter or not?

Yeah, it was a little lower than we expected in the quarter. The other impact is we're not taking any benefit for any losses in North America or taking a provision if we're profitable when we were because of some of the restructuring we've gone profitable in North America in the second quarter and that did allow us to bring that rate down a little better than we expected.

Did that pretty much offset the charge in the quarter, the 3 cents--or the 3m?

Yeah. That's right.

Okay. So [unintelligible]. Can we just talk about Challenger and I know where--at least when I last checked with you, you were pretty much on track with what your forecasts were for the year. Can Bob just give us an update on what's going on with the CAT dealers and how quickly we get to the 500m goal?

Well, Joanna, I should leave that up to you to answer. You're the one that has the survey that's out there on the street. Unfortunately, that survey didn't cover all of the dealers. It only covered about 23 of them. We are still considered that the Challenger project is a full go project as we indicated. There is no reason for us to retrench or downgrade any of our estimates. We've told you all along that it is growing and it is on plan. And quite frankly, we're very, very pleased with the results.

And the survey that you put out even confirmed the fact that we now have the attention of the Challenger dealers as to the fact that the participation in the agricultural market is a very advantageous opportunity for them. And as your survey also reported, it indicated that their estimates were in the 900m area. Now, that's not something we have estimated. We told you that we expected that it would get close to 500m in '05 and that's next year. Maybe that's a little aggressive but we'll wait and see because it's building up rather quickly at this point. They're having a good year. They're really starting to improve the mix of products that they sell and that's what we've waited for as to improving the profitability of that franchise. So at this time--.

I agree with all of you on that, Bob. And that's not what we meant to put in our survey to say that this is not a good deal. But what my concern is is the 500m is a bit aggressive and so Andy, can you just give us the update on where we're running year-to-date? Are we on track for what we expect - to break even basically, for 2004? And then what's the ramp up realistically for 2005 because I think that the 500m is a little aggressive.

Joanna, I just want to add some information. In the meantime, the CAT dealers put more than 250 sales people in place and we all know them, we trained them here in Duluth. We had about 100 people here on a training program. They opened new outlets. They have--are adding dedicated stores. And I personally believe that everything is doing very, very well. I know most of the dealers personally and I think we will make that project, as Bob already said, successful as indicated. And Andy can give you some more numbers.

Sure. For the full year, we're still on track. We said we'd be up 20 to 30 percent over last year. Our sales last year were a little over 200m so we're looking 20 to 30 percent above that. In terms of earnings, our earnings are a little better than last year through the first half. And we still are projecting that we can get to break even this year.

And then what's the ramp, I guess, from here towards that 500m?

Well, we certainly haven't put anything in place. Our planning process really starts in the next few months and so I don't have any specifics that I can comment on except for we do see that we think we'll continue to progress towards that total amount. Bob said, I think 500m is a little aggressive for next year and so I would assume it's lower than that but I couldn't give you anything more specific.

And we just did put in a new [unintelligible] new veins of [unintelligible] into the Caterpillar distribution and that will also help of course to grow the business.

I also have to add one other thing, Joanna. The 500m, you know, came from a question like this from somebody I think within 30 days of when we signed the contract with Challenger to start the distribution through CAT dealers. And now you want us to forecast next year. I'm not going to stick my neck through that noose again. It'll be what it's going to be but it's growing, it looks good, it's positive for the business. We're very pleased with it. Whether it hits 500 or 495, we'll be very happy.

Thank you. Our next question comes from Gary McManus with JP Morgan.

Good morning, everybody. First question, Valtra, what was their--in local currency terms, what was their first half revenue growth and how did the margins look year-over-year?

Their revenues are fairly flat in Europe and they're up in South America. Don't have that specific number in South America, but they're up in line with the industry in South America.

And their margins? I mean, it looks like they're 7-1/2 percent excluding the amortization. 7-1/2 percent in the first half this year, is that pretty comparable to what they were doing last year?

It's a little better as well because South America's performing better this year.

Yeah. That's kind of my second question is just, you know, in general terms, I mean, where are we in the cycle in South America? We've had, you know, if I strip out Valtra contribution, your revenues, AGCO's revenues have doubled in the last three or four years. You're making huge profit margins. I mean, what's the risk that next year we could see a substantial drop off?

I think it's important to recognize that a very critical factor in Brazil particularly is the continuance of Phenome [sp] which is the financing program. That program is in place for the balance of this year and it has been through this past period of growth. And at the same time, with a new government, they've really experienced tremendous growth in agricultural production. And that growth is anticipated to continue through the expansion of the Madagrasso [sp] area on for another decade or so. So when you talk about cycles in South America, it's a little different than cycles in a mature market but this is a growth market, and as such, I don't think that cycle will end for some time. The biggest variable will be the financing.

Okay. Great. That's helpful. And just the last question, I mean, looking at your full year guidance, it kind of suggests an EBIT margin or around maybe 6-6 1/2 percent for 2004. You guys have done in the 90's, you know, 10-11 percent margins for a number of years. I know it's [unintelligible] is a lot different today with Valtra and Challenger and Ad-Chem and so forth. But I'm just wondering, what do you think given good peak operating margins [inaudible] and you know, for AGCO. We'll leave it at that.

Well, certainly our internal target that we talked about are to try to return back to those percentages. We've got a long ways to go to get there. And I do agree that our mix of the business has changed significantly since those last peak results. But, that's why our internal targeting is to try to get back to double digit operating margins. From a progression standpoint, I think that we're looking at somewhere half a point a year is something that we will be targeting to try to do. But, it certainly depends on mix and it depends on currency but we have cost reduction initiatives and programs in place that are designed to continue to improve our margins as we demonstrated over the last few years.

Yeah. I mean, does Europe need to be, you know, the fundamentals in Europe need to be a lot better than they are now to get to 10 percent?

Yeah. I think they do. I think that we would need to see some additional production within the facilities. We've done a lot of work in terms of getting our facilities in place to pass utilization much better but we still need to see some additional leverage off of those facilities to get to that level, I believe.

And is the weak dollar, you know, is that--I mean, if we assume the dollar stays weak versus the Euro going into the future, is that kind of a structural difference today that prevents, you know, when I'm going back and looking at where the margins were back in the 90's, is that an issue of why the margins are lower today?

Definitely. That's definitely true because our margins are significantly impacted here in North America. Again, from a total earnings standpoint because we have significant profits in Europe, those are offset from a currency translation basis that the profits we have in Europe are worth more in dollar terms. But when you look at North America and look at your margin, it's a pretty significant head wind that we have. And I think that as these currency levels, you know, the higher operating margins in North America are still certainly what we'll be focusing on but we do--if we had lower Euro value here--Euro to dollar, you would see some fairly significant improvement in North America coming out of that. So it is a problem if you're just looking at margins. But if you're looking at income, it's not as big of an issue.

All right. Great. Thank you.

Thank you. The next question comes from John Mcginty, Credit Suisse First Boston.

Yeah. A couple of points. Kind of as a follow up to that, Andy, you mentioned that there was a $7m hit on currency on the U.S. numbers but for AGCO in the quarter was there any impact or was that offset in the other direction?

Our estimate is that the offset didn't cover all that, that we were impacted by about 3 pennies - 3 cents a share relating to total currency.

And you made a comment in the text that the productivity improvements in Europe were offset by an unfavorable sales mix in the region. I have not heard you use that before. Could you just explain what that is?

Well, we certainly have improved our cost structure in Beauvais versus last year saw that benefit come through. What we're talking about in terms of sales mix primarily it relates to high horse power product sales and particularly the Fendt business which is focused a lot in the German market. And that's where we experienced some higher margins. And so in the first half, the market was and what our sales were of high horse power tractors particularly in Germany were lower than last year which impacts margins and provided some offset. So that's something that we've been dealing really in the first half of this year. And then we hope to see some of that turn back around here in the second half.

Okay. In other words, just really just Germany because of Fendt which is your highest margin business versus the other which are not quite as high margin businesses?

Yes. That's right.

Okay. And in terms of the steel cost--the steel issues in the States, did that impact you or was that offset by price or what was the impact on that?

Impact was about $2m.

Pre-tax?

Pre-tax in North America.

And do you expect that impact to be--in other words, for the full year since you raised prices, does it stay at 2m or does some of it actually, you know, turn positive--not turn positive, but be less than that for the full year?

Well, we expect to be about balanced by the end of the year.

Okay. And then in terms of market share, you talked about the markets and you talked about what AGCO did which in very broad terms was in line with the markets. In other words, industry's up 11 percent, you're up. But you don't talk about how much. Basically, as we look at your marketing regions, did you--were there any share changes for AGCO in the quarter?

The good thing is we didn't lose market share in any market and we gained a little bit in one or the other markets, so we have a general positive tendency.

Okay. And then the final question is when we look at '05, what kinds of--the sales are going to be what the sales are going to be and we can all make our estimates of that. Do we have carryover structural benefits, changes, costs, things that are occurring in '04 that are going to have specific benefits in '05 or could you talk about specific programs. I mean, not making a forecast, not making it sales, but just kind of what's underlying from the restructuring some benefits and cost efforts you're taking?

Well, we certainly will start to see some of the benefit from the Randers, Denmark restructuring that we recently announced. That total benefit we said would be somewhere 7-8m I would expect. A portion of that, not all of that, would be experienced next year. And certainly, you can see that we're improving our margins and our business and some of those do have some carryover impacts because the improvements are ongoing. So we would--haven't gotten to a point where we'd tell you what we think our improvement's going to be, but we certainly at this point in time would expect that we can continue our favorable trend on margin.

Thank you very much.

Thank you. The next question comes from Andy Casey with Prudential Equity Group. Please state your question.

Hello, again. Can we talk about the inventory position that you discussed earlier in the call, Andy, in North America for tractors and look at the second half and the perceived benefit of a tax buy maybe later in the year? How are you guys going to produce given that the field inventory's running a little bit higher than last year? Is it a kind of flat outlook or are you going to increase production? I guess what are the dealers telling you that they want?

Well, we have, as I said, we do have higher month supply than last year. You have to keep in mind that our--that supply was somewhat constrained at this point last year due to some of our production issues. So I think where we are right now is in good position and it's also reflecting some of the optimism that we have in terms of retail sales levels in the second half of the year.

In terms of orders, our orders are up and so our dealers are still looking for product so I don't it's going to be--there's a production issue associated with our month supply from a seasonal basis. It's high at this point in the year and then it'll come back down by the end of the year. So I think we're pretty much on track with a normal year.

Okay. Thank you.

Thank you. The next question comes from Scott Graham with Bear Stearns.

Hi. Just two more housekeeping questions and then a third. Andy, the AR securitization balance at the quarter end?

It was 400 and--hold on a second. 438.4m.

Okay. And it wasn't clear to me in your answer to a previous question whether Challenger was in fact profitable or had a loss in the second quarter?

The second quarter they were break even and so for the first half, there's slightly--we're at a slight deficit right now which we would hope to recover in the second half.

Okay. And lastly, one of the things that you cited in your press release was the impact from new products. Could you talk about some of the new products by market and why you think they're doing well? What are the differentiating features of them?

Well, certainly in North America, we've introduced the CVT transmission in our AGCO brand and we've seen significant improvement in that product line. And in Europe, we really over the last 12 months have introduced almost a full range of Massey Ferguson equipment that's being introduced there and worldwide. And then in Fendt, we improved some of the ranges there as well including a new small tractor line. So it's really ongoing but we have seen some nice improvements and nice response to some of the new product introductions that we've completed over the last 12 months.

And differentiation here in North America is mainly by transmission technology.

Okay. If I may, one other housekeeper. Valtra, including the amortization, was the acquisition accretive or dilative and if you could tell us by how much in the quarter?

It was about break even.

Thank you.

Thank you. The next question comes from Barry Bannister with Legg Mason.

Just a question here. As I recall, the sprayer business is seasonally strong in the first and second quarter on a mild overlap there, so can you give us sprayer results in the second quarter versus the same period a year ago.

Okay. Sprayer sales were relatively flat. They were up in the first quarter and flat in the second quarter. And our earnings are up about $2m in the second quarter.

Okay. And is the board of directors looking at a new incentive pay plan and if so, what is the structure that is being proposed?

No. The board of directors is not looking at a new pay structure. The current--if you're talking about the [unintelligible] Program, that has another three and half years to run. And there's no effort being made or studies at this time to change that.

Okay. And lastly, Challenger's inventory year-over-year, did you give those?

No, Barry. I don't have those specifically in front of me but I don't think there's been any--no significant change year-over-year there.

Okay. Thanks.

Thank you. The next question comes from Joanna Shatney with Goldman Sachs.

I'm set. Thanks.

Thank you. The next question comes again from John Mcginty with Credit Suisse First Boston.

Yeah. Just a follow up. When we're talking sprayers and profitability and you're talking Challenger, as you have given the sprayer after-market business to the CAT dealers, is that showing up under Challenger or is that showing up under sprayers? Is that actually getting your costs down or could you just talk to--the dealers love it. Could you just talk to what's going on and the accounting for it, two different issues there.

Well, in terms of where that business shows up, that shows up under sprayers as part of the sprayer business or really all falls--all of it falls under North America. So the way we're reporting, it's all together.

But it doesn't show up when you talk to the Challenger profitability--.

We're talking about--no. We're not talking about--that does not include--when we talk about Challenger, we're not including that.

Okay. Thank you.

Thank you. Once again, ladies and gentlemen, if you do have a question, please press *1 on your push button telephone at this time. As there are no further questions, I will now turn the conference back to Mr. Ratliff.

Thank you very much, everyone, for your interest in AGCO and your participation in the conference call. Please remember that we're always available. If you have any questions, don't hesitate to call Andy or Martin or myself for any fill in information. With that, we'll conclude the call and say goodbye. Thank you.

Goodbye.

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.