AGCO Corp (AGCO) 2004 Q3 法說會逐字稿

Good day, everyone. Welcome to the AGCO Corporation's 2004 third-quarter earnings release conference call. Today's call is being recorded. At this time I would like to turn the conference over to Mr. Robert Ratliff, Chairman of the Board.

Thank you and good morning, everyone. Welcome to the AGCO's third-quarter conference call. I have with me today Martin Richenhagen, our President and Chief Executive Officer, Andy Beck, our Senior Vice President and Chief Financial Officer, and Molly Dye, our Vice President of Corporate Relations. I would like to begin the call with the following statement regarding its content.

During the course of this conference call we will make forward-looking statements including some related to future sales and earnings. We wish to caution you that these statements are predictions and that actual events or results may differ materially. We refer you to the periodic reports that we file from time to time with the Securities and Exchange Commission, including the Company's form 10-K for the year ended December 31, 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 would now like to turn it over to Martin to summarize our financial results.

Thank you, Bob. Net sales for the third quarter of 2004 were 1.2 billion, compared to 800.3 million in the prior year. For the first 9 months, net sales were 3.7 billion, which was approximately 52 percent above the prior year. Operating income for the quarter excluding the restricted stock compensation expense and restructuring and other infrequent expenses was 73.7 million, compared to 41.4 million in the prior period.

For the first 9 months, operating income was 235.7 million, compared to 148.3 million in the prior year. Diluted earnings per share excluding restricted stock compensation expense and restructuring and other infrequent expenses were 40 cents for the third quarter compared to 24 cents in the prior year period. Year-to-date earnings per share excluding restricted stock compensation expense and restructuring and other infrequent expenses was $1.32 per share, compared to 85 cents per share in 2003.

Our third-quarter results were highlighted by strong volume growth and improving margins. We are pleased with our results for the first 9 months and looking forward to earnings and cash flow improvements in the remaining quarter of 2004. We will continue to focus on growth, productivity improvements, and pricing to offset the severe impact of higher product import costs, particularly related to steel costs. Now I would like to turn the presentation over to Andy to discuss the additional financial information.

Thank you, Martin. Reported sales for the third quarter were 52 percent greater than 2003. Acquisitions and currency translations contributed approximately 33 percent of this increase. Consisting of an increase of $219.4 million related to the Valtra acquisition and favorable currency translation of $46.7 million. Excluding Valtra and currency translation, net sales increased 150.1 million or approximately 19 percent over the prior year.

Reported sales for the first nine months were also 52 percent greater than 2003. Acquisitions and currency translations contributed approximately 37 percent of this increase consisting of an increase of 725.4 million related to the Valtra acquisition and favorable currency translation of $176.9 million. In addition to the consolidation of our transmission joint venture GIMA contributed approximately 35.8 or approximately 1 percent of the increase in 2004. Excluding Valtra, GIMA, and currency translation, net sales increased $340.9 million or approximately 14 percent over the prior year.

The remaining 19 and 14 percent increases in net sales in the third quarter and first 9 months respectively can be broken down on a regional basis as follows. For the quarter, North America up 23.1 percent; South America up 20.5 percent; Western Europe up 18.6 percent; and the rest of the world markets including Central and Eastern Europe, Asia-Pacific, Africa and the Middle East up 5.7 percent. For the first 9 months, North America was up 17.9 percent; South America up 39.8 percent, Western Europe up 7.6 percent, and the rest of the world markets down 2.2 percent. Parts sales in the quarter were 186.8 million, compared to 144.9 million in the 2003. Excluding the effect of currency translation in Valtra, parts sales in the quarter were approximately 8 percent higher than the prior year period. Parts sales in the first 9 months were 520.6 million, compared to 406.5 million in 2003.

Excluding the effect of currency translation in Valtra, parts sales in the first 9 months were approximately 5 percent higher than the prior year period. Valtra generated net sales of 219.4 million and 725.4 million in the third quarter and first 9 months respectively, with operating income before amortization and intangible assets of approximately 16 million and 54 million for the third quarter and first 9 months respectively. In addition AGCO recorded non-cash amortization of purchase intangibles related to the Valtra acquisition of approximately 3.4 million and 10.4 million for the third quarter and first 9 months respectively.

In the third quarter our gross profit margins increased from 17.8 percent of net sales to 18.6 percent in 2004. Gross margins for the first 9 months of 2004 were 18.4 percent compared to 17.9 percent in the prior year. Our gross margins improved versus the prior year due to increased production volumes, improved productivity, but were partially offset by lower margins in North America due to the impact of the stronger euro on products exported from our European manufacturing facilities and higher steel costs. Gross margins were also impacted by the write-down of inventory of $5.8 million in the first 9 months associated with the Randers, Denmark restructuring plan.

The restructuring and other infrequent expenses recorded in the first 9 months of 2004 relate primarily to the first quarter gain on the sale of the Company's Coventry, England facility of $6.9 million on a pre-tax basis and a second quarter $2 million gain on a pre-tax basis on sale of machinery and equipment, as well as reserve reversals related to the Coventry closure in 2003.

These income items were offset by a second quarter $8 million pre-tax write-down of property plant and equipment and a $1.7 million pre-tax severance charge associated with the rationalization of the Randers, Denmark combine manufacturing operation. The Company did not record a tax benefit relating to the Randers charges. The restructuring and other infrequent expenses in the first 9 months of 2003 relate primarily to the closure of Coventry facility and expenses related to litigation regarding the Company's UK pension plan. For the balance of the year we expect to expense an additional $3 to $5 million of restructuring expenses related to the Randers restructuring.

Losses on sales of receivables primarily under our securitization facilities which is included in other expense net were 3.7 million for both the third quarter 2004 and 2003. For the 9 months of 2004, losses on sales of receivables were 11.3 million, compared to 10.8 million in 2003. Interest expense net for the third quarter was $16.4 million compared to 15.6 million in the prior year and $61.8 million for the first 9 months compared to 45.7 million 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 for the first 9 months by approximately $3 million due to costs associated with the repayment of AGCO's 8.5 percent senior subordinated debt.

The Company's effective tax rate was 38.4 percent for the third quarter of 2004 compared to 42 percent in 2003. The effective income tax rate was 40.5 percent for the first 9 months, compared to 45 percent in 2003. Excluding the impact of the Randers' charges, the effective tax rate for the first 9 months of 2004 was approximately 38.2 percent.

Moving on to the balance sheet, accounts receivable and inventory combined were $557.1 million higher than the end of 2003. The increase includes approximately $352 million of receivables and inventory related to the Valtra acquisition. The remaining increase in inventory and receivables is due primarily to seasonal inventory requirements, sales growth, and foreign currency. Funding under Accounts Receivable securitization programs was $416.8 million at the end of September 2004, which compares to $448.4 million at the end of December, 2003.

North America, our dealer inventory month's supply at the end of September on a trailing 12 months' basis was as follows. Approximately 7 months for tractors, which is higher than the prior year; 7 months for combines, which is lower than the prior year; and 8 months for hay equipment, which is approximately the same as the prior year. Our debt-to-capital ratio was 46.2 percent at September 30, 2004 compared to 44 percent at December 31, 2003. EBITDA, excluding restructuring and other infrequent expenses of $1.7 million was 97.7 million for the third quarter of 2004. EBITDA, excluding restructuring and other infrequent expenses of $1.6 million was 57.7 million for the third quarter of 2003.

For the first 9 months of 2004 EBITDA including restructuring and other infrequent expenses of 1.1 million was 313 million. For the first 9 months of '03 EBITDA excluding restructuring and other infrequent expenses of $27.8 million was 192.1 million. Unit volumes for worldwide tractor and combine production during the third quarter and first 9 months of 2004 were approximately 16 percent and 17 percent higher than 2003 levels, respectively.

Turning now 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 expected to increase by 65 to 75 percent, due to the reduction of restructuring and other infrequent expenses incurred in 2003 related to plant closures. For the fourth quarter of 2004 AGCO expects to improve adjusted earnings per share over 2003 by 10 to 20 percent. Fourth-quarter earnings are expected to benefit from continued sales and margin improvement offset by higher steel costs.

Reported earnings per share is also expected to be approximately 5 percent to 15 percent higher than 2003. AGCO also expects to generate free cash flow, which is operating cash flow less capital expenditures, of approximately 100 to $125 million in 2004. Capital expenditures are expected to range from 90 to $100 million during 2004.

The earnings per share outlook for the fourth quarter and for the full year of 2004 excludes the impact of the expected adoption of a new accounting rule related to the treatment of contingently convertible debt in the calculation of diluted earnings per share. This rule change will have no impact on AGCO's 2004 operating results or net income but requires a revised method of calculating diluted earnings per share. Upon the anticipated adoption in the fourth quarter of 2004, the expected impact of this rule change will result in a reduction to diluted earnings per share for the full year and fourth quarter of 2004 of approximately 8 percent.

Well, that concludes our comments. Shannon, we are ready to open up the conference call for questions if you would do so please.

(OPERATOR INSTRUCTIONS) Andy Casey of Prudential Equity Group.

Good morning. I have got a question on the outlook, but first it appears as if you are reasonably comfortable with North American demand. Could you tell me whether my assumption that order delivery leadtimes for North American tractors are running around 3 months at this point?

You mean on production?

Yes.

That is about right.

Okay, so presumably you are receiving orders for '05. Can you tell me whether you have experienced any noticeable drop-off in order activity for North American tractors? In other words, based on what you can see in your order activity and backlog today, would you expect --

The market looks pretty strong so that we see a pretty good first quarter of 2005 with regard to demand in North America.

Thank you, and then lastly with respect to the contingently convertible debt potential impact on EPS in 4Q in '04, just a clarification please. Does the full year guidance imply with that impact in there that share count for full year earnings per share diluted, will use the new share count as if it existed all during '04 and so the earnings containing consensus for the first three quarters right now, plus the adjusted 4Q may not add to the full year?

That is correct. The fact that, really the reason why they won't add up is because we did the stock offering in March, so that creates a different value of weighted average versus the year-end amount of shares or the fourth-quarter amount of shares. The contingently convertible shares will add in will add in in every quarter the same amount since that was outstanding for the entire year. That is about roughly 9 million shares. You also will add back the 1.75 coupon to the net income and our estimate is it will be an 8 percent dilution to that.

Also add that new rule is expected to be put in place in the fourth quarter and it has not been officially enacted yet, but that is what we expect. We are also looking at certain alternatives in structuring that note to see if it would be a potential to not have that dilution factor hit us as much. There are some options we can take and we're looking at that right now.

Thank you very much.

Gary McManus of JP Morgan.

Just to clarify that earlier first question, is your earnings estimate taking into account the change in the share count from this conversion or not?

They do not include it.

They do not include it, okay. You kept the full year guidance unchanged even though the third quarter came in maybe a nickel better than expected at least on the high range, so in a way your lowering your fourth-quarter guidance and I am just wondering is this just conservatism? Is there a shifting in process from the fourth quarter to the third quarter? Or is there higher steel costs? Just talk about the fact that it looks like in a way you are lowering your fourth quarter guidance.

I would say the primary factor for what you are pointing out is the impact of steel. It has continued to increase over our estimates that we had in the second quarter, and also we did have a little shift in earnings from the third to the fourth, but the majority of the issue is our ability to get in front of these higher steel prices. We are putting pricing in, but we are also honoring orders that are already in our system, and so effectively the steel prices get ahead of us, but we are putting pricing in so that as we get into next year we will have rebalanced the situation.

Okay, my follow-up is with the drop we have seen in grain prices for the last six months or so, what kind of impact do you think that is going to have on demand around the world? Like with soybean prices declining so much, is that going to hurt demand in South America and North America with lower grain prices? Just give me a sense of how much impact you think the drop in grain prices is going to have on demand?

I personally think that the key element of supply and demand is really the export of these grains and continuing into Asia and particularly China, and we see no indication that they won't continue a pretty aggressive program of importation. The fact that the prices have dropped is because of course the bountiful harvest here in North America particularly, and actually even though they have come down a little bit they are higher than they were when we were talking about this maybe a year ago, so we still have a pretty good price structure.

We know that the North American farmer is going to be in pretty good position this year with the bountiful harvest and many of those farmers sold their crops in the first quarter and really have come out pretty nicely. So we really don't think it is going to have a tremendous adverse effect. There may be some adjustments up and down but basically we don't see that as being a critical factor going forward.

If we assess the different markets, South America we think is more or less stable on a pretty high level. Europe might increase slightly next year. North America is stable with just for us not too importance of our market share in North America is rather low. We want to increase market share so that means we want to grow our American business whatever the slide markets would go up and down. It does not influence us too much.

Okay, thank you very much.

Barry Bannister of Legg Mason.

Good quarter. The six-year average operating margin in the third quarter for Europe, Africa, Middle East is a good 200 basis points higher than the number you got. Yesterday CNH Global said that the UK and Germany were the only weak spots in Europe. Do you think you can close the gap and get back to that kind of an operating margin as we progress through the year? I was expecting a somewhat better margin against the drought comparison.

I think our margins in Europe are continuing to be impacted a little by the weaker market in Germany. That is where we have high margin business, particularly with the Fendt operations, so that has impacted us. We did not see that increase in demand and improvement that we expected in Germany, so that was I think one of the principal reasons why you have not seen as big of an increase. But the margins did improve and that is largely due to the elimination of some of the issues that we had in Beauvais in the prior year so a lot of the improvement you're seeing is really with the Massey Ferguson business in Europe.

I think some of that Massey Ferguson business, particularly in Germany is impacted by the heavy discounting of the new entry of the CLAAS tractor in that market. And as they continue to sell their products at very low, low prices we are encouraging people to keep buying them so that the impact is rather severe to the Klaus Company. In the meantime we hold our market share even though it is quite modest.

So there is no higher cost base from a more new plant in the Beauvais location for moving out of the depreciated Coventry plant that permanently impacts the European margin?

No, we should have achieved and we did certain cost savings associated with that move and that is part of the reflection coming through this year. Last year certainly did not come through but now we're seeing some of that benefit come through and that results.

I'm sorry I'm slow. I have to clarify. Are you saying that your fourth quarter earning includes the extra 8 percent dilution and so when you guide to a 44 to 48 cent number it really would have been 48 to 52 without the dilution?

No, we kept the outlook the same, on the same basis, and so it excludes -- it does not include the additional shares. If that rule gets enacted and we are required to make that rule change, then it will reduce by 8 percent because there is still some uncertainty as to the timing of that rule change. We did not want to change our outlook.

And the dilution will be retroactive to March so the 8 percent in the last three quarters?

No, it is retroactive for the full year. The convert was issued at the very end of December 2003, so it impacts every quarter equally for the full year.

Joanna Shatney of Goldman Sachs.

Can you talk specifically about how much steel costs hurt your outlook in the third quarter? And then what it's expected to do in the fourth? And also talk about what pricing looks like as a percent of that topline increase year-over-year by region?

Our estimate is that steel costs us about 3 to 4 cents in the third quarter, and it's going to cost us about 5 cents to 6 cents in the fourth quarter and that is net of pricing. In terms of the pricing, we have been putting pricing in and various times during the year in our various market. To generalize that it ranges from 2 to 4 percent and we put in pricing in North America in the fourth quarter, and put additional pricing in Europe in the fourth quarter.

Okay, and Bob, to go back to the peak of the last cycle you were actually one of the first ones that said that things were going to be not only turning South but would stay South for a lot longer than any of us thought and we would go down a lot faster than any of us thought. Can you just compare and contrast where we are now versus where we were when you got that level of concern? And what are the points that we should be watching in say, the next six to nine months in your mind that will say whether we're going one way or the other, up or down, in North America?

I think key factor, Joanna, is to keep our eye on the exports of commodities because we still have the capability in a reasonable climate to outproduce demand throughout the world. I am not including demand in those countries that are certainly suffering from lack of food, but I mean the ones that can buy it. And as such the export is the critical factor and the last time when it went down it was because China stopped buying and the surpluses expanded.

So Bob, in the last cycle of the peak, what was the first sign that you actually saw that export number was impacted your business? Was it in cancellations? Was it in the way farmers were talking to you? What was it that suddenly changed in the marketplace?

Actually I picked it up off of the Department of Agriculture's export reports. That is where I saw the first indicator and that's what I keep looking at.

Okay, do you think we'll have some sign on cancellations if things do turn South?

No, I don't think anything we've got in our situation would result in that. I think our order bank is rather solid and you got to remember now that there's a lot of cash in the hands of our consumers at this time and that should run on through into at least six months of next year, which extends beyond our order bank and I think as such we feel pretty comfortable with what we've got.

Great and one last follow-up on the steel costs. Andy, what should we be thinking about in terms of '05? It sounds like you think you can have better match between what you're actually getting in terms of pricing for your equipment versus steel, but should we think about steel as being a negative impact going into '05?

I think there still could be some timing issues associated with rolling the pricing through our order board, potentially in the first quarter. But beyond that, I think we feel comfortable we'll have all the pricing in place.

Okay, Thanks.

Scott Graham of Bear Stearns.

Good morning. I have three questions. Could you tell us what Challenger sales and profits were in the quarter, Andy?

Sure, Challenger sales for the quarter were about $60 million. That is up from about $48 million in the prior year. And they are, they broke about even for the quarter, and last year we lost about $1 million in the quarter.

Great. Andy, also is there a way to assess what sales mix did to the margin in the quarter? Was it a positive or a negative?

Mix for the third quarter was relatively flat. We really expected to get a richer mix probably at the beginning of this year because we thought Germany would improve but in effect it was the same mix as last year.

Are new products aiding or hindering mix?

I would say aiding.

Lastly on Europe and maybe this is a better question for Bob and Martin, the European environment obviously remains pretty lackluster. And even though a good harvest is expected this year, what kind of indications are you getting from your dealers in Europe as far as whether that good harvest this year will actually translate into some buying next year, even anything anecdotal?

We saw some pretty strong markets and we are expecting the same for next year mainly in France and Spain. Those are the markets that are strong. We expect also Scandinavia growing a little bit next year and England is doing pretty good we think. We have one area which is not that excellent which is Germany and I think the farmers might be somewhat influenced by the overall kind of recession or depression Germany is facing. I think they will invest sooner or later. The population in Germany in general is pretty new, so therefore they can afford to maybe invest less for a year or two but if they did already that last year and this year, therefore I am optimistic that this market will come back. I am sure that it will not go down further.

I think there is one other little story. You said anecdotal, our Fendt operation had a customer product showing in September and drew over 40,000 people in Germany. That is a 25 percent increase over the same show a year ago. When you can draw that kind of crowd to a product, a single product that is pretty indicative of the future potential for that business.

And manufacturing in Fendt peaks this year so that will be the highest output ever. We just have a little bit different product and content mix so we do a little bit less in Germany but we do much better in some of the other markets, so in the area of above 60 horsepower, we are really performing very, very strong.

Okay, back on that show, did that show yield orders or was that not, orders not taken?

It did. Normally you can expect that those farmers who go there also are interested in buying. Not everybody does of course but we are very optimistic and I say the feedback is pretty good, you know how farmers are. Basically, Wintertime is coming now as preparation is almost done. And then they think about what to do and how to invest and some will do that maybe before the end of the year because of tax reasons.

John McGinty of Credit Suisse First Boston.

Andy, can I just come back -- are you saying pricing up 2 to 4 percent? Are you saying of the sales increase in the third quarter that price was 2 to 4 percent of that?

No, because that is what we put in place but that has not rolled all the way through. I say incremental pricing relating to the third quarter, relating to steel was less than a percent, but by the beginning of next year we will be in the 2 to 4 percent range.

But the fourth-quarter steel prices going up from 3 to 4 to 5 to 6, does that mean that steel goes up and you get no more pricing in the fourth quarter or does steel go up a lot?

Steel goes up a lot, but we pricing as well.

In matching it next year with 2 to 4 percent price, then in other words whatever sales we assume next year, we would assume in general terms 2 to 4 percent price on top of that?

That is correct.

And in your mind that's going to be enough to capture whatever steel does even if it just stays where it is?

If it stays where it is, that's correct.

And what is your assumption? That it stays or that it goes up or that it goes down?

The assumption is general is that it does not go up anymore and there are some experts who think that it will go down step-by-step during the year.

Okay, fine. But at this point the 2 to 4 percent is kind of a global number, in other words, kind of an average all in for AGCO worldwide or that's what we should think of?

I think average is about 3 percent.

Just a couple of questions about the demand outlook. One, you said Latin America was going to be fairly stable at a high-level and I guess the question is, are you just saying that the impact of substantially lower soybean prices, which is very important obviously to the Brazilian market is not going to have an effect on demand?

That is what I think. I think the overall market is pretty stable; we saw a slight downtrend but I think that will recover.

We're also seeing some pick up in Argentina, John.

Okay, but I mean Brazil is still your biggest --

Yes, but let's say we have also to do a lot of pigs boar (ph) to South American markets, on Brazil we had some markets other people are not in that much like Paraguay and Venezuela where we have a very strong position including Argentina, which means that overall we are rather optimistic that we can stay on the level we are.

Okay and with regard to Europe, when we look at the impact of the common agricultural policy of bringing in the former Eastern European countries and trying to deal with that, are you concerned at all that that is going to have negative impact as commodity prices are lower on a global basis and therefore put some more strain on the exporting out of Europe? And in other words do you think that is playing any kind of a role in what the German farmer is looking at or do you think it is just simply the drought and as your point, which is valid about the recession there? In other words are the European, the French and German farmers looking over their shoulder at Eastern Europe and questioning what's going to happen with that common agricultural policy?

Let's say first of all Germany. I think Germany was facing one of the best harvests during the last 8 to 10 years this year, so therefore the German harvest was not impacted by drought at all so we talked to a lot of farmers and we have the chance to do that during the field days (indiscernible) was talking about. So that means they are in pretty good shape; they are just a little bit conservative in when to spend and how much, and so therefore I am rather optimistic about Germany.

When it comes to the 10 new candidates the situation for us is pretty good because we are already in most of those markets. Farming in those areas is pretty professional and there is a huge demand to recover basically and to get into new equipment. So even in case there would be a slight switch between let's say between Western Europe and Eastern Europe, we would benefit from that. We are traditionally very strong in those countries and we have very good partners in distribution both in Turkey and Hungary, countries like that, so therefore we are optimistic. And I don't think that it will have a negative impact on that, I rather expect a positive impact. But it is somewhat difficult to judge about.

Final question, if I can go back just to clarify because obviously it is a point of some concern for people, and that is the fact that the depreciation, the expiration of the accelerated depreciation in the states, the concern among some that there is a pull forward, the concern among some that the commodity prices are substantially lower. Despite all of those things I think getting back to Andy's original question, you were in terms of looking at your order book, your order book as you look through the first quarter you said despite those factors remains strong. I just want to make sure that I was clarifying that that was what you were saying.

Yes.

Thank you very much.

Andrew Obin of Merrill Lynch.

Good morning. I have a question on your combine share in North America. I just looked at the latest retail statistics from John Deere and Case New Holland (ph) and it seemed that both of these companies seemed to outperform their market. Does that mean that there was some significant downward shift in your share for combines?

Not really. Me we also work on let's say a new generation of combines for the North American market, and our idea is to grow that marketshare next year.

But was there a significant change in marketshare in the third quarter in combines or --?

Not for us.

No.

The second question, maybe I missed it, could you break down the performance of Valtra in the quarter by region, and both in terms of profitability by region as you've done previously?

Well, I am not sure exactly what I gave previously but as we reported already they had sales in the quarter of about $220 million. They had operating income of about $16 million. If you want to look at that regionally, the sales were almost virtually the same proportion that we've seen before. It is about 75 percent in EMEA and 25 percent in South America with a little offset and some of these small markets, but various limited volume in any other market besides those two. The operating margins in South America were about 12 percent and the operating margins in EMEA were about 3 percent.

Thank you and just final question, any updates on what CADE is going to do in Brazil?

Our situation looks pretty good, pretty stable. We think that everything is going into the right direction and we expect an answer first or second quarter of next year. The process (indiscernible) is a little bit slow, but we are very optimistic that the whole deal will be approved.

Thank you very much.

I want to make one statement with regard to the combines. There is one major change which is (indiscernible) combine somewhat is going out of the market, and we think they only will sell about 100 combines, which is almost nothing in North America.

Thank you.

Charlie Rentschler of Langenberg & Co.

Good morning. On capital expenditures, I guess Andy said that he was estimating for the year they would run in the $90 million to $100 million range. Through 9 months they were 47 million, so that would say that you're going to spend almost as much in the fourth quarter as you did in the first 3 quarters. But combined with that, I wonder while you are answering that you could also give us an update on where the company is in terms of consolidating and rationalizing and fussing with operations. I realize big manufacturing companies would never get through this, but your Coventry is closed. Randers, I guess, is being restructured. Sisu engine is being insourced, etc., but can you kind of throw this all together for us, please?

I will answer the question about capital and then turn it over to Martin on the second question. In terms of capital we typically spend more capital in the fourth quarter. You are right that the trend would not lead us to think we will get to 90 to 100. We do have some more significant expenditures that we are planning to do in the fourth quarter but there is also a possibility we fall a little short of that number as well.

Are there some significant projects you can tell us that are going

There is nothing specific except for tooling for new equipment, new machines for productivity improvements, things like that.

There are no other plant closings anticipated or even being studied at this point. We are running pretty close to one shift capacity in all of our plants except Randers, which is the reason it is being restructured, and that operation will be in its new format or new restructured operating format by the first of the year, or in the first quarter. I think that is conservative. But there is no other major plant closure capital investments. Most of the capital investments that would come under that number while there are some tool issues there is a lot of new product development going on. And even taking the Sisu engine and putting it in other products requires some capital investment.

Thank you.

David Bleustien of UBS.

Just a couple of accounting questions. Does your free cash flow guidance include proceeds from PP&E sales?

No.

Can you walk me through the impact of interest expense? The interest expense calculation for the EITF 0408, and what was the size of the convert?

The convert was $200 million. The coupon is 1.75 percent, so that amount gets added back into net income in your diluted EPS calculation.

Okay, terrific. Goodwill jumped by $15 million in the quarter but it does not appear that you bought much. Were all those changes purchase accounting related to Valtra?

That would say probably just currency movements.

And what type of tax rate are you expecting for next year?

I don't have a number for you yet. We will give that guidance probably next quarter.

Thanks much.

Jeannie Wendell (ph) of Cain Anderson.

Quick question in regards to the accounting changes for contingent convertibles, you mentioned that you were considering some measures to counter the dilutive effects. Can you talk about that?

Well, there's a lot of companies that are looking at an exchange of those notes to a net share settlement concept where instead of the convert being all in common stock shares you would repay the principal value or the $200 million value in cash and only the effectively the appreciation of the stock above the exercise price would be paid in stock. So there's a lot of companies looking at that right now and we are looking at that as well.

Tom (indiscernible) with Credit Suisse First Boston.

I think if you back out using your numbers as the Valtra before it looks like maybe 5 million or so, 6 million of Valtra's operating income came out of Europe. So when you look at organic European improvement on operating income went from say, 13 into the mid to high 20s. How much of that is Beauvais efficiencies, Beauvais getting better versus just the volume improvements in Europe?

In the third quarter we estimate the benefit of Beauvais getting back to normal as you will eliminating the problems of last year is about $8 million.

And is that pretty much running at the desired levels now of efficiencies?

I would say that they are at normal efficiency levels. We still think that there is improvement opportunities that we can have, but we certainly don't have any excess costs due to supply disruptions or anything like that.

Just on the working capital, do you see that working capital use reversing by year-end or how much of that reverses by year-end?

By the end of the year I think we expect to have a working capital net use of about $40 million to $50 million.

A follow-up from Joanna Shatney of Goldman Sachs.

Just two housekeeping things. Can you just break out the Challenger revenues for the third quarter and give us an update on the antitrust issues in Latin America, and in Brazil?

The Challenger revenues were $60 million for the quarter. What was the second question?

An update on the antitrust issue for the Valtra acquisition and Brazil, I know you filed. Do you have any news or still going to be a while?

Both questions we answered already but I can repeat it again. We don't see any major problem with (indiscernible) obtaining approval in Brazil.

Okay, thanks.

(OPERATOR INSTRUCTIONS) Our next follow-up question comes from John McGinty of Credit Suisse First Boston.

I wonder, Andy, if you would just for a second help us when we look at '05, I know you're not giving any guidance. You all have talked generally about the volume trends that are out there. You have talked about being able to price to offset steel price increases and so on. Could you help us in terms of restructuring benefits? For example the Beauvais benefits, its back to normal level. When we think of '05 versus '04, clearly there's volume issues and there's leverage on that volume, and that is the adjustment that we can make or not, but are there internal issues at AGCO that benefit '05 from '04? Are you pretty much done on those? In other words what chunks are there that we would be looking at '05 to '04 other than just simply volume price leverage?

The only restructuring item that we will see some benefit from next year is the Randers restructuring. What we said was we thought the benefit of that would he somewhere in the $8 million range over a two-year period, so we will probably get about half of that next year. There also are a few onetime items that we had this year relating to the write-down of some inventory related to that comes back through. Other than that I would only point to normal operating improvements, volume as you point out.

I'm sorry, the 5.8 million Randers inventory, I think it was an inventory write-down, maybe I got that wrong, but when you were going over the gross margin that was not an infrequent restructuring and other infrequent costs? In other words is that a number that you ate that we get back next year on an operating basis?

That's right that was in margin that was in cost of sales.

We get back, we get 4 million from the Randers restructuring and the 5.8 million from the absence of the write-down is a separate number, in other words that is not double counting, that is a separate number?

That is correct.

And we of course work on some of our core processes with regard to redesign them and we will show the impact in the plan for 2005.

Okay, thank you very much.

Adam Allman (ph) of Midwest Research.

I wonder if you can discuss a little bit the acquisition environment (inaudible).

We always have maintained a pretty good assessment of opportunity and quite frankly at this point we do not see a lot of situations in the markets of North America or Europe that would really enhance our operations. And where we are lacking some strong product entries, we are investing heavily in being a stronger competitor in those specific markets, such as the harvesting business in Europe or particularly some of the products such as sprayers or planters and so forth in South America. If we were to find or entertain an acquisition, there is nothing in the short term that I know of, but we continue to explore opportunities in South America for small, short line situations.

Mike Kinder (ph) of Citigroup.

Just following on that question, you are generating a decent amount of free cash flow. What are your priorities for '05 with cash flow? In terms of acquisitions on an opportunistic basis potentially. Can you just walk us through your other thoughts on '05?

Certainly we would like to continue to reduce our leverage, and so that will be a high priority of any cash we generate. We are anticipating that we continue high levels of investment in R&D and product development. We see that is important for our future but at this point any cash that we generate will be debt reduction.

And I think there is a priority here to move back towards investment-grade and that certainly requires payment of debt.

Barry Bannister with Legg Mason.

When I add up 75 percent of voucher and EMEA doing 3 percent and 25 percent in South America doing 12, it's about 5.25 percent but then you said that you did 7.25 percent margins, 16 million on 220 this quarter. I tried to plug the difference on the amortization but it still wasn't enough. Could you square those numbers for me because they're not adding up.

Let me try here. I believe the difference is that South America I gave the wrong number. Their margins were more like 15 percent. I'm sorry about that. That should pull you up to the right number I think.

Okay, thanks a lot.

(OPERATOR INSTRUCTIONS) It appears there are no further questions at this time. I would like to turn the conference back over to you for any additional or closing remarks.

Thank you, everyone, for participating in our third-quarter conference call. We appreciate your interest in the company and we are always available if you give us a call for any of your specific questions. Thank you, Shannon, for monitoring our conference call. We will look forward to talking to you again at the end of the year. Thank you.

That does conclude today's teleconference. Thank you for your participation and have a wonderful day.