AGCO Corp (AGCO) 2004 Q4 法說會逐字稿

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Good day everyone and welcome to the AGCO Corporation 2004 fourth quarter earnings release conference call. Today's call is being recorded. At this time I will turn the conference over to Mr. Martin Richenhagen, President and CEO. Mr. Richenhagen, please go ahead, sir.

Welcome to the AGCO fourth quarter conference call. I have with me today 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 actually -- 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 that call will be available on our corporate Website for the next 12 months.

I would now like to to summarize our financial results. Net sales for the fourth quarter of 2004 were approximately $1.5 billion compared to approximately $1 billion in the prior year. For the full year net sales were approximately $5.3 billion, which was approximately 51 percent above the prior year.

Operating income for the quarter, excluding restructuring and other infrequent expenses was $88.3 million compared to $63.7 million in the prior period. For the full year operating income on the same basis was $323.6 million compared to $211.9 million in the prior year.

Diluted earnings per share, excluding restructuring and other infrequent expenses and before the implementation of the new EPS accounting rule related to convertible debt was 56 cents for the fourth quarter compared to 40 cents in the prior year period. Full year earnings per share on the same basis was $1.87 per share compared to $1.24 per share in 2003.

Our 2004 results were positively impacted by strong sales growth and improved margins due to cost reduction initiatives. In addition, higher production volumes and improved supply chain performance lead to productivity gains. We expect to take further actions in 2005 to improve our financial position for the future through further cost reduction projects and product development.

Now I would like to turn the presentation over to Andy to discuss additional financial information.

In the fourth quarter AGCO implemented EITF Issue No. 04-08 related to the treatment of contingent convertible debt and the calculation of earnings per share. This rule is sometimes referred to as the Cocoa Rule. The implementation of this rule required AGCO to add approximately 9 million shares to its share count for the fourth quarter and the full year of 2004.

In our release we have provided our EPS results both before and after this accounting change. The results are summarized as follows. For the quarter adjusted earnings per share before the new rule, 56 cents, adjusted earnings per share after the new rule, 52 cents, and reported earnings per share after the new rule, 52 cents. These results compare to earnings per share of 40 cents and reported earnings per share of 39 cents in 2003.

For the full year adjusted earnings per share before the new rule, $1.87, adjusted earnings per share after the new rule, $1.75, and reported earnings per share, including all items after the new rule, $1.71. These results compared to adjusted EPS of $1.24 and reported EPS of 98 cents in 2003.

Reported sales for the fourth quarter were 48 percent greater than 2003. Acquisitions and currency translation contributed approximately 34 percent of this (technical difficulty) consisting of an increase of 282.1 million related to Valtra acquisition and favorable currency translation of 65.1 million. Excluding Valtra and currency translation, net sales increased 152 million or approximately 15 percent over the prior year.

Reported sales for the full year were 51 percent greater than 2003. Acquisitions and currency translation contributed approximately 36 percent of this increase, consisting of an increase of 1 million 07 -- excuse me, 1,007,000,000 relating to the Valtra acquisition and favorable currency translation of 241.9 million. In addition, the consolidation of our transmission venture, GIMA, contributed approximately 35.8 million, or approximately 1 percent of the increase in 2004. Excluding Valtra, GIMA and currency translation, net sales increased 492.8 million or approximately 14 percent over the prior year.

The remaining 15 percent and 14 percent increases 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 15.9 percent, South America up 9.7 percent, Western Europe up for 15.8 percent, and the rest of the world markets, including Central and Eastern Europe, Asia-Pacific, Africa and the Middle East up 11.7 percent. For the full year North America was up 17.4 percent, South America up 30.7 percent, Western Europe up 10.1 percent, and the rest of the world markets up 1.5 percent.

Part sales in the quarter were 179.1 million compared to 136.1 million in 2003. Excluding the effect of currency and Valtra, part sales in the quarter were 7 percent higher than the prior year period. Part sales for the full year were 699.7 million compared to 542.5 million in 2003. Excluding the effect of currency and Valtra, part sales for the full year were approximately 5 percent higher than the prior year.

Valtra generated net sales of $282 million, and 1 billion 7 million in the fourth quarter and full year of 2004 respectively, with operating income before the amortization of intangible assets and restructuring and other infrequent expenses of approximately 17 million and 71 million for the fourth quarter and full year respectively. In addition, AGCO recorded non-cash amortization of purchased intangibles related to the Valtra acquisition of approximately 3.7 million and 14.1 million for the fourth quarter and full year respectively.

In the fourth quarter our gross profit margins increased from 17 percent of net sales in 2003 to 17.3 percent in 2004. For the full year gross margins increased to 18.1 percent compared to 17.6 percent in the prior year. Our gross margins improved versus the prior year due to increased production volume and improved productivity, but were partially offset by lower margins in North America due to the impact of the weak dollar on products exported from our European and Brazilian facilities, in addition to higher steel costs.

The restructuring and other infrequent expenses recorded during 2004 related primarily to an $11.5 million charge associated with the rationalization of the Randers, Denmark combine manufacturing operation, as well as a $1.9 million charge associated with various rationalization initiatives in Europe and the U.S. These charges were offset by gains on the sale of property, plant and equipment and restructuring reversals totaling $9.2 million related to the Coventry, England facility closure, and a reversal of $4.1 million of a previously established provision related to the Company's pension scheme in the UK. The Company did not record a tax benefit relating to the Randers' charges.

The restructuring and other infrequent expenses reported during 2003 related primarily to the closures of the Coventry facility and DeKalb, Illinois facility, as well as expenses related to the litigation regarding the Company's UK pension scheme.

Losses on sales of receivables, primarily under our securitization facilities, which is included in other expense net, were $4.3 million for the fourth quarter of 2004 compared to $3.8 million for the fourth quarter of 2003. For the full year losses on sales and receivables were 15.6 million in 2004 compared to 14.6 million in 2003.

Interest expense net for the fourth quarter was 15.2 million compared to 14.3 million in the prior year, and 77 million for the full year of 2004 compared to 60 million in the prior year period. Interest expense increased due to the higher debt levels in 2004 as a result of the financing of the Valtra acquisition. The Company's effective tax rate was 33.5 percent for the fourth quarter compared to 38 percent in 2003. The effective income tax rate was 38.4 percent for the full year of 2004 compared to 42 percent in 2003. Excluding the impact of the Randers' charges, the effective income tax rate for the full year 2004 was approximately 36.5 percent.

Moving onto the balance sheet. Accounts receivable and inventory combined were $535.4 million higher than the end of 2003. The increase includes approximately $340.7 million of receivables and inventories related to the Valtra acquisition. The remaining increase in receivables and inventories is due primarily to sales growth and foreign currency translation. Funding under our receivables securitization programs was 458.9 million at the end of December 2004 compared to 448.4 million at the end of December 2003.

In North America our dealer inventory month's 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; 6 months for combines, which is lower than the prior year; in addition, our dealer month's supply of hay equipment is approximately 7.5 months, which is also lower than the prior year.

Our net debt to capital ratio was 37 percent at December 31, 2004 compared to 38 percent at December 31, 2003. Our cash flow in 2004 allowed us to improve our debt to capital ratio within 1 year after the Valtra acquisition. EBITDA, excluding restructuring income of $1 million, was 119.1 million for the fourth quarter of 2004. EBITDA, excluding restructuring income of .2 million was 86 million for the fourth quarter of 2003. For the full year EBITDA on a same basis was 432.1 million for 2004. For 2003 EBITDA, excluding restructuring expenses of 27.6 million, was $278 million.

Unit volumes for worldwide tractor and combine production during the fourth quarter and full year of 2004 were approximately 6 percent and 14 percent higher than 2003 levels respectively. For the full year our production was slightly below our retail sales.

Turning now to our outlook for 2005. As highlighted in our release, industry conditions are expected to be mixed in 2005. We anticipate North America to be flat to up approximately 5 percent, and Western Europe to be flat. In South America industry conditions are expected to decline from the strong levels of 2004. We currently expect industry sales to be 20 to 30 percent below 2004, with a larger decline in combines than in tractors. As a result of this outlook we expect AGCO sales to increase about 5 percent, including the positive effects of pricing and currency.

For the full year of 2005 our outlook reflects the following, impact of the decline in the South American market, a 20 percent increase in engineering expense to accelerate benefits of new products and cost reduction initiatives, improved results in our other regions driven by productivity gains from cost reduction and other initiatives, and the negative impact of higher shares. As a result, our outlook is for earnings per share to be flat to 5 percent higher than 2004. Our forecast for this first quarter -- for the first quarter is for adjusted earnings per share, after the adoption of the Cocoa Rule, to be between 20 and 25 cents per share. In 2004 our EPS, restated for the Cocoa Rule, was 25 cents per share.

Our earnings in the for us quarter will be more heavily impacted by the South American market decline because of the importance of South America combine sales in the first quarter, and the seasonality of our overall results.

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

(OPERATOR INSTRUCTIONS). Gary McManus with JP Morgan.

Can you talk a little bit more about South America in terms of -- you say industry volumes are going to be down 20 to 30 percent, what would your revenues be on that? Because I would assume you get some residual benefits of the weak dollar. And secondly with South America, the margins dropped from -- it is been running 16, 17 percent margins and then it dropped in the fourth quarter to about 12. What kind of margin expectations should we expect in South America in 2005?

On a sales side, you're right. As you know, we're saying that industry sales are going to be down 20 to 30 percent. What we're looking at is really before pricing and currency sales to be down a little over 20 percent, and then after you take into effect the pricing and currency, sales will be down about 12 percent.

Can you say the nature of revenues in South America?

It is South America revenues.

And then margins?

Now margin standpoint, I think they're going to -- we're looking at a decline in margins year-over-year because of the lower volume. And I think what we're looking at is margins to be fairly comparable what you see in the fourth quarter. So closer to 12 percent.

And we think that we have now here a pretty conservative forecast.

So why wouldn't margins decline further in South America, just given lack of absorption with big production declines and so forth? Because if I go back a few years ago, obviously this is before the Valtra Brazilian business, but AGCO's margins in South America had been in the single-digit area.

What we're doing, we have a comfortable situation in South America because we have enough terms working in Vavic (ph) favor to be in an imposition to adjust easily an end of amount of this month, end of February, we will already have 350 people less than last year. So that means we are in a position to very flexibly adjust to the situation, and we also work on overhead cost reduction and indirect labor.

The other point I would point out is with the Coventry closure we moved production from -- some of the production from England into Brazil, which allows that plant to not be so dedicated to -- and dependent on the South America market. They're exporting a lot of product into U.S., some into Europe, and some into Australia. And so that cushions the blow from a tractor standpoint.

The combine facility is impacted fairly significantly by this market decline because we don't export combines at this point -- stage out of that combine plant. The other point is the Valtra business will -- seems to be holding up a little better. They are more dependent -- or more in closer to the sugar cane market in South America, which we believe will hold up better than the markets associated with the soybean sector. So Valtra is not going to decline as much as the Massey business.

And just one quick follow-up. Any progress in getting government antitrust approval in Brazil?

Everything is on schedule, and we're optimistic that we will get an approval soon.

Andrew Obin with Merrill Lynch.

Looking at the operating improvement in Europe in the fourth quarter I was wondering what specifically happened, and how sustainable are these improvements going into 2005?

When you look at Europe, obviously you have an impact of adding the Valtra business there. But secondly you have to think about what we saw last year in the fourth quarter, we were still struggling with our Beauvais facility, and had lowered production there to effectively control what was happening, get our inventories back in line. And this year we have corrected those issues in Beauvais. The plant is running at much improved productivity levels, hitting all their targets, and really had a very strong year from an improvement standpoint. And so I think we expect that we're going to see continued improvement in our European or EMEA results and margins going forward.

My understanding was that I think next year we were going to go to Beauvais and fix some systems, I think, or some issues with the Cabot (ph) assembly line. And I was just wondering what kind of operating margins that we are seeing for 2005? Are we sort of thinking there will be any operating disruptions from the fact that we have to go in and fix stuff? Could you give sort of more specific guidance in final (ph) what you told us in South America about Europe?

We announced a major project now in Bovair (ph), in Corpos (ph) at Reedy rhyme (ph), and that includes the whole supply chain, the logistical systems, housekeeping, inventories, as well as major productivity issues, including the caps -- so you described and you were talking about. And we adjust let's say in the situation where we try to figure out what the improvement number is, and in the budget we have something like --.

In terms of overall cost improvement, we're looking at an improvement of about $25 million. And a lot of that does reflect European -- improvement in the European business. So again we expect our margins to improve in Europe, not only relating to the Beauvais facility, but also our other facilities and other businesses in Europe.

And just a final question. What are you guys -- I know the German market is very key for you given scent (ph). What are you guys seeing in Germany in early '05?

Sometimes the agricultural business is a little bit anti-cyclical, so the German industry is really very pessimistic. I just happened to talk to the new head of the industry association, Uran Tuman (ph), a couple of days ago, and everybody is pretty pessimistic about our expectation in the future.

But we don't see that in that ag business, or the ag business we believe might perform stronger than the overall industry. And the reason here for this might be that they had a very good harvest last year. That they still have commodities where they will sell during the next couple of weeks. That they -- it that make sense to invest tax wise. And that they also -- if they didn't invest too much within the last couple of years. We of course want to be prepared for a future potential downturn. And Fendt is launching a major restructuring project together with Arthur D. Little (ph), Switzerland.

Joanna Shatney with Goldman Sachs.

Can we talk a little bit about Challenger, what the expectations are for '05 from an incremental revenue point of view and also from a profitability point of view?

Sure. In 2004 we increased our sales close to 30 percent above 2003. We expect to -- our target for 2005 is about another 25 percent increase in sales, which would put us well above $300 million. From an income standpoint, we were -- lost about $3 million in 2004. Our target was to break even, but because of the currency and some steel costs we did not achieve that, but we expect to be profitable in 2005, somewhere in the 3 to $5 million range.

And what is the key to getting us to profitability? Is it product mix?

It is product mix. We think that we might sell -- or want to sell more combines this year. In order to do that we have a dedicated sales force in place, and that will help.

Can you talk about North America a little bit? Your outlook is for flat to modest growth, but can you talk about what you're seeing right now, and kind of lay out how you see it by quarters? Is every quarter a growth quarter? Is the front half of the year strong, the second half weak? If you could just give us some color there?

Well, the year started pretty good, so we had a very, very strong order intake in the month of January, and February looks also very strong. We have a good order book, so I'm pretty optimistic for the first quarter. Talking to customers and dealers, nobody is assuming that it will change during the rest of the year. So I'm pretty optimistic.

So growth in every quarter?

There should be growth in every quarter. It is more related to the first-half than the second half.

John McGinty with Credit Suisse First Boston.

A couple of nits. Andy, what was the effective price increase in the fourth quarter and for the full year of '04?

Let's see if I can look that --.

And then the next question is what are you assuming for price in '05?

Right. Okay. For the fourth quarter we had pricing about 4 percent. And for the full year it rounded out to about 3 -- a little over 3 percent. And next year we expect pricing to be around 3 percent as well.

So in that 5 percent sales, because there's currency in there too do you expect -- is the 5 percent really flat or down real? In other words, taking out currency -- is 5 percent -- 3 percent of that is price, but currency has been to be a factor in there too.

Currency is about 2 percent. So excluding those two items, (multiple speakers) a decline in South America, it is pretty flat.

And then in terms of -- you had said in the third quarter that steel cost you 3 to 4 cents. And you were assuming it was going to cost you I think 5 to 6 cents in the fourth quarter, did it, or was it worse?

That is about right for the fourth, and then for the full year our estimate is about 10 cents.

And what are you assuming in your estimate of flat to up 5 percent? What are you assuming for steel?

We're assuming that our pricing offsets the steel.

Okay.

There might be a little chance because it looks like that steel prices are flatish and even going down here and there.

But you are not -- are you bought ahead or not? In other words, are you going to benefit from that, but on the other hand the offset is there some risk if it goes the other way?

We will benefit from that.

Now with regard to the increase in engineering, a 20 percent increase is like $20 million, if I'm reading this correctly. Was a 20 or a 25 percent increase, I'm sorry?

20.

20. And that is a base of 100 or so million?

Correct.

That is a lot of money, particularly for AGCO which has never been a heavy spender. Could you kind of talk to what you're doing -- where that is going? Is that -- is that kind of a change that you brought in?

Yes. And it's, let's say, part of our vision. Our vision is to be -- to provide high-tech solution for professional farmers feeding the world. And you'll hear that maybe once in a while in the future. And we have, let's say, certain products where we need improvement. We need to complete our product range in Europe with a European combine offer. We have some products where we -- let's say -- we're a little bit dated. We have other products where we are excellent. So the big balers, the sprayers, the track tractors, and also most of our wheel tractors are in very good shape, and we think that that generates growth. We come up this year, we just launched a complete line of new compact tractors, which we think are leading with regard to technology, and that already creates volume. And this is a little bit the direction we're heading for.

And in terms of Valtra, I think again going back to the notes on the third quarter that back then it was 220 million, and it was like a 75 percent, 25 split Europe, South America. With the European margins of 3 percent and South American margins to 15, given what happened in the fourth quarter I assume those numbers are not comparable. Did Europe finally come up and South America come down in the fourth quarter?

Europe margins in the fourth quarter were much better.

Like 5, 6, 7 percent?

Closer to like 5 percent. And then the South American margins were a little below 10 percent in the fourth quarter. That is pretty typical for them. I don't think it is -- they cut off their production mid-December.

So it is seasonal then?

Kind of a typical lower margin quarter for Valtra South America.

Final question with regard to the Challenger and the assumptions that you're making next year and the mix of combines, where are you right now? Of those Challenger dealers what portion of them are selling -- are still selling the cost (ph) combine as opposed to also selling the Challenger AGCO? Is it still 50-50, or where are we? And is it still duel or are you able to try to move the Lexicon out, or what is happening there?

Actually I think that about 15, something like that, around 15 Cat dealers still in North America and Canada still buy actively combines. And they are a little bit more optimistic as I heard about year 2005. As it looks like that they might sell something like 200 combines, which doesn't hurt us too much because our combines are positioned a little bit in a different segment. We will come up with a big Class A combine around 400 horsepower, which will be a more competitive. And so we don't try to aggressively push Lexicon out above the Caterpillar distribution. But that might happen anyhow one day, I guess.

But if they are selling 200, put that into perspective, are you selling 500 or --?

I hope so. But not yet.

Barry Bannister with Legg Mason.

You know if I had a half a point to your EMEA margin and knock the South American down to 12 and keep the Asian flat, it is hard to get to your 0 to 5 earnings guidance. You would have to do less than 2 percent in North America down year-over-year. Is your North America margin the real laggard and part of that is the R&D spend?

I didn't follow those numbers. But we expect that margins in North America to improve, so that may be part of your difference there. The R&D spend is I would say more weighted into Europe, but it is really across the board.

And you know Andy is always a little conservative, I would call it.

But what about the year-over-year operating margin improvement, '05 over '04, could you quantify it in basis points? Because again I can't get the math for your 0 to 5 earnings guidance.

Operating margins should be relatively flat overall.

I will follow up with you later. Thanks.

Charlie Rentschler with Langenberg & Company.

Back to Brazil. Can you give us your thoughts on what will it take to turn the tide in the soybean market down there? I guess it has been a bit of a freefall, but is this something that you would expect would go on for the a year or 2 or 3, or do you see some -- is there some grounds for optimism that things will turn around?

We have a pretty good relation to the Secretary of Agriculture, Mr. Rodrigues. And one of our Board members is also in Brazil, one of our Directors. So I think we have a pretty good picture on how the market is doing. And what everybody is telling us is that this is a kind of short-term thing, and that they will recover next year latest. So I'm even not sure whether this might also change during the course of this year a little bit. Because now everybody, after a very good year 2004, gets maybe a little bit too cautious. And so I think in general Brazil will be back to normal latest 2006. That's what we hear.

Mark Koznarek with Midwest Research.

I would like to ask you about your sprayer business, given the issue of Asian rust here in North America. And given that you've got such strong position in South America, can you provide some prospective on how the Asian rust situation might evolve here? But the first question is the prayer business, how does that do in '04 and the outlook in terms of the order board for '05?

Actually we didn't bring the prayer yet to South America to Brazil, and we are working on that. As we are working on getting a combine into the Valtra distribution, which let's say now is a little bit easier because we have a little bit less work to do in the combine factory.

So with regard to the sprayer business here in North America, the Asian rust of course does help. So the only way out how to fight against it is basically by spraying. And we have -- there's a good management in place. We have very good sales force. So we also work on a facelift for those products. Fix little problems we had in the past -- we faced in the past. So I think this is a business which will be important to us also in the future.

Most specifically in your outlook for North America, 0 to 5 percent, what is the growth expected in your sprayer line, revenue (multiple speakers).

For sprayers we expect sales growth to be more in the 10 to 15 percent range.

And that is around -- if I remember correctly, around a 400 million business for you, is that right?

More like well over 300 million.

300. Okay. Alright. Thanks very much.

Gary McManus with JP Morgan.

I was looking at my notes on Valtra for 2003, and I had like 950 million in revenues and about 70 million in operating income. If that is right, it doesn't seem like you had a lot of revenue growth or operating profit growth in 2004. So I want to verify that is the case. And explain why with -- I would think between currency in Brazil you had pretty good growth from Valtra.

The sales did grow, and most of that growth was in South America. And I think once -- from a -- maybe the numbers that you had were before some of the new basis of accounting that we had to put through, because they did show some improvement in 2004.

So do you have what the revenue growth from Valtra was '04 versus '03 in margin?

I don't have in front of me, but they did show some improvement. The one thing that did hurt them a little was a decline in the Finnish market, which is where they are very strong, and also some impact of steel hurt that business a little. But overall they were improved in '04 versus '03.

And secondly, can we took about marketshare performance across the major regions, Europe, or may be breaking it down to like Germany and some of the other key markets there in Brazil? How you did obviously looking at it from an organic standpoint?

From a marketshare standpoint we were effectively in line with the market in most places, and showed an improved market share, particularly in Europe. And that was effectively a recovery and improvement in the Massey from the issues that we had in 2003. We recovered very nicely and have some good momentum in that business in Europe now.

And would you say you lost share in North America because of the currency -- importing from a high-cost area?

No, we didn't lose share in North America.

Andrew Casey with Prudential.

Just a question on the outlook. And I joined the call a little late so if you went over this, I apologize. As you look at the first quarter the guidance of 20 to 25 cents being a little bit beneath the adjusted last year of 25, to get to the full year of flat to up 5, what has to change as we go through the next quarters?

I think the impact -- I think what is happening is the impact of the decline in South America is much more weighted to the first quarter. They are a much heavier percentage of our income in the first quarter. And so because of that, you see it be a decline. But that level is backed out over the next 3 quarters. So we expect to be up in the following 3 quarters to offset the decline in the first quarter.

And then if I turn to cash flow, which was better than I expected in the quarter, you had what appears to be a very good working capital performance. Is that kind of seasonal and we should see more seasonal patterns going into 1Q, or has there been something that you have changed that should make it a little bit more sustainable performance, specifically in days inventory?

I think the end of the year is our low point, and so you would expect that to be where we're generating the cash. We will always use cash in the first 2 quarters of the year. So I would expect us to be -- have the same seasonal patterns that we had last year.

What I would like to focus on is that in 2004 we realized highest revenues in the history of the Company, highest operating income and highest cash flow. So -- and the rest we will work on.

Andrew Obin with Merrill Lynch.

Just a follow-up question on -- to touch on Andy's question on free cash flow. What are we expecting for free cash flow in 2005? And also sometimes when the Company has had very strong cash flows in the fourth quarter, are we going to see a massive payback in the first quarter of the year?

Again I think it will be -- go in line with how we did last year. So we certainly will use working capital and use cash in the first half of the year. But I don't think it will be unusual. I would -- our forecast for '05 is that we will have free cash flow of about $150 million. And the difference between '04 and '05 will basically be that we expect to have a higher capital expenditure budget for '05.

So how much in CapEx are we going to have?

About 110 to 120 million. And some of that increase is due to the new product introductions. Also, capital involved in increasing our capacity in our Seesue (ph) engine plant, which is a major project that we're starting in 2005.

Just on a more macro question, in terms of what is happening in Latin America, I think one of the concerns about Brazil is that the acreage growth, and we're not only talking soybeans, the acreage growth will slow or turn negative in '05 and '06. What do you guys think about sort of the longer-term prospects? Are we in for a multiyear pause in acreage, or do you think that the growth will continue in '05, resume in '06? Sort of a 30,000 foot view if you would.

What we heard -- we know the governor of Madagascar, and what we heard is that there is a slight slow down in 2005. But there is still planning to grow, and there's nobody talking about a reduction of acreage.

John McGinty with Credit Suisse First Boston.

Just a couple of points. With flat sales in real terms, currency and price out, is that production equal to retail at this point, or are you further bringing something down?

Our production will be slightly below retail. This is our plan at this stage.

And where is the inventory you want out, North America or --?

Primarily North America, but also a little South America as well.

And then CapEx you gave as 1 -- I'm sorry, you just gave us 110 to 120. Although part of that I assume is because the CapEx came in below what you have been forecasting.

That's correct. There is some timing involved as well.

And depreciation and amortization still about 100 million?

All in with the debt costs and all that amortization, it should be about 115 million. It was about 113 million this year.

And then working capital, are you going to use it? If your sales are flat in real terms, what do you end up doing do you think for the full year, not first half, second half, but full year?

Full year we have forecasted somewhere between 0 to 25 use. I think some of that could be a reduction in payables and accruals. Our inventory and receivables we expect to be flat to down.

The tax rate was a little bit less, although part of it -- I guess the question is how much of the reduction in the tax rate to 36.5 versus the 38 something you have been running, is that all Randers or was that excluding Randers, or what is going on there? And what -- more importantly what should we use for '05 for tax rate?

The 36.5 takes the Randers impact out. So I think that is kind of the number that you should look at. And then for '05 I think that is probably a good number, somewhere between 36 and 37 percent.

Which is down from the 38 or so we have been using. Why?

That is primarily mix of tax rates, things like that.

And then I'm just looking back -- I understand you're saying in answer I think it was Andy's question and to Casey's question that one of the issues with the first quarter was South America seasonally. But if I look at the absolute level of operating income over the last -- I don't know -- last 4 or 5 years the first quarter has actually been one of the smallest. In fact the first quarter has been the smallest, except obviously for this past fourth quarter. So is that that the impact is going to the greatest in the first quarter? Or I'm not sure I understood, because last year's first quarter I think was -- the number I have is 31, and then it was higher than that in the second and third quarter.

What I'm saying is that as a proportion of our total income in the first quarter, it is -- and it is going to be a higher percentage decline as well. So it is both impacts. The combine business is seasonal and it is very important in the first quarter. That is where more of the decline is going to be seen.

So in other words more of the hit you take in South America that you have given us earlier in the forecast, more of that is to occur in the first quarter because of combines?

That's correct.

And because of the let's say adjustments in labor we talked about. So there we have a little time lag of course.

And then final question, as you go into the engine at Seesue there is a 20 percent increase for R&D, but one of the things as you begin to look at all of the environmental standards for the off-highway in the United States and in Europe as you meet them that when you look at the people that do that, the Cats and the Cummins and the Beers they have -- make their engine Arnie (ph) actually continues at a fairly high level. So is this $20 million step up kind of like something that we should look at as permanent given the structural move to make your own diesel engines much more a portion of where you are?

I think we have no major problems to cope with the PS -- with the diesel engines. In diesel they are pretty much online with everybody. So there is nothing we have to do especially. But I would agree that we certainly need to invest a little bit more into R&D, not only this year, but maybe also in the future. So that would be my plan. Because if you start to do that, you just move a little bit into a different direction.

We also have plans how to double the volume of the engine business. And that requires investment, but on the other hand that would also show a very good return. So this is not yet approved by the Board.

Can you give us a ballpark? You talked about in New York, you didn't really have a number. Could you give us kind of a ballpark of what it would cost you to double the productive capacity?

Yes, when we go up to 55,000 engines we would have to invest something like between 30 and $35 million.

And that would probably not be done in 1 year, right?

No, within a period of maybe 3 years.

Three years. Okay, thank you very much.

Mark Koznarek with Midwest Research.

Just a question about the South American outlook, and given that the Fananny (ph) is an annual program that ends June 30, I believe, correct me if I'm wrong. What would your assumption of the Fananny be for the '05, '06 year in your assumption here?

Our assumptions it is that the program continues as it is today.

My understanding is it was up a lot for this period versus the prior period. So it is at kind of a peak level right now. And do you guys foresee that there is the political will or political motivation to keep the spending level at relatively high levels?

Yes, that's what we hear.

And then just another detail here on South America is that of course Brazil is a large part, but not the entire part of South America, and just in terms of the outlook, are we looking at the rest of South America, Argentine in particular, also down similar amounts? Or are we talking really about Brazil being the major part of the regional decline And more flattish kind of performance in some of the other regions?

Yes, Argentine we do expect to be down. Obviously it was up significantly in 2004. We do expect it to decline as well, probably not as much as the Brazilian market.

So Brazil really, if we were looking at statistics solely of that market, we might be talking about 30 plus percent decline is expected in your outlook?

It depends on the product. So in the combines it is around the 30, and in tractors it is maybe less, so it is between 15 and 20. Seen as of today, so that might change during the day -- during the year. And I personally believe that it will not go down further more so that there is kind of an upsides potential.

So it is not as conservative as you can get? (multiple speakers).

Yes. Well, we just talked to everybody. We had the conference with all Brazilian sales guys involved and the management team. They had meetings with their dealers and with customers. So I believe that it is a realistic, or let's say conservative assumption we take.

And then final one here on the Brazil, or Latin American in general. You mentioned that your staffing at year-end down there was 350 people lower than the year before. And is there a target of employment for '05? Are you planning further reductions, and if so, by how much?

That was related to direct labor as a result of the decline in the production volume. We're still looking at further cuts, but don't have any other others to report at this point in time.

A similar -- a potentially similar order of magnitude?

No, those cuts are what we have made just in the last month or 2 in that market.

Oh, that is far in '05?

Yes.

And we have a very intelligent system in place, so that means we can adapt to those variances easily, which is something I would like to see in other factories in other countries as well. And we are working on that.

Okay, I've got it. So '04 the labor adjusted for Valtra may have been kind of flattish. Already you have taken out 350, and we could see more coming out.

Right. That's correct.

(OPERATOR INSTRUCTIONS). Charlie Rentschler with Langenberg & Company.

A question about operations. As you look at your factories worldwide, are you pretty pleased with how they are running, other than obviously the layoffs in Brazil? But you look at Beauvais or Jackson or whenever are you -- how would you assess how they are performing?

I think they're doing very well. And they were always very cost minded. But we also think about vertical integration and outsourcing, core competencies. We think about Kaizen. That is a kind of Kaizen or Six Sigma kind of a very detailed approach to improvements. And I personally believe that we have enough room for improvement in the future.

But you happy with Beauvais is? Is it where you want it to be, or 80 percent of the way or what?

I would say it is maybe 50 percent. And I see that there's a chance for major improvement.

Barry Bannister with Legg Mason.

When I was looking at the fourth quarter cash flow it looks like your inventory and receivables used 105 million in '04. Let's just talk about the full year actually. 105 million used in '04, and then payables and accruals was the offset, up 92 million. It sort of flipped in signs from a year ago. So I am wondering why you had that kind of peculiar full year '04 cash flow number on the working capital line?

Part of it is in '04 of last year was when we were really bringing inventories down from levels that were way too high, particularly related to the Beauvais facility, cut production back, inventories came down, and the payables came down as well. This year is much more of a normal activity level. I will suggest to you that inventories were a little higher than we would have liked to have seen. But we did (technical difficulty) a little higher inventory levels at the end of the year so that we could fill orders, particularly in the U.S. in the first quarter. So we held inventory levels a little higher in South America and in Europe in order for them to be able to produce products to be shipped in time for first quarter in North America. So that was part of (technical difficulty) the payables and accruals side I think it is just associated with the higher activity levels.

We know that your competitors in the fourth quarter in South America were down 25 percent or so. But if you toss Valtra back into your fourth quarter '03 to make it comparable, what was your sales, your production, your shipments in fourth quarter on a comparable basis year-over-year?

I'm not sure I have that in front of me. I can tell you that our sales were down for combines and about flat for tractors in the fourth quarter.

Industry sales numbers report that Valtra and Massey were up in the fourth quarter year-over-year in terms of total unit sales. Did you have a shift in mix that caused the dollar figure to fall or what?

What you're looking at is just Brazil, but there was some decline in some of the other markets that we're selling into as well.

So Argentina began to fade?

Right.

And then lastly, following up on John's question, 150 million of R&D over 3 years, that would be maintaining about 2.3 percent of sales. Are you looking at a target as a percentage of sales now that you are trying to transition from being a roll up to an operating company a little but more?

We don't talk about 150 million, but more like 120. And it is a slight shift, I would call it. And so as we have, as I mentioned already, some products where we really are state-of-the-art, and we have others where we need to improve. And what you can is as soon as you the right or leading technology that has also been very good, not only for revenues, also for margins. So this is the direction I would like to propose as a strategy.

There's nothing wrong with it. Martin, I think you said though that 120 was '05 and that you would ramp maybe up to 150. It hasn't been proposed yet.

I didn't say that.

I must have misunderstood. I think I heard 150 at some point.

And my Chairman maybe wouldn't like to hear that also.

(OPERATOR INSTRUCTIONS). There are no further questions. That does conclude today's conference call. We thank you for your participation and have a nice day.

Thank you.