AGCO Corp (AGCO) 2005 Q1 法說會逐字稿

Good day, everyone. Welcome to AGCO Corporation's 2005 First Quarter Earnings Release Conference Call. Today's call is being recorded. At this time, I would like to turn the call over Mr. Martin Richenhagen, President and CEO. Mr. Richenhagen, Please go ahead.

Good morning. Welcome to the AGCO first 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 actual events or results may differ materially. We refer you to the periodic report 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, 2004. 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 summarize our financial results for the first quarter. Net sales for the first quarter of 2005 were $1.3b compared to $1.1b in the prior year. Operating income for the quarter, excluding restructuring and other infrequent expenses, was $54m compared to $57.6m in the prior period. Diluted earnings per share, excluding restructuring and other infrequent expenses, was 24 cents for the first quarter compared to 26 in the prior year period.

Our first quarter results were impacted by anticipated market declines in South America, which affected sales and profitability in that region. Sales increases, margin improvements, and currency translation benefits in our European operations helped to offset a large portion of the shortfall.

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

Thank you, Martin. Reported sales for the first quarter were 12.7% greater than 2004. Favorable currency translation of $42.1m contributed 3.8% of this increase. Excluding currency translation, net sales increased to approximately $99.2m, or approximately 8.9% over the prior year. The 8.9% increase in net sales in the first quarter can be broken down on a regional basis as follows -- North America, up 32.6%, South America, down 18.4%, Western Europe, up 2.3%, and the rest of the world market, including Central and Eastern Europe, Asia-Pacific, Africa and the Middle East, up 23.8%. Parts sales in the quarter were $155m compared to $145.3m in 2004. Excluding the effect of currency translation, parts sales in the quarter were approximately 3.3% higher than the prior year period.

In the first quarter our gross profit margins decreased from 18.6% of net sales in 2004 to 17.5% in 2005. Lower margins were as a result of weaker market conditions in South America, which resulted in lower production levels, unfavorable sales mix and currency impacts. These declines were partially offset by improved margins in Europe, which were impacted by increased sales and positive currency impacts.

Margins in North America continue to be negatively impacted by the weak dollar on products imported from Europe and Brazil.

The Company recorded $1m of restructuring and other infrequent expenses during 2 -- during the first quarter of 2005, primarily related to rationalization of the Randers, Denmark, combine manufacturing operation, which was announced in July 2004.

Losses on sales of receivables, primarily under securitization facilities, which is included in other expense net, was $5.0m for the first quarter compared to $3.8m last year. Interest expense net for the first quarter was $17m compared to $22.8m in the prior year. Interest expense decreased to the lower debt levels in 2005 versus 2004. The Company's effective tax rate for the first quarter was 42.1% compared to 44.6% in the prior year period.

Moving on to the balance sheet, accounts receivable and inventory combined were $291.4m higher than the end of December 2004. The increase in inventory and receivables is primarily due to seasonal inventory requirements, primarily in North America. Funding under accounts receivable securitization programs was $449.3m at the end of March 2005 compared to $458.9m at the end of December 2004.

In North America, our dealer inventory month supply at the end of March on a trailing 12-month basis was as follows -- approximately 7.5 months for tractors, which is higher than the prior year; 7 months for combines, which is lower than the prior year; and our dealer month supply of hay equipment was approximately 7 months, which is lower than the prior year.

Our net debt to capital ratio was 43.8% at March 31, 2005, compared to 37% at December 31, 2004. The increase is due to the use of cash for seasonal working capital requirements. EBITDA, excluding restructuring and other infrequent expenses of $1m, was $78.9m for the first quarter of 2005. EBITDA, excluding restructuring and other infrequent expenses of $6.6m in 2004, was $83.7m. Unit volumes of worldwide tractor and combine production during the first quarter were approximately 5% higher than 2004 levels.

Now turning on -- turning now to our outlook for 2005. For the full year of 2005, AGCO expects adjusted net income per share, which excludes restructuring and other infrequent expenses, to be flat to 5% higher than 2004. Reported net income per share for 2005, including all items, is also expected to remain flat to 5% above 2004.

Second quarter adjusted net income per share in 2005 is also expected to be relatively flat compared to 2004, while reported income per share is expected to be about 10% above 2004 levels due to lower restructuring expenses anticipated in 2005.

For the full year, we continue to focus on sales and cost improvements to focus -- to offset the expected decline in South American operating profits. In addition, we are maintaining our budget for a 20% increase in engineering expenses, which will be used to fund product improvements, cost reduction projects, and the expansion of our engine manufacturing facility. Martin?

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

Thank you. The question and answer session will be conducted electronically. To ask a question, please do so by pressing the star key followed by the digit 1 on your telephone. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, it is star 1 if you do have a question.

First we'll go to Andy Casey with Prudential.

Good morning.

Good morning, Andy.

I have two questions. The first is on the cash flow, the inventory consumption. It seemed a little high. Is that mainly just the seasonal effects? It seemed higher than last year.

And then second, the margin performance in South America, when you look at the mix, I presume some of that is utility equipment, that shift up to the US that offsets some other stuff. But when you combine that with the inventory position that you talked about, the 7.5 months in the US, is the utility tractor production from Brazil to support the demand sustainable feature, in your opinion? Thanks.

Okay. On the first question, Andy, on the inventories, the main issue was timing, and it was for seasonal requirements. If you recall, last year, we really had deliveries a little later than normal up into the North American market. And for this year, we did change the timing of our production schedules and dedicated more production to the North American market earlier in the year, and that's allowed us to, we feel, to be better prepared for the spring selling season here in North America. So, the majority of that increase is for the spring selling season.

Also, we have some new product introductions that are coming in about this time, and we have a fair amount of inventory that's in transit, getting ready for the introductions. So, it is a little different in terms of its pattern than last year, but we expect that inventory level to really start to come down starting in the second quarter and throughout the balance of the year.

As it relates to your question in Brazil, the way we account for South America is the regional results that you see are for that local market only. So, if a product is produced in South America -- produced in our Brazilian market, and sold in North America, that's going to show up in the North America results. So, the impact for anything that's sold in North America shows up in North America.

The question about production levels, we did -- we were able to maintain a fairly level production level in our tractor manufacturing facility in Brazil as a result of supplying product into North America. That probably -- we'll see that sustained in the second quarter, and then you see production start to come down in South America in the tractor facility in the third and fourth quarter. So, there's a little change in pattern there as well.

Thank you.

Next we'll go to Andrew Obin with Merrill Lynch.

Hi. Yes. Good morning. My question is regarding your end market outlook at the end of this quarter as compared with end of the year. What has changed? In particular, I was wondering if you could comment if there is an end at the end of the tunnel in South America?

Well, actually, let's do it a little bit by market. In South America, we were really hit by the downturn in the market. We all think that this might be over, more or less, now. And everybody is more optimistic for the end of this year, so, that would mean third and fourth quarter, but we don't see those numbers yet as order income.

With regard to North America, we are pretty optimistic that the market will stay on a very interesting level. And our plan to increase market share in North America so far is successful. So, we don't want to get excited, because the year is not over yet. And also, we think that we want to avoid that the competition gets excited as well. So, we are gaining market share, which is part of our plan and which is true for both distribution networks. So the strengthening of the AGCO distribution is advancing as planned, and Challenger is doing better than planned.

But in terms of the North American market, as I look at the possibility in North America, it doesn't seem that we are benefiting from the upturn in the market simply because the currency is working against us. And I understand that you guys are benefiting in Europe through better volumes. How do you solve long term this issue of profitability in North America? And are we going to see any significant changes in profitability in the North American market this year?

We are working actually, also as announced, that the additional volume helps us, first of all, to reduce cost of overhead in relation to revenues here in North America. So we have a better volume to justify the people in certain marketing we have in place.

Second, we, of course, need to work on getting costs down because nobody helps us with regard to the exchange rates, but just imagine, a little strengthening of the dollar would be extremely good for us. What are we doing? We work to generate the Valtar Synergies, and this is according to plan. We do a major re-engineering project in France, together with an external consultant firm, Arthur D. Little, and we just launched a build to order project for North America, only where we want to get basically much faster in the whole process, which includes the full logistical chain coming from how we process the orders here in-house, in dealer central, how we work together with our suppliers, and that will reduce costs dramatically. And I'm pretty optimistic that we will also generate money in the future with the business we enjoy here in North America.

But do you think we are going to see tangible results in '05, or this is sort of something more of a longer-term project?

We are -- there are some long term, or I would call them midterm projects, which will be at the end of 2006, but there are also some short-term gains, and I'm pretty optimistic that margins will get better during the year.

Thank you very much.

Once again, it is star 1 if you do have a question. Next from Bear Stearns, we'll hear from Scott Graham.

Yes, Good morning. I would like to piggy-back on that last question and maybe with a little bit of a different slant. The North America margin being what it was this quarter, we've obviously been seeing this pressure for some time with the currency. Why this quarter such a low margin versus the year-over-years that we've been seeing the last several quarters. Why this quarter was it where we almost had a break-even? What was the one swing factor if you would?

Well, I think if you look at -- obviously, each quarter, you have to look against each other, because the mix and the seasonal patterns can't allow you to really look sequentially. But in the second -- in the first quarter, we did have incremental sales, but those were really at pretty low incremental margins because of the currency. We also had the currency on the existing sale [pace] as well.

So, currency still is really the key to why the income is down. We also did have a little different timing in operating costs. We have some product launches and some acceleration of sales and marketing expenses here in the first quarter, which is a little higher than what we'll see in the balance of the year. So, those were the main reasons why our income was down in North America.

And I can tell you that it's neither price nor discount. Both are in Fendt.

Okay. Flipping to the other 2 regions, the European, African and Middle Eastern margins now for 2 straight quarters has been looking a lot better on a year-over-year basis. If you could, Andy, give us maybe rank order? Is it Valtra Synergy first, core cost reduction, volume? What's sort of the peck -- the order there in terms of order of magnitude contributing to these improvements?

Okay. Well, the key improvement, I think, is really cost reduction in those manufacturing facilities. Really, we filled -- we saw a lot of improvement in the Beauvais facility. If you look year-over-year, first quarter was still -- there was still a lot of improvement that we created throughout the year in Beauvais. Also the margins in our Valtra business in Europe were much better in the first quarter this year than last year. That was primarily due to some headcount reductions that were taken in the fourth quarter, which came through this quarter, so our operating costs were lower, and also because the mix was better. We had some new products that we introduced throughout last year available in the first quarter and they weren't' available last year. So, we saw better margins on Valtra products here in the first quarter.

Lastly, I think our Fendt business did a little better as well. So, all our businesses are showing better margin in Europe, and I point primarily to cost reduction initiatives and productivity improvement.

I would like to give you some little details. We started very early last year already with those projects because we -- the idea was to compensate the losses, as you know, we saw coming in South America. So, this will of course, help us further on to improve the margins in North America in the second step. So as soon as South America recovers, you will certainly understand the potential we are showing here.

And then also, we worked on prices in Fendt in first markets; for example, markets like France, where we were in a position to increase prices compared to plan and to previous year.

Okay. Thank you. Last two questions, South America, can this -- with the worst behind us now, in your view, is this a region where we can still generate a double-digit margin in 2005, and if you would also separately tell us what your price realization was globally for the quarter. Thanks.

Scott, we still are forecasting that we will be double-digit margins in South America for the full year. Margins are a little better in the third and fourth quarter which allows us to get there. And in terms of pricing, pricing for the first quarter was [up] 3.5 to 4%.

Pricing was 3.5 to 4%?

In the first quarter over last year.

Globally?

Yes.

And the gross margin was still down?

Yes, because --

Because it is mainly mixed, as you heard.

-- it's offsetting the increase in steel costs. So the pricing that we got was -- did not go down to the bottom line. It was offsetting incremental higher material costs.

Was that pretty much dollar for dollar, Andy?

Yes.

Thanks.

But we see also steel prices -- or we think that steel prices might go down going [inaudible - background noise]. We have first indication that that happened already.

Thanks.

And next we'll go to Charlie Rentschler with Langenberg & Company.

Yes. Good morning. Can you hear me all right?

Yes. Good morning, Charlie.

I wondered if you still expect full year free cash flow to be in the $150m area? I think that's what you told us on the year end conference call. Was that -- is that, Andy, still a good estimate?

Yes.

Okay. And then as a follow-up, coming back to North America, what can you tell us about the sprayer business in the first quarter, assuming you had brisk business, anticipating farmers gearing up for possible Asian rust battles or -- ?

Actually, since we have the [inaudible], we are in a position now to also leverage the additional distribution we have for the Valtar dealers, and we will do that in two ways. One is, we will make a combine harvester available for the Valtar dealers. They are tractor dealers only today, and they are short on combines. And that will generate market share and additional business.

Second, we also think about how to bring more sprayer business over to Brazil. Basically, the demand is similar to what we see here in North America, and it's a strong demand. So, that means it's not only coming from new diseases farmers face, but also from the fact that everybody is more concerned with regard to environmental protection, and everybody wants to make sure that chemicals are not wasted. And that is, of course, the investment in the sprayer, it basically pays back for cost savings in chemicals you are using.

So therefore, we strongly believe that this business is growing. We are pretty optimistic that we see not only a strong year 2005, but also a long-term growth because this is high-tech farming, so to say. And we also see already growth in Europe. We only do something like 30m of sales, a little bit more. I think it's 30m Euros of sales with sprayers in Europe, and we think that this business will also develop. Europe typically today is full type sprayers and start now to look into self-propelled also.

Okay. Well, I was -- I guess I was wondering, Martin, about the roughly $100m increase in sales in North America year-over-year. Was -- what -- how much of that was sprayers? I assume that you had a very good sprayer business in the first quarter in the States?

Charlie, about 10% of that increase was on sprayers. We did have a good increase of about 10% in the first quarter, and expect good increases here in the second quarter as well. The order book looks very good on sprayers.

Thank you very much.

And, Charlie, you can understand, we -- I just met yesterday with the sprayer team and you can understand that we really try to push that business because -- this is in defense of farming [inaudible - highly accented language]. We produce all sprayers here in North America, and we don't suffer from any impact on the weak dollar.

Good. Thank you.

You're welcome.

Moving on. From Legg Mason we'll here from Barry Bannister.

Hi. How are you?

Hi, Barry. Good morning.

Good morning. Just to clarify on the sprayers, Andy said 10%. Did you say 10% of the change or 10% growth in sprayer sales? I didn't' catch that.

Well, to be honest with you, it's about the -- it's both.

It's both?

Yes.

Okay. Yes. In South America, the tractor market didn't fall off for you nearly as much as combine. So, it sounds like you were just really more over-dependent on combine profitability than I even anticipated. I always felt that your tractor business, especially Valtar, was pretty profitable. So, would you attribute this margin decimation year-over-year to combine harvesters?

It's mainly volume, because the tractor business went down. The tractor market went down by something like, we think, about 20, 25%, something like that. But the combine business went down by more than half. And the reason is, first off, all drought; second, low soybean market prices. And what happened in addition to that was that some farmers started to go into the contractor business and basically, when they had drought in their area, they took their combine on a truck and went to areas where harvesting was done, and that reduced the number in addition to that.

Okay. And then on the sprayers again, did you actually lose money X sprayers in North America in Q1? And the seasonality of that business being heavily concentrated in the first 4, 5 months of the year, are we going to see the dropping off of sprayers benefit, and then the rest of the business have to stand on it's own kind of scrawny feet for the rest of the year?

Well, I don't really like they way you portrayed that, but you are correct that it is typical for the first quarter that the sprayer business does offset losses, operating losses, in the other part of the business. But as the volumes improve, we do expect to see profitability on the non-sprayer business in the balance of the quarters.

Well, Andy, in all honesty, you guys made 6 percentage points in North America in '97, and you're doing about 1/6 of that level now. This is not good. It's less than T-bills after tax. So, we have a reason to be a little disappointed in that margin.

Well, I think again, our dependence on the currency impacts on the products that we're bringing in not only from Europe, but from Brazil, where the Real has strengthened quite considerably against the dollar, is certainly impacting the margins that we're seeing fairly dramatically over the last couple of years. We do get some offset in the other markets, as you know. And so we are trying to focus, as Martin said, on the profitability of the other products that we sell as well that are exclusive of exchange; so, combine business, sprayer business, in order to try to offset this impact.

And don't worry. The sprayer business is profitable.

Maybe that stronger Real will push South America back above 10 then?

Well, you might [inaudible].

As we've said, the margins in South America are expected to be about 10%.

Thanks.

And as a final reminder, it is star, 1, if you do have a question. Next we'll go to David Bleustein with UBS.

Good morning.

Good morning, David.

Martin, longer-term question, but can you talk about your longer-term targets with respect to R&D as a percentage of sales? And can you also discuss your regional strategy? Arguably, you compete at the high end of the market in Germany, but focus on the value end in some of the other markets. Can you talk about the longer-term positioning of AGCO and how R&D is going to fit into that picture?

Well, actually, I see the R&D expense on a level, similar level like 2005 maybe for 2 or 3 years, in case we generate the money that supports that strategy. As you know, that is, let's say, kind of flexible. So, we could spend also less if needed.

Long term, we are -- as you know, our vision is to be the -- to provide high tech solutions to professional farmers feeding the world. And that means that we want to go more and more into that direction, and the reason is very simple. That is where you make the money and where the margins are. So, as long as -- as soon as you have a product differentiated by technology, you can see that this is much more successful than being in the commodity compact tractor business for example.

So, we are there already with a lot of our products, so that's nothing new, so to say. We have the world's leading big bailer; we have the world's leading sprayer; also we have the world's leading wheel tractor technology. And we have the best [track] tractor in the world. So, we have a lot of products where we are already there. And the additional investments we spend is basically in some of the areas where we are not that strong, like for example, in harvesting in Europe.

Okay. Terrific. And Andy, just -- if 10% of the $100m increase was sprayers, what was the other 90?

Well, the Challenger business grew about $15m from last year, and then the balance was just in the base, what we would call the base North American business. Again, a lot of it was a little different timing than last year. If you recall, if would go back and look at last year, our sales were relatively flat in the first quarter, although our -- the retail activity had been picking up, and then we had a very strong second quarter last year. So this year, the timing was a little different, so we had a much stronger first quarter delivery into the North American dealer network.

Okay. Terrific. Thank you.

You're welcome.

And next from Credit Suisse First Boston, we'll go to John McGinty.

Good morning. Andy, can -- to clarify that last point, can you just give us production versus retail in North America this year versus last year, just so we can get a flavor of that?

John, I don't have it in front of me for North America only.

Well, then -- because most of the change would be in North America. So, do you have a -- ?

Yes, so our production versus retail was about -- well, we produced about 40% above retail in the first quarter.

And last year?

Last year was about 20%.

And most of that difference would have -- I mean, not all of it, but the biggest part would have been in North America?

I think that's right, yes.

Okay. And then secondly, currency, you talked about the currency dollar impact, the 42m, 3.8%. What's the currency impact -- A, what's the currency impact on earnings? And then, B, is it meaningfully different as we look at the 4 regions?

Well, the currency impact on North America was about $8m for the first quarter.

Operating income, or --

Operating income.

-- $8m negative?

North America, it impacts the -- your margins.

Okay.

The offset, which was about 4 to 5 cents back against that, was -- primarily shows up in Europe.

Would 8m and 4 to 5 cents -- can you make them apples-to-apples?

I'm sorry. 4 to -- it would be 4 to $5m.

Oh, okay. I'm sorry.

I'm sorry. I said that incorrectly.

Okay. So -- and nothing in South America?

South America would have had maybe about a couple million improvement.

So net-net, it's about a wash, but it's an 8m negative in North America, 4 to 5m plus in Europe and a 2m plus in South America?

It's slightly negative. It's probably 2m negative for the quarter.

Okay. And this is versus the first quarter a year ago?

That's correct.

Okay. And then on steel, should we just assume -- steel was hurting you. We were talking cents per share per -- in the second half of last year per quarter. But the price -- and now, the price wiped that out, or how should we look at that?

Yes.

Yes, pricing wiped that out.

Okay. Zeroed that out. Challenger sales for the year, you said they were up 15m. What was the Challenger sales for the year? And what's the earnings impact?

For the year, we were -- we're expecting increase of about 25%. We were about 260m last year. And income-wise, we lost about $3m last year, and we expect to make 3 to 5m this year.

And in the first quarter, did you make money?

First quarter, we were break-even.

Which would be consistent with making 3 -- in other words, because of the seasonality, that's consistent?

Yes.

Right. We're on track.

And the 15m higher in, again, seasonality, was the 15m higher in sales for Challenger in the first quarter? Was that the 25%? Was that in the 25% range?

That was --

I just don't have the [inaudible].

Yes, we were actually -- total Challenger worldwide, we were 50% above last year.

Okay. So, that 15m is up 50%. It's like 30 to up to 45m?

Yes, right.

Okay. Now with regard to the working capital question, we would -- I think you had last quarter that you expected to use about 25m of working capital. Is that still about right for the full year, even with the big jump that we had in the first quarter seasonally?

It's still about right.

Okay. And then the tax rate, what do we use for the year? Do we use the 40, whatever it was, 40 -- ?

No, it should be -- come down throughout the year, somewhere between 37 and 38.

So no real change in that regard?

That's correct.

Okay. Now let me just ask you about Europe. A phenomenal performance, but what I'm trying to understand is if I look at the European quarters last year, and really, if I look at Europe over the last 3 or 4 years, the first quarter was dramatically lower than anything we had seen, 4.2% on the margin, and then it kind of jumped up 6, 8 -- it looks -- I mean, it's a phenomenal increase, 6, 8 over 4, 2.

Was -- are we at that much of an incremental rate, or was it just that the first quarter of last year had all of the problems that you're talking about? In other words, are we still looking at like an 8% margin for the full year in '05, or -- I'm just trying to understand how much of the increase is an increase in the run rate, and how much of it is just you had a really poor first quarter a year ago.

Right. No, we won't expect to see that same incremental improvement for the balance of the year. For the full year, we expect the margins in Europe to be a little less than 1% better than 2004.

Okay.

It is a positive [inaudible], so that means [inaudible]. The improved margins are at least 1% or more.

Okay. So, somewhere between less than 1% and at least 1%. I understand.

Yes.

Close to 1%.

Close to 1%. Final question, can you help us understand -- getting back to this issue of South America and the earnings decrement, it's only a reported 13% decline in revenues. Is there -- should we be looking at currency or price? In other words, is there some way to help us understand what the -- maybe the real or the -- put that into some other perspective than the 13% decline giving a 60% decline in operating income?

Right. Before -- our estimate is -- before pricing and currency, we were down about 27%.

Okay. All right, great. Thanks very much.

And next we'll go to Joel Tiss with Lehman Brothers.

Hi guys. How are you doing?

Good.

Very good.

Good morning.

Can you talk a little bit about who you're gaining share from in North America, and maybe a little bit, like what product lines, large, small equipment, and lead that into the -- some of the new product introductions you guys are talking about for 2005?

I would say we gained maybe in the small tractors with regard to our competitors from Asia. I don't want to mention names, but you know I'm talking about producers coming out of Japan, for example. And we are not -- it's not that we have record gains here, or that we outperform everybody else in the market. And it's a pretty -- it's a kind of mix, I would say. So, I think so far, we are gaining a little bit from everybody here and there. Maybe we don't gain too much from the strong competitors like [Vea], for example.

Okay. Can you talk a little bit too also -- well, I'll just combine two questions here, and then I'll get it over with. Why are your corporate expenses up 28% in year-over-year in the quarter? And also, can you talk a little bit about 2006? What are some of the trends you're seeing in '05, and what kind of -- ? You made a general statement before that the market looks pretty stable in North America for the next couple of years, or that's how I heard it. Can you just talk about some of the factors you're seeing today that would drive 2006 trends? Thank you.

As it relates to corporate expenses, that expenses were higher in the first quarter, primarily just timing related items. By the end of the year, we expect our corporate expenses to be at or below 2004 for the full year. And I'll turn the answer over to Martin in terms of outlook for North America.

I think if I would know exactly what's going on in North America, I wouldn't work for AGCO, but this is a little bit -- kind of speculation, of course. I personally believe that the agricultural markets in general will be pretty stable. And that is, as I've mentioned already several times, based on a substantial growth in rural population, and also a certain change in ethics. So in the world of our days, where you have information flow going from one country to the other globally within minutes, so to say, I think nobody can accept people dying from hunger, which means that they're -- let's say that politically, it makes sense to make sure that people don't starve. And in some areas, you have an increasing demand on better quality of food, which is mainly countries like China and India, and you can see that.

I think that countries where agricultural business has a long tradition, like North America, that those countries will benefit from this development, and we see that. In Europe, everybody is talking about all the threats from eastern markets and things like that. But the agricultural business in Europe is pretty stable since a couple of years. And I could imagine that the same will happen here in North America, and I'm sure that South America will recover.

So therefore, in general, I'm much more optimistic than a lot of people on Wall Street are, but the reason might be that I'm, let's say, also more often with farmers than you are. While you are in the coffee shop, I might be somewhere on a farm and talk to farmers. And this optimism is also shared by a lot of people who are in the farm business, dealers, farmers, competitors.

Okay. Thank you.

And next we'll go to Luigi Pignatelli with [Dexia] Asset Management.

Good morning. I have a question in regards to your bonds, 250m bonds maturing in 2008. If I understand well, they are callable May 1, 2005 and -- they were. And I was wondering what -- if that's correct, what you are planning to do with this call?

You are correct. They are callable now at this time at a premium of about -- I think it's about --

104.75.

-- 104.75. We're currently evaluating our debt and liquidity positions and have not made any determination what we'll do with those bonds at this time, but it's something that is under review with us; and probably have a little more definition of what we'll do by the end of next quarter.

Next quarter. Okay. Does that mean that you would probably -- you would be able to reduce your cost by refinancing it, or -- ?

That's correct. You could -- there's different options. We could certainly look at refinancing it. We also want to look at the amount of liquidity and cash that we think we'll have by the end of the year, and potentially looking at using some of existing debt facilities or cash to repay it as well. But again, that's under review right now.

Okay. And what about the position on your revolving lines?

The revolving lines were put into place at the beginning of last year. They were, I believe, 5 year facilities. So, we still have a long-term commitment on those lines.

And how much has been drawn on that, or -- if anything?

Really nothing at this point in time.

Okay. Thanks.

And we do have a follow-up from Scott Graham with Bear Stearns.

Yes, Andy. Would you mind giving us the currency effect on sales and the way you report them regionally? I -- certainly, we have South America, but -- and even North America, but I guess specifically then, my comment -- my question is the Western Europe, Africa region, what was the currency impact on that number?

Currency impact on the Europe, Africa, Middle East was about a little over 4.5%.

Great. And also back on Challenger, I guess I was a little confused on the numbers, because I had 50m in year-ago calendar sales, and 15m above that with the 65, and not really jiving with the 40/50% increase I think you said. Do I have my numbers wrong? And if so, could you lay out for me what the quarterly sales were for Challenger in 2004 because I thought I got that from you guys on a conference call.

Well, the original -- the first question I had was relating to North America, and I answered it. When we talk about Challenger, we usually talk worldwide sales. And last year, net sales were about $46m, and it was up -- we were up about 50% in the first quarter.

Okay. Thank you.

Sure.

And we do have a follow-up from Andrew Obin with Merrill Lynch.

Just a follow-up on North America, and then I understand that you guys are positive long term. But what sort of tangible evidence do you guys have about optimism about second half of the year in the North American market, if any?

Well, I think that the only evidence we have is in terms of how strong our orders are and the basic confidence and sentiments that our dealers have right now. Certainly, as we get into the latter part of the year, it's not as clear what the retail environment will be like, but we don't see any signs right now that the market is turning down or anything like that.

So basically, the order activity and indication of interest of your dealers is fairly positive for the second half of the year?

Actually, what [inaudible - highly accented language] competitors, we invite our dealers regularly for dealer interface meetings and talk to them. And like this, we generate a kind of information, soft information, on how they feel about the business. And I never saw them so optimistic as last time. So, they are very satisfied with the product offer from AGCO, and they are also very optimistic with regard to the market. And of course, they can be right or wrong, but our dealers think that they will face a very good year.

Terrific. Thank you very much.

You're welcome.

And Mr. Richenhagen, there are no further questions. At this time, I would like to turn the conference back to you for any additional or closing remarks.

Yes. We thank everybody for the interest. And we can promise you that we do everything to do as good or better than previous year. And as planned and promised, we try to walk the talk. Have a nice day.

That concludes today's conference. We do thank you for your participation.