AGCO Corp (AGCO) 2005 Q3 法說會逐字稿

Welcome to AGCO Corporation’s 2005 third quarter earnings release conference call. Today’s call is being recorded. At this time I would like to turn the program over to Mr. Martin Richenhagen, President and CEO. Mr. Richenhagen, please go ahead.

Good morning. Welcome to the AGCO third quarter conference call. I have with me today Andy Beck, our Senior Vice President and Chief Financial Officer. 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, 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 third quarter. Net sales for the third quarter of 2005 were $1.2 billion, which was slightly higher than the prior year. For the first nine months net sales were $4.1 billion, which was an increase of approximately 9% over the prior year.

Operating income for the quarter, excluding restructuring and other infrequent expenses, was $58.8 million, compared to $73.8 million in the prior period. For the first nine months, operating income on the same basis was $221.2 million, compared to $235.3 million in the prior year.

Diluted earnings per share, excluding restructuring and other infrequent expenses, was $0.31 for the third quarter of 2005 compared to $0.38 in the prior year period. Year-to-date earnings per share, excluding restructuring and other infrequent expenses and costs associated with the June 2005 bond redemption, was $1.16 per share compared to $1.22 per share in 2004.

Market conditions in South America and Western Europe have softened further in the third quarter. Our operating results in South America continue to be significantly impacted by the severe market decline, lower production, and the strengthening of the Brazilian currency.

Despite weaker market conditions in Western Europe, continued productivity improvement and cost control measures in our European operations have resulted in improved operating margins, partially offsetting declines in operating margins in South America and North America. We are pleased that we have been able to improve the performance of our European operations to substantially offset the impact of the market changes in South America.

With the exception of South America, we expect to show improvement in our full year results in all regions, which will demonstrate that we have many effective initiatives in place to improve our business.

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

Thank you Martin. Reported sales for the third quarter were 1.4% greater than 2004, favorable currency translation of $34.4 million contributed 2.8% of this increase. Excluding currency translation, net sales decreased approximately $17.3 million or 1.4% below the prior year.

Reported sales for the first nine months were 8.7% greater than 2004, currency translation contributed $144.8 million or 3.9% of this increase. Excluding currency translation, net sales increased approximately $180.8 million or 4.8% over the prior year.

The decrease in net sales of 1.4% in the third quarter, and the increase in net sales of 4.8% for the first nine months can be broken down on a regional basis as follows. For the quarter, North America up 4.6%, South America down 35%, Western Europe up .8%, and the rest of the world market, including central and eastern Europe, Asia Pacific, Africa and the Middle East, up 28%. For the first nine months, North America up 17.7%, South America down 26.9%, Western Europe up 2.3% and the rest of the world market up 35.2%.

Part sales for the quarter were $204.4 million compared to $186.8 million in 2004. Excluding the effect of currency translation, part sales for the quarter were approximately 7% higher than the prior year. Part sales for the first nine months were $571.1 million compared to $520.6 million in 2004. Excluding the effect of currency translation, part sales for the first nine months were approximately 6% higher than the prior year period.

During the third quarter our gross profit margin decreased from 18.6% of net sales in 2004 to 17.8% in 2005. Gross margins for the first nine months were 17.5% in 2005 compared to 18.4% in the prior year. Margins in South America have declined significantly in 2005, resulting from lower production levels, unfavorable sales mix, and the impact of the continued strengthening of the Brazilian real. These declines were partially offset by improved margins in Europe as the result of productivity improvements, new products, extensive control measures and pricing changes.

Losses on sales or receivables, primarily under our securitization facilities, which is included in ‘other expense net’, were $5.9 million for the third quarter, compared to $3.7 million in the prior year period. For the first nine months losses on sales or receivables were $16.5 million compared to $11.3 million in 2004. The increase in losses are due to higher interest rates in 2005 as compared to 2004, as well as an additional $30 million of outstanding funding under the U.S. securitization facility during portions of 2005.

Interest expense, net, for the third quarter, was $15.8 million compared to $16.4 million in the prior year, and $64.7 million for the first nine months compared to $61.8 million in the prior year. Interest expense for the first nine months increased over the prior year due to the redemption of our 9.5% senior notes in the second quarter of 2005.

The company’s effective income tax rate was 37.1% for the third quarter of 2005 compared to 38.4% in 2004. The effective income tax rate was 39.4% for the first nine months of 2005 compared to 40.5% in 2004.

Moving on to the balance sheet, accounts receivable and inventory combined were $202.9 million higher than the end of December 2004. The increase in inventory receivables is primarily due to seasonal inventory requirements. Funding under our accounts receivable securitization programs was $444.5 million at the end of September 2005 compared to $458.9 million at the end of December 2004.

In North America our dealer month supply at the end of September, on a trailing 12 month basis, was as follows; approximately seven months for tractors, which is the same as the prior year; approximately seven and a half months for combines, which is slightly higher than the prior year; and our dealer month supply of hay equipment is approximately five and a half months, which is lower than the prior year.

Our net debt to capital ratio was 39% at September 30, 2005, compared to 37% at December 31, 2004. The increase is due to the use of cash for seasonal working capital requirements.

EBITDA was $84.6 million for the third quarter of 2005. EBITDA excluding restructuring and other infrequent expenses of $1.7 million was $97.7 million for the third quarter of 2004. For the first nine months of 2005, EBITDA excluding restructuring and other infrequent expenses of $.2 million was $292.1 million. For the first nine months of 2004 EBITDA excluding restructuring and other infrequent expenses of $1.1 million, was $313 million.

Unit volumes for worldwide tractor and combine production during the third quarter and first nine months were approximately 13% and 2% lower respectively than 2004 levels. In the fourth quarter we expect production levels of tractors and combines to be approximately 30% below 2004 in order to reduce inventory levels by year end.

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 and the June 2005 bond redemption costs, to range from approximately $1.48 to $1.53 per share. Reported net income per share for 2005, including all items, is expected to be approximately between $1.32 to $1.37 per share.

Fourth quarter adjusted net income per share in 2005 is expected to range from $0.32 to $0.37 per share compared to adjusted net income per share of $0.52 in the fourth quarter of 2004. Reported net income per share is expected to be approximately $0.31 to $0.36 per share in the fourth quarter of 2005.

Our fourth quarter results are expected to be negatively impacted by lower production levels, reduced sales volumes in our South America and Europe, Africa/Middle East regions, and by currency impacts. Operating income for the full year is expected to be below the prior year, due to lower profitability in South America, partially offset by improvements in other regions, particularly in the Europe/Africa/Middle East region.

In addition, our results include an expected 20% increase in engineering expenses in 2005 for new product introductions, common platform designs, and the expansion of our engine manufacturing facility. Martin.

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

[OPERATOR INSTRUCTIONS]

Gary McManus, J.P. Morgan.

Good morning. I think, Andy, you said 30% drop in production, and that’s fourth quarter, year-over-year?

Yes.

Roughly, what kind of revenue guidance would you suggest for the fourth quarter? I mean you’ve got parts, you’ve got pricing and so forth, I assume it’s somewhat better than the 30% drop.

Yes, we expect our sales in the fourth quarter to be down somewhere between 8% and 9%. Some of that decline is the currency will turn the other way in the fourth quarter because the euro is now weaker than where it was a year ago. So excluding currency, down about 6%.

But a 30% drop would only cause a 8% to 9% revenue drop? Why wouldn’t it be more severe than that?

Because we’re selling out of our existing company inventory that we have on hand right now.

OK, I got it. I know you don’t want to talk about ’06 specifically, but can you talk about just general trends in the various ag markets around the world? Obviously you’re seeing weaker conditions than expected in some regions; but just talk a little bit about direction, where you see ’06.

We are just in the middle of the planning period for 2006, and it’s a little bit too early to talk about. In general, we of course talk to dealers, talk to one or the other competitors, to analysts and people like that, and I think in general our assumption will be that it’s more or less flat.

OK, and then just generally, if it’s a flat market can we see some recovery in profits on that basis? Is some of this production again getting inventory down, non-recurring?

I think the production cuts will get us back to where we’d like to be. We’re expecting it to bring our inventory levels down somewhat from where they were a year ago. But we are producing at maybe slightly below. Our plan will be if we hit our retail sales targets we’ll be producing at or slightly below retail. So there could be some improvement there on the production side. I think that more importantly some of the things we’ve done to our balance sheet with redemption of the bonds that we did in the middle of year, and then some of our other initiatives that we have in terms of cost reduction and other opportunities to improve our business through market share improvement will also, we hope, help us improve our business next year.

OK, thanks.

Ann Duignan, Bear Stearns.

Hi, good morning. It’s Ann Duignan, of Bear Stearns. Could you guys comment a little bit on your inventory levels on hand? You’ve got about 117 days of inventories. What’s your goal for the end of the year? And then, in order to flush out some of that inventory, are you going to have to do anything on pricing in the market place?

Yes. Our goal, as I said earlier, is to get our inventory levels, at the end of the year, below where we were last year. So that suggests a pretty significant decline in the inventory levels from where we are today.

Again, we’re cutting production to match what we believe our demand will be in the fourth quarter, and that is not with any suggested changes in our discounting or our pricing. So, we’re making production changes so that we maintain our price levels in the market.

In general, one could say that we are really working on getting better there, in the area of inventories. And we have a certain weakness with regard to our logistical systems. Now, we will take action and I think we should make sure that you don’t ask too many questions about inventories in the future anymore.

That would be good news.

I do get a lot of pleasure for my part, I can tell you.

With 117 days, I’m not surprised.

Yes, that’s too much.

You mentioned that pricing was stronger in Europe. Could you talk a little bit about that and give us some color on where you’re getting pricing? Is it through new products, or is it specific regions? And could you just give us a little color on what’s going on over there?

You know pricing is up year-over-year really in all our markets. We were in a situation where the whole industry--we’re pricing to offset the higher material costs that we started seeing last year, particularly on the steel. I think that we have been successful in adding price. I think that we have seen some relatively good pricing improvements in all markets. I’d say that where we have the biggest pressure right now is in South America.

OK, thank you.

Andrew Casey, Prudential Securities.

Thanks, good morning. I have a quick question on the quarter and then on guidance. In North America the margin’s a little bit lower than I expected. Is that currency mix? Or, were there any plant shutdowns pulled into 3Q?

It’s mainly currency.

It’s mainly currency, Andy. That was approximately $5 million of the decline that we saw. We also, as we put in our release, had a littler higher warranty expense. We have some programs to correct some issues we have with a few of our products out in the field. That was about $3 million, and then, as we’ve talked about all year, we’ve added engineering expense so we can introduce some more rapidly some new products in the market place. That was about $2 million in the North American market.

So offsetting that, to some extent, was the volume and some other margin improvements and in pricing. So, net, we were down, but the biggest issue is still the currency, particularly on the continued strengthening of the Brazilian Real. The Euro has now started to come down. It’s at 120, so that, probably starting in the fourth quarter, will stop being an issue for us on a year-over-year basis. But the Real, where it is today, is still a drag on earnings.

OK, thank you. And then, on the guidance, is there any chance I could get you to update the free cash flow guidance. I think in the past quarter it was about $100 million, if I recall.

Yes. We said last time about $100 million to $125 million. Based on where we are today we’re still targeting the $100 million. I’d say that there’s a substantial amount of work that needs to be done to get us there, in terms of the inventories coming down. It will be primarily dependent upon hitting the retail sales activities that we have across the globe.

Recall that that $100 million estimate would exclude the additional $100 million that we received from taking that transfer of receivables to our finance joint venture. So, if you would include that, we’d be at about $200 million. But again, we’re obviously in a negative position today and our focus is on turning that positive in the fourth quarter.

OK, thanks. And, with the free cash flow performance to date, does that bring you in jeopardy of any restrictions on your borrowing capacity?

No, we still have a significant amount of capacity left on our revolver. I believe that we are at about $150 million on the revolver, and it’s a $300 million revolver. Certainly now is the time when the working capital comes back down. So, we would expect to be all the way out of that revolver and putting cash on our balance sheet by the end of the year.

Thank you.

Andrew Obin, Merrill Lynch.

Good morning. I have just one question on margins in the quarter. You talked about the currency impact in North America, but the big move in the Real was, I guess, last quarter, right you would see. And the Euro started moving in your direction in the second quarter as well. Your North American profitability was actually pretty good in the second quarter. And as we move from the second to the third quarter, actually the Real has gotten a little bit better, sequentially. And so did the Euro, yet you’re saying that the currency impact has gotten much worse. Can you help me to understand what’s happening there? Is this because we’re in FIFO? Is that what’s really going on?

Yes, that’s part of it. Your cost is going to be —- you know the impact of the currency is going to be on a lag as you sell through the inventory that you’re bringing in. Keep in mind that’s coming, obviously from Brazil and Europe, so there’s a little longer lag than maybe you expect, if you were having it as a local product.

I think that the Real did move during that quarter since last call. I think it has weakened more severely, and so that is one of the issues. But, what we’re talking about is more of a year-over-year. And, certainly year-over-year the currency, on the Real, is at least 25% stronger than it was a year ago. So, that’s the main issue.

Sequentially, the Brazilian Rial is getting worse, but we did say that the Euro is getting better. And in the fourth quarter, as we sell out that inventory, we’ll start to see that not be as big of an issue.

The reality is, I guess, we were talking for a while that, you know, currency translation is sort of impacting North American profitability and we’re not going to see really solid North American profitability until the Euro turns the right way. But, it seems like now that the Euro is turning the right way, we’re being hit with the Real. Is that right?

That’s correct.

Another question, just in terms of your outlook for next year, vs. what you guys were saying at your meeting in June, can you go into a little bit more detail on what happened in South America and Europe? And particularly, you sort of said last quarter that you’ve already dropped volumes in South America. And in Europe, some of your competition was actually saying that such key markets for you as Germany and the Nordic countries are actually doing OK. I would’ve thought that would be a net positive for you.

Can you just talk a little bit more on the margin, what happened in the past three months to make you a lot more conservative on your outlook?

For the answer to this question, I just want to come back to the exchange rate problem we are facing. That’s to explain to you what we are doing as a long-term strategy. I don’t know whether you know, but we have a joint venture in India. And we basically did a lot of engineering work and now have some tractors coming from India on a test program here in North America and also in Europe. We are pretty sure that we can get some volume, which we formerly brought over from Europe to North America, coming in from India in the future, which would fix a lot of our currency problems, or at least, quite a portion of our currency problem, beginning maybe mid-2006.

And to follow up on your question about the markets, I think when you look at where we were at the end of the second quarter, and then what happened in the third quarter, I think we gave a lot of that information in that the Western European market was down 8% in the third quarter. That was more than we anticipated. We expect that trend to continue and maybe even be a little worse in the fourth quarter.

And then, on South America, it was down, I’m not sure I have the figures in front of me, but down more in the third quarter than it was in the second, the first half of the year. So, the South American market is also continuing to be worse than where it was at year-to-date, and we didn’t really expect that to occur. So, those are the primary issues that the market size of what we see in the second half of the year, we are having to readjust our expectations and obviously make adjustments to production and sales force tasks as a result.

I guess that I’m just a little bit surprised because both Deere and Case New Holland have actually recently raised their outlook for South America. You know, Deere did a couple of months ago, and CNH did it yesterday. But you guys--so is it just a function of you guys just being a little bit more bullish on South America than your competition to begin with? Are you seeing something completely different in the markets? Because, judging from those guys, South America has bottomed out.

So far, the combine market went down by about 70% and tractors by almost 40% in 2005. Now, we have been, obviously, a little bit optimistic for the last quarter of 2005 and that didn’t happen so far. So the market basically went down and we think that in 2006 that we might see a slight recovery. But, on the other hand there’re some other South American markets, like Venezuela, Chile, Argentina, where we’re less optimistic because we sold product there mainly on tender business. We face here another problem with regard to the strong Real.

So, that will be difficult to do also in 2006 again, so therefore, in general, how we see South America compared to 2005 will be rather flat.

Thank you very much.

David Bleustein, UBS.

Good morning. Can you just touch on steel and some of the other raw material prices? Did you see continued inflation in the quarter? What do you expect for Q4? And then, really, the heart of the question is, looking out into 2006, would you expect raw materials costs to be a head wind, or a tail wind?

We have not seen any significant changes in steel prices recently. As we look forward into probably the first quarter or so of next year, as we talk to our suppliers, we’re not seeing that significant of a change, at least at this point. The material costs where we are getting some pressure is anything that’s an oil or petroleum-based content, like tires, which we’re seeing a little pressure on. So I think as we go into ’06 I would say it’s fairly neutral at this point from an outlook standpoint.

So it’s safe to assume that the negotiations for steel and contracts, the contract prices you’ll sign are looking flattish?

Yes, we have a very good guy here in charge of materials and purchasing, and we are negotiating with most of our suppliers already now, and I’m slightly optimistic that we can also get one or the other reduction negotiated.

And one last follow up, on the tires, are you seeing improvements yet in availability?

Yes and the reason is I will be with our main tire supplier in two weeks. The reason is that they do get some relief with regard to capacities mainly coming from the automotive business. So it looks like truck and automotives slow down a little, and that helps the agricultural business. So capacities seem to be a little bit smaller problem than they have been during the year.

Terrific, thank you.

Mark Koznarek, Midwest Research.

Hi, good morning. Andy, could you give us the component of price in the revenue growth for the three months and the nine months?

Yes. For the three months it was about 4%, and for the first nine months it was slightly below that, a little under 4%.

OK. Then these are just a few clean up questions here. You had mentioned the currency impact on North American income in the quarter. Do you have that available for the nine months? Then in South America you mentioned that the Real is an issue. Can you quantify the degree of impact in the income in the quarter and the nine months there as well?

On North America the impact would calculate to be about $15 million for the first nine months. On South America, I guess the way to answer that is, you can see the large margin decline in the South America results. I would say that 50% to 60% of that decline is relating to currency. The rest is not leveraging off of your fixed overhead cost and expense costs. So it’s a pretty significant portion of the margin decline that we’re seeing.

OK, and then the capital spending that’s implicit in your cash flow outlook.

We’re between $80 million to $90 million.

OK, and then finally, the Challenger contribution to revenue, and if you can comment on profitability there.

The Challenger’s profitability for the quarter was a loss of about $3 million, which was a little worse than last year; somewhat because of currency, and also some of the warranty programs related to the Challenger business. So that was the main issue. On a full year basis we still expect sales of Challenger products to be about 20% to 25% higher than last year, and for us to be at break even or a little better by the end of the year.

So what were Challenger revenues in the quarter then?

Challenger revenues in the quarter were about $65 million, which is about 10% better than the year before.

In the Challenger business we will see substantial scale economies in the future, I think with the volume overhead and percent will go down, and also we think about restructuring one or the other better functions to get overhead down a little more. So I think with the increase in revenues we will see that this business will develop in a very nice direction. In general, this is a question which is always asked, the CAT dealers are pretty engaged in the meantime and we will see quite some revenue growth, I think, in 2006.

Martin did you just say there’s going to be some restructuring there to further reduce costs?

Yes, but this will not be cost effective, so we’ll do that in a very smooth way. But we see certain opportunities to get headcount overhead costs down.

That’s in this fourth quarter, or that’s going to be an ’06 issue?

We are working on it already now and it will happen, more or less, between now and ’06.

So there will be some in ’06?

Yes.

OK. All right, thanks very much.

John McGinty, Credit Suisse First Boston.

Good morning. A couple of clarifications first; getting back to David Bleustein’s question about the steel, I assume that given where your production is, most of the steel that you’re buying, you’re buying in Europe. Would that be a fair statement? Rather than the states?

Yes, most in Europe, but we are also buying steel in America and South America.

OK. Then on the warranty, well first of all on the impact in the states of the real, that’s essentially bringing the old Massey Ferguson product that you moved out of Coventry, the low end of the product, down to Brazil and bringing that into the states, is that essentially what that is?

Exactly.

OK, and with regard to the warranty issues on the Challenger and the currency issues, I thought most of the yellow Challenger, yellow AGCO tractors, would have been coming from Bovay. Are you bringing Brazilian tractors in as Challenger product?

No it’s all coming from – you’re correct, it’s either coming from the Jackson plant or from Bovay. The currency was -- you have a lag there on the currency.

Oh, it’s a euro currency?

On the euro currency, but it will start turning around here, starting in the fourth quarter.

And on the quality issue we had on the tractor from Jackson, so this is an old problem and we are basically fixing it now.

On that, the warranty issue, the $3 million in the states, that was all Challenger, and that was the track type, or was that the AGCO tractor?

It’s mainly the track type, the Caterpillar design, the track tractor.

OK. Then with regard to the inventories that you’re trying to reduce, in other words, you’ve got excess inventories. Could you talk to where those are? If we look at what you talked about in terms of your tractors and combines at seven, seven and a half months, it doesn’t seem outrageous. Is the excess inventory in Europe and in South America, where you traditionally don’t have finished goods inventory? Or is it in the states, or is it equal? Could you kind of talk to where that inventory is?

It’s really in all the markets. As you pointed out, the dealer inventories aren’t too out of line. This is again for what’s in company stock at this point. So the numbers we gave earlier were dealer inventories, so what we’re doing is reducing production so that we sell through what we have in company stock. It is, I would say, more North America and South America, but Europe as well, because we’re in a situation where that market, we’re having to get the inventory levels down there as well as the market conditions are a little weaker than we expected. But it’s really across the board.

OK, and then if I can just make sure I understand this, you’re taking the fourth quarter down by roughly $0.20, or bringing the year down by about $0.20, all of it in the fourth quarter. Where exactly are you – you had given the guidance for the year before, but we didn’t really get into the specifics of where it is. Is it in South America, Europe and North America? Is it even? Is it mostly in South America and in Europe? In other words, where are the reductions taking place relative to what you had given us as guidance or thoughts three months ago? In other words, what’s the difference in the fourth quarter now versus three months ago, in terms of where that hits? Is it across the board, is it mostly in South America, mostly in Europe, or where is it?

It’s mostly Europe and South America, and then the impact of the production is probably a quarter of that reduction as well.

I’m sorry, what do you mean by that?

The production cut that we put in place reduced kind of overall that will be spread. Primarily Europe and South America, but somewhat a little in North America too; that was about a quarter of the decline. Then just reduction in our sales forecasts and margin outlooks excluding that are more weighted to Europe and South America, but we do expect, from our earlier expectation, a slight decline from where we were on North America, and then a little higher on the interest costs as well, because we’re carrying a little more debt than we expected going into the end of the quarter.

OK. Then if we look at ’06, you’re not making a forecast, but we do note that you’re talking about essentially ending ’05 producing more or less at retail, maybe a little bit below retail. Martin talked about essentially flat retail sales, so you’ve got basically flat production in ’06. You’ve got probably what, 3% or 4% of price going through. You highlighted, Andy, a couple of things. Can you put any numbers around them? In other words, what kind of a full year benefit do we get from the refunding and perhaps the lower debt on an interest expense, on a year-over-year basis, ’06 versus ’05, and any kinds of carry through cost reduction. Just kind of help us put some numbers around the pieces that might benefit ’06 versus ’05.

Well on the interest, I think we said that we would lower our interest expense by somewhere between $15 million to $20 million, because of that bond redemption. We are losing some of that because of the higher interest rate, so we want to have our variable debt down to offset some of that. But we’re getting about half of that reduction this year, so there’s another half to come next year.

On the rest of the benefits, we are starting to implement the additional production in our engine business. We’ve talked about that being a $20 million benefit over about a three year period, and then we have a lot of new products coming through next year, some higher horsepower products that carry very strong margins and some new products with common platforms. I’m not really ready to comment until we get the budget pulled together on how all those benefit the 2006 results.

All right, thanks very much.

Ann Duignan.

Just a follow up on the flat production in 2006 that John mentioned. If your inventories end up at about last year’s levels at the end of the year, will you really produce at retail levels next year, or will you have to under produce again?

It will be more or less at retail level. We also are negotiating with most of the factories to get more flexible with regard to our labor hours to make sure that those variances can be digested without additional cost.

Can you talk about your new product rollout, specifically the engines to meet the new emissions standards? Will you have to use credits, or will you have engines that will be compliant, and are they equally as fuel efficient, or more fuel efficient, or less fuel efficient than your current engines?

Well let’s say we differentiate ourselves from competition by lower fuel consumption in general, so the engines we put in not only the Caesar engines, but also some engines we get from suppliers, are pretty good on that. In general you could say that fuel consumption with the new regulations might go up slightly, but on the other hand we think that with regards – the benchmark what we are doing with our competitors, we still would be substantially better. Everything is pretty much on plan, so we have the advantage that we are not in the truck engine business, so therefore we somewhat follow with the AG engine, with the highway diesel engine somewhat the truck industry, and that makes the development of the new engine generation much more cost effective than for other suppliers.

And just as a follow up, what does it do to your dealers if they are still receiving products in January and February of next year that have engines that are not compliant? Is that an issue for them?

No. There’s a kind of grace period so that’s not an issue for the dealers and not a problem for customers at all.

The cut off is more on production. You can’t produce the new product with a non-compliant engine starting at the beginning of the year.

OK, so it’s not a problem for the inventory you have in hand?

No, not at all. The only inventory impact we do get from --let’s say, for some of the engine models we carry some inventories to make sure that everything works smoothly. So that’s a little impact, but no problem for our dealers or customers.

OK, and could you just clarify what you mean that you sell products on tender in South America or in some South American countries?

In some South American countries, there are bigger lots. You can sell, like, 150 tractors to Venezuela, or something like that. They typically--or let’s say, come in a tender offer. And, let’s say, we did do some business to compensate the problems we were facing in Brazil this year. But, with the strong Real, that gets a little bit more difficult. So, the danger is that you don’t generate a proper margin by doing that. And, we are not sure how that will work, exactly, in 2006.

Those standards are basically generated by finance offers, retail finance models coming from subsidies or governmental action.

OK, so those products are sold in Real? Is that in Real denomination, is that--?

That will be perfect. They are always in dollars.

Always in dollars, OK.

And so the strong Real makes it a little difficult, then, to be competitive.

OK, I understand, and then just one quick final follow up, your $3 million in warranty costs in Q3, is that over and done with? Or, do you expect further warranty costs in Q4 and even into ’06?

No, that was a one-time somewhat unusual item

OK, thank you.

We are negotiating with our supplier here so that means hopefully we can do something on that.

What was the specific problem?

Well, let’s say it was a little technical problem on the product. And, we basically have to replace it and we negotiated with our supplier for his participation. So, there might be some —- we might recover some of the costs.

And, can you tell us what specific part of the product, the problems might have impacted?

We’d prefer not to get into the details.

OK, thanks guys.

Mark Koznarek.

Just a question on tax, please. The year-to-date is 39.4%. Is that reasonable for the fourth quarter?

We’ll be somewhere between 38% and 39% for the full year.

And then, Andy, what’s a reasonable tax assumption to use for ’06, given all the cross currents that are part of your network there?

I would say pretty much the same ballpark, 37% to 38%.

OK, thank you.

Andrew Casey.

Thanks. Just a quick follow up; I think, Martin, you mentioned something about pressure on pricing in South America. I would presume that’s Brazil. Could you give a little more color on that, please?

That’s not Brazil, but Andy can give more details.

Yes, it’s not really Brazil as much as it is on these export markets, where again, we’re losing margin by selling in the dollars into Argentina, Chile, Peru, as we talked about before. We’re trying to certainly raise the price to offset some of the currency issues, but that is becoming more and more difficult, and impacting those markets. But that was basically what we were talking about.

OK thank you. And then, lastly, just to round it out, no pricing pressure in any other region at this point?

No particular or specific problem we can see.

Thanks a lot.

John McGinty.

Yes, I just wanted to -- going back over the notes on this, you said, Andy, that most of the reduction in the fourth quarter came from lower schedules, mostly in Europe and South America, somewhat the lower production overall. But in effect, is the retail sales experience--is this because the retail sales experience in Europe and South America is worse than you thought? Is it that you had expected a pick up that didn’t occur? Or, is it that, in fact, things have continued to deteriorate and weaken further than you thought? I’m just trying to understand what’s different than you thought.

Is it that you had expected a pick up and it didn’t happen? Or, is it that you had expected things to stay flat and it’s gotten worse?

It’s more the latter. We expected what we saw going on in the second quarter to continue, and it’s gotten worse. Our own retail sales activities have been good, relative to the industry, what’s happened in the industry. So, it’s not really our retail performance, per se, but what’s happened with the market and our expectations of the market, that we’ve had to lower.

OK. In that regard, how comfortable are you in saying flat next year, Martin, in terms of the fact that, going through the third quarter and looking into the fourth quarter, things are continuing to deteriorate?

But it’s kind of a mixture. So, when you look into Europe and you certainly did that, you know that there were several markets that were somewhat down this year, like France, or southern Europe. Mainly, the problem was a major drought, which normally shouldn’t happen every year.

So, there are certain reasons why you would think that France, Portugal, Greece and Spain could recover and Italy. England was down and then there are other markets that are flattish, like Nordic countries, where we think that they could maybe also develop a little nicer next year. Germany didn’t really peak, so they went down and recovered a little bit. But you could be also a little bit more optimistic.

So eastern Europe is still pretty strong. We think that by getting better and better dealers step by step we could get more business there.

South America, you know, is a big question mark. But we think also, like our competitors, that they might be, I’d say that they wouldn’t go down further. North America seems to be pretty stable.

OK. Thanks very much.

[OPERATOR INSTRUCTIONS] And Mr. Richenhagen, it appears we have no further questions at this time.

We survived. Thank you very much. Have a nice day.

This does conclude today’s teleconference. You may disconnect at any time.