AGCO Corp (AGCO) 2006 Q1 法說會逐字稿

Good day everyone. Welcome to AGCO Corporation's 2006 first-quarter earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Greg Peterson, Director of IR. Please go ahead, sir.

Thank you, Kim and good morning. I'm Greg Peterson's, AGCO's Director of Investor Relations. Thank you for join us for AGCO's first quarter 2006 earnings conference call. On the call with me this morning, I have Martin Richenhagen, our President and Chief Executive Officer and Andy Beck, our Senior Vice President and Chief Financial Officer.

Let me remind you that 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 productions 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, 2005. 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 Web site for the next 12 months. I will now turn the call over to Martin.

Thank you, Greg, and good morning. I also would like to use this opportunity to welcome Greg, who is our new Director of Investor Relations. We were in a position to hire him from Bell South in order to improve AGCO in the area of investor relations.

I will begin by summarizing our financial results for the first quarter. For the first quarter of 2006, our adjusted diluted earnings per share was $0.19 compared to $0.24 in the prior year period. These amounts, as well as our reported earnings per share, are detailed in our earnings release.

As we told you during our fourth-quarter call, our focus in the first quarter was on reducing seasonal working capital requirements. We reduced our production by 18% and succeeded in reducing our build of working capital by over $130 million. As expected, these actions put pressure on our sales and margins, especially in North America.

First quarter net sales declined approximately 7% from the first quarter of 2005, but our gross margins did manage a slight increase from the same period last year. We've continued to manage inventory levels very closely through the first half of the year. This emphasis is expected to put us in a better position for improved asset returns and better margins for the full year of 2006. We saw good results from our Europe, Africa and Middle East segments where strong demand in some of our key markets drove year-over-year increases in net sales, as well as a 13% increase in operating income. Our first quarter results were negatively impacted by the continued market decline in our key market of South America. Lower farm income in 2005 has hurt demand for farm machinery, especially combines. Results in Brazil were down due to the strengthening of the real and its pressure on commodity exports. Now I will turn the call over to Andy Beck to discuss additional financial information.

Thank you, Martin. Reported sales for first quarter were 6.9% lower than 2005. Unfavorable currency translation of 39.8 million contributed 3.1% of this decrease. Excluding currency translation, net sales decreased approximately 47.3 million, or 3.8% below the comparable prior-year period.

The decrease in net sales of 3.8% in the first quarter can be broken down on a regional basis as follows -- North America down 19%, South America down 20.1%, Europe up 13.6% and the rest of the world markets, including Asia-Pacific, Africa and the Middle East, down 29%. Parts sales for the quarter were 159.1 million compared to 155 million in 2005. Excluding the effect of currency translation, parts sales for the quarter were approximately 6% higher than the prior year period. During the first quarter, our gross profit margins increased slightly from 17.5% of net sales to 17.6% in 2006. Despite lower production levels in the first quarter, our gross margins were higher due to improve productivity and a favorable sales mix.

Losses on sales of receivables, primarily under our securitization facilities, which is included in other expense net, were 6.5 million for the first quarter compared to 5 million in the prior year period. This increase in expense is due to higher interest rates in 2006 as compared to 2005.

Interest expense net for the first quarter was 13.6 million compared to 17 million in the prior year period. Interest expense in the first quarter of 2006 was lower than 2005 due to lower debt levels in 2006.

The Company's effective tax rate was 52.9% for the first quarter of 2006 compared to 42.1% in 2005. The Company's first quarter 2006 effective tax rate was impacted by our accounting practice of not recording a benefit for losses incurred in the United States.

Moving onto the balance sheet -- accounts receivable and inventory combined were $222 million at March 2006 than at the end of March 2005. Funding under accounts receivable securitization programs was 455.6 million at the end of March 2006 compared to 462.7 million at the end of December 2005 and 449.3 million at March 2005. Accounts receivable transferred to AGCO Finance, our retail finance joint venture as of March 31, 2006, was approximately $132 million. Excluding these receivable funding facilities, accounts receivables and inventories are $83.9 million lower then a year ago.

In North America, our dealer inventory month supply at the end of March 2006 on a trailing 12-month basis was lower than at March 2000 by. The dealer month supply was substantially lower for tractor inventories, partially offset by higher month supply of combines and hay equipment. The month supply for 2006, March ending, was as follows -- approximately 6.5 months for tractors, approximately 7.5 months for combines and 8.5 months for hay equipment.

It is important to note that in the first quarter of 2006, we held the seasonal growth of our North American dealer inventory from year-end levels to first quarter levels to 28 million versus 101 million in the first quarter of 2005, representing a $73 million reduction. Essentially, we lowered the seasonal ramp in dealer finished goods inventories in the first quarter by $73 million which resulted in a reduction in our North American sales.

Our net debt to capital ratio was 36.2% at March 31, 2006 compared to 43.8% at March 31, 2005. EBITDA, excluding restructuring and other infrequent expenses of 0.1 million, was 75.8 million for the first quarter of 2006. EBITDA, excluding restructuring and other infrequent expenses of $1 million, was 78.9 million for the first quarter of 2005. Unit volumes for worldwide tractor and combine production during the first quarter 2006 were approximately 18% lower than 2005 levels.

Turning now to our discussion to 2006, net sales for the full year of 2006 are expected to be below 2005 levels based on lower industry demand, planned dealer inventory reductions and currency translation. We are targeting to improve our earnings by up to 10% and improve working capital utilization in 2006 with higher operating margins and reduced interest expense. Actions to reduce seasonal increases in dealer and Company inventories are expected to continue to result in lower sales and earnings for the first half of 2006 compared to 2005. Second quarter net sales for 2006 are expected to be approximately 7 to 8% lower than 2005 which will have a negative impact on earnings in 2006 compared to 2005. Martin?

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

(Operator Instructions). Andrew Casey, Prudential Equity Group.

A question on the gross margins in the first quarter, Martin and Andy, you highlighted how you got there. With the [78]% reduction in topline that you expect in Q2, should we look for equally impressive gross margin performance given the unit volume decline?

I think for the second quarter, again, we're looking at very similar declines in production as the first quarter. And so as a result, that will continue to put pressure on the margins. Our production is actually higher in the second quarter typically than in the first quarter. And so our margin expectation is, again, as we've said before, were higher margins for the full year, but in the second quarter, don't expect to see a significant margin improvement.

Okay, thanks. And then just a follow-up to that. If I recall correctly, the full-year guidance of up to 10% earnings growth implicit in that is in expectation that there might be an improvement in the second half for South American unit volumes. Is that still the case?

I think we would expect that in the second half of the year that, because of the base that we're working off of now of the weak 2005 results, that's we are expecting to see some improvement there in the second half.

Thank you.

Ann Duignan, Bear Stearns.

Could you give us a little bit more color on the tax rate and what specifically drove the tax rate? I know you mentioned it a few moments ago, but I didn't quite understand what you were saying. And then, what is your expectation for tax rate for the remainder of the year?

The tax rate is driven by our profitability by tax jurisdiction. And specifically in North America, if we have a loss, we don't take a credit or a benefit for that loss. So in the first quarter, which is a seasonally low quarter for our North America or U.S. market, we had losses. And since we did not generate a benefit for that, that effectively raises the income tax effective tax rate. So that should adjust itself throughout the year, and it is somewhat seasonal or it differs by quarter what our tax rates will be. But by -- our full-year tax rate is still expected to be in that 38% range.

Okay. And along the same lines, what is your outlook for currency going forward if the dollar were to stay at its current low level -- what kind of an impact would that have on your earnings.

The dollar has weakened just the last couple of days here. What that does is continue to put pressure on our profitability in North America, particularly with where is the real is in relation to the dollar and our exports out of Brazil into the U.S. It also puts pressure on our market and our profitability in South America.

As it relates to the euro, it's a little more of a balanced situation because of our stronger profitability in Europe. I would expect that the impact of that to be somewhat minimal as it relates to the offsetting of the impact of exporting product from Europe into the U.S. It will be offset by higher profits in Europe.

And just one quick further follow-up. You mentioned that gross margins were slightly higher because of favorable mix. Could you give us some color on that -- where did you see the favorable mix and what is favorable mix?

For the most part, the mix relates to the strengthening of the German market. We saw very strong market conditions in Germany here in the first quarter and our sales were up in Germany. And as a result, that is one of our highest-margin markets with our Fendt brand, and that did contribute to some of the margin improvement that we saw.

Okay, I will get back in line, and I do have a couple of follow-up questions. Thank you.

Gary McManus, J.P. Morgan.

Good morning, Martin and Andy. Can you talk a little bit about -- in North America, obviously, you cut production to work off inventories there. Are they at desired levels? It doesn't seem like that's the case, because you are going to be underproducing in the second quarter. And I want to note -- to what degree do you expect to underproduce in the second quarter? And if I look at 2005, you had about $20 million pretax profits in North America. So that accounted for all of the profits for the entire year last year. Obviously you may be down, but are you going to get seasonal strength in North America like what happened last year?

We will take two questions. On the inventory side, again, we're going to -- we are trying to level out the seasonal requirements that we had last year. So last year, we really built up working capital and then dropped it significantly in the fourth quarter. What we're trying to do is create a much smoother production and sales change there, and that is going to impact our first half as we have discussed already. So our inventory is our where we want them to be and our dealers and our company; they are getting there, but we still want to make some further improvements here throughout the year. And we would like to see it come down for the full year as well. That is one of the things that we're targeting this year is to get inventories and our accounts receivable improved over the previous year on a combined basis. When you look at North America in the second quarter, we would -- we are expecting to see, again, fairly significant reductions in sales volume in the second quarter which will pull down the expected earnings as well pretty significantly from the second quarter of what we did last year.

But if you make money there, then you're going to have a much lower -- what is the tax rate assumption in the second quarter? Because I assume if you make money in North America and you had a high tax, what you're going to do -- I assume a tax rate on a first-half basis. So do we have an usually low tax rate in the second quarter?

No, I think it should be lower than it was in this first quarter, but probably still above the year average. So the tax rate will be lower in the second half.

Okay. And I guess in answering Ann's question, you talked about strength in the German market. Could you quantify how strong was demand in Germany, what's your expectations for the rest of the year?

The German market was up about 20% in the first quarter. I don't think we expect that market to stay up that much, but we do expect to see it improve for full year above last year's levels.

Okay, thanks.

Andrew Obin, Merrill Lynch.

Good morning. Just a follow-up question on inventories. I was not entirely clear about your comments about receivables and if that impacted inventories, but I just have an observation that inventory used in the quarter was a lot better than last year. But if we go back to '04 or '03 or '02, it [was] actually sort of average to below average. And I'm just wondering, given that we are still cutting production on the producing, why is the company consuming so much in terms of inventories? And this is why I'm asking -- is this related in some form to the sales of receivables?

If the business that you're talking -- if you're talking about inventories, not receivables, the sales of receivables would no have any --.

Okay (MULTIPLE SPEAKERS).

But on an absolute basis, when you're looking at our inventory level, absolutely, where trying get them improved. I think if you go back to those previous years, you have a couple of things that change, you have an acquisition in 2004 that could have impacted. And then prior to that, the North American market was weaker and our inventory requirements and working capital requirements are the highest as it relates to North America. So as the markets improved and as our sales have gone up in North America, that does require more working capital.

Also, we have been growing with our Challenger business, which is also -- had some requirements for working capital that, If you go back, we've talked about over the years. So those are some of the reasons why. But certainly as we have talked about already, our focus is on trying to improve that and make strides in getting our inventory requirements down in the North American market and worldwide.

So is it fair to assume that a lot of the inventory used in the quarter is related to growing the Challenger business?

No, I wouldn't say that. I would say that, in the quarter, it's a normal seasonal improvement and seasonal increase in working capital that we have where we build both dealer and company inventory levels for preparation for the spring selling seasons, and that is really on a worldwide basis. But probably the largest increase is in North America.

Okay, so I'm just a little bit puzzled because we're saying that we're underproducing to demand at the same time we're building inventory in the dealer channel -- this is where I'm sort of lost a little bit.

Every year, from year end to first quarter, you build your inventory levels. What we are saying is, the amount that we built our inventory levels is significantly lower than what we did the prior year.

I guess I understand the prior, but the prior year, we decided that the year was going to be a bit better, and that sort of hurt us in the second half of the year. What I'm saying is that, you're telling us that you're being very conservative building inventory. But as I'm looking at the numbers, they're not that different down from prior years. That's I guess where the disconnect is for me. You see what I'm saying?

Well, the inventory balances were -- from what --.

I'm just looking at -- maybe it's a bit simplistic, but I'm just looking at the use of cash associated with inventory buildup. And my observation is it's at or above average level for the past five years. That is why I'm sort of a little bit puzzled -- if we're talking about inventory reduction, why inventory is eating up so much cash?

What we're doing is we're looking relative to last year, and relative to last year, we used $74 million less working capital for inventories.

Okay, so from your [perspective], nothing unusual? And can we talk a little bit more about the Challenger profitability? Are we running into some structural issues with North American profitability? Because I understand underproduction, et cetera, et cetera, but what are the targets for this year for Challenger? Do we feel we're on track with this business in the long-term? Are we thinking about maybe exiting North American business?

Certainly this is a strategy we will not implement. We are very satisfied with the growth we see in the Challenger business. We have some issues here with regard to our profitability we work on, which means that we bring too much product over from -- except from outside America, mainly from [Euro] countries and also from Brazil. We work on sourcing, and as you know, we have joint ventures in as many years already in India. So we have product here already in North America on test which will help us to get into a much better position with regard to purchasing material from outside America for example. So those are the things we work on right now.

But is Challenger profitability, is it a currency issue, or is it an issue where we're trying to grow the share, and given that we have [Deere], [that's the new good job] we sort of have a regurgency [in age], we just have to discount a bit more than we thought. Which one is it? Is it just because we are manufacturing in Brazil and Europe and the currency is killing us, or is it the pricing issue?

No, it's a currency issue. We didn't reduce our prices. We know that Case/New Holland was a little bit more aggressive, but we kept our prices stable.

Thank you very much.

Mark Koznarek, FTN Midwest Securities.

Could you folks discuss the impact of price here in the quarter and what the price outlook is for the year?

Sure, Mark. Pricing for the quarter was a little below 2% and our expectation for the full year is about 2%.

Okay. And then, can you talk about your raw material expectations for the year -- inflation or deflation from year-ago?

I think it's flat. We don't see major increases, steel prices seem to be rather stable. So I don't see any impact on the remainder of the year right now.

Okay, thank you very much.

Joel Tiss, Lehman Brothers.

Two questions, most of the other ones have been answered. Can we dig a little bit more into Brazil? Because it seems like the volume decreases in the end market were more than what you saw and your profitability hung in there a lot better than would be commensurate with the volume decreases. So can we just dig a little bit into that and what's going on? Thank you.

We did do a little better on margins. You're right; the volume was down because of continued market weakness. Net market weakness was within Brazil, but also outside of Brazil, some of the other markets in South America were down as well. I think the difference between where we were on the margin side is that we were a little more stable in our manufacturing situation since we're really adjusting to the market decline a year ago. And so we got our costs back in line here in the first quarter. And also, we have been able to adjust pricing in certain markets that have been impacted by the strong real relative to the other currencies in the South American market.

Also, our guys in purchasing did a great job and we renegotiated most of our contracts, which helped.

Okay. And then the follow-up is -- I think Ann asked something about whether the decreasing value of the dollar recently is included in your expectations for the rest of the year, and I did not hear the answer to that.

I think the answer to that is that, what we've put out today is the target. There have been recent changes in the currency in the last couple of days. I would not say that is reflected in the latest numbers that we have certainly. But from the standpoint of the euro, I don't expect it to be a significant impact, but there could be some impact as it relates to the real if it stayed at this level.

Okay, thank you very much.

Charlie Rentschler, Foresight Research.

I wanted to ask a little bit more about Brazil. It sounds like you don't see any real improvement there for the rest of this year. Is there some optimism for '07? Can we see anything happening? I understand the strong real hurts you as exporters and farmers as exporters, but is that the main thing that has to happen? What about -- we read about sugar cane and the need for the country to find room to grow more sugar cane so it can export more ethanol, that kind of a thing. What are the bases, if any, for optimism down there?

I think 2006 will be more or less flat as we see it, but we also don't know what the impact of the elections might be and things like that. Sugar cane is very strong right now and this is an advantage for us because mainly the Valtra high-horsepower tractor has a high market share in the sugar cane business. So this is certainly good news, but crop, so mainly soybeans and corn, don't do as well yet, and this is mainly all caused by the real, by (indiscernible). [As] they work on it, I think you saw that they increased interest rates, and so -- decreased, sorry -- the interest rates slightly, and they're doing that. But we don't know exactly what will happen to the real yet.

Thank you.

John McGinty, Credit Suisse.

One question. Andy, you said that you were assuming price increases would be up 2% this year last quarter -- I'm just looking at the transcript -- you said that you were expecting them to be up 2.5%. Is that a rounding error, is that a deterioration, or could you just explain that difference?

I think I said 2 to 2.5. I am rounding down now. We have seen a little more competitive pressure in certain markets, particularly North America and in South America on pricing, and so I am adjusting that down slightly.

Second question -- the production was down 18% in the first quarter. You said the second quarter would be done about as much with the balancing in the fourth quarter. What is the full-year production versus the retail, or the full-year production overall that you are assuming?

About 3 to 4% down.

3 to 4% down, so that implies the second half is obviously up pretty strongly?

That's right, particularly the fourth quarter where we were down significantly last year.

Okay. And then you talked very explicitly about the sales impact of currency overall in [EMEA] and in South America. How does that all net out in terms of the earnings impact of currency overall, and specifically in South America and in Europe, Africa and the Middle East?

I'm not sure I have it by anything more than in total, but currency certainly hit us by, as you know, about 40 million on the sales. And so that did impact margins from that standpoint. So we were probably down, lost about $0.02 or so because of currency.

Okay, but would the -- .

It would've been a positive impact on South America and a negative on Europe.

Okay. And in the U.S., because you are importing stuff from Europe, that would have been --.

It would have been relatively stable because compared to a year ago, the euro is actually weaker, but the real is actually stronger, and so those offset each other.

And then when you were discussing the inventory and receivable changes, you gave one number in there which was the transfer of -- I believe it was the transfer of retail receivables to the joint venture of 132 million. I don't remember you discussing that number in the past. Is that something new, or what was the year-ago or -- because every other number you gave a year ago --?

That was done in the second quarter of last year and we issued a release on that and have discussed that. But at the end of the year, it was about $110 million, and then obviously at the end of March last year, we had not done the program yet. So if you're comparing receivables from this year to last year, there is a $130 million -- they're $130 million lower than a year ago last year because of this program.

So on a pure apples-to-apples-to-apples basis, the number you gave, the 83.9, that is the year-over-year reduction that you affected?

Yes.

Okay and then, finally, on Challenger, a bunch of questions. What were the sales of Challenger in the quarter year-over-year, and what was the operating loss in the quarter -- or the operating profits? Sorry.

You were right the first time. The sales were about $65 million, which was just slightly below the year before, and there was some inventory adjustments we were doing there as well. The retail sales were up in the first quarter. So we're hitting our targets on retail on the Challenger business. And then the income was about a $4 million loss in the first quarter. Some of that related obviously to the sales reduction, some of it related to our lower production in our plants like Jackson and Hesston, and then some of it related to sales mix and higher expenses.

And what was the versus on that one?

We were pretty much breakeven a year ago.

Okay. And for the year, are you still expecting that -- I believe that you said, you thought Challenger would break even for the year versus a loss for all of last year?

That is correct. We're still on target for that.

Thank you very much.

Barry Bannister, Stifel Nicolaus.

It looked to me like your parts sales you said were up 6% on a 155 million base, so that's about $9 million. Is my math correct, that if parts are about 20% margin and the rest of your equipment is about 4 or less, then the increase of only 9 million sales of parts year-over-year would have offset the entire effect of a $47 million sales decline, ex-FX?

I [haven't] looked at those numbers as you're going through them. Our margins are actually higher on parts than what you're quoting, and our machinery margins are usually a little bit better than that too. But certainly, that did also help our margins for the quarter.

And was that an unusual build, a 6% year-over-year for a Q1 period in parts?

The stronger sales were in Europe and a little in our Asian market. I don't have any other specifics than that.

Did you give any guidance on 2006 free cash flow? You've done pretty well the last couple of years -- 168 million in '05, 188 in '04?

Our target is for 125 to $150 million of free cash flow for the year.

That is just because you have not revised it and so forth?

That's correct. That is consistent with what we said last quarter I believe.

Lastly, options and restricted stock. The stock has performed very well. Management has some options in some restricted stock. I would wonder if you have any visibility on the cost for the year of those?

Well, we have just pout in a new program that was approved by shareholders just last week, total new incentive program for our executive management and other key managers. And the program is focused on us achieving financial performance targets, specifically earnings per share and return on invested capital. Those targets are for the main program that we have is over a three-year period starting this year. The expense associated with that new incentive program is going to run for the full year, we estimate about $7.5 million of expense relating to the new accounting rules, and so a little over $2 million a quarter.

Did you 2 million in the first quarter, or is it (MULTIPLE SPEAKERS)?

No. Since we had a lower amount in the first quarter, it was 1.3 million. That more related to some of the old programs that we had. So since the new program was just approved, we start with the expense associated with the new programs in the second quarter.

How did sprayers do in the quarter? Is it competitive throughout there pretty heavily?

Sprayers in the quarter, sales were down about 12% and some of that related to inventory adjustments as well. That market is very competitive right now, but we continue to perform well in that area and we have some new products that we're coming out with in the second half of the year that we think will be well received in that market.

Think you can do a 10 margin in that sprayer business? Historically, that's where it has been.

Yes, that's right.

Thanks.

David Bleustein, UBS.

What was the increase in operating profit spent in the quarter?

David, I don't have that specifically in front of me, but their sales were up. The most in that Europe, Africa, Middle East, we were up in both a number of our brands there, but defense sales were the highest improvement because of the strong market, particularly in Germany. And so they did lead some of that improvement in earnings that you see in the Europe, Africa, Middle East segment.

Second, it looks like goodwill increase by about $20 million in the quarter? Can you just walk us through what the increase was attributable to?

That would just be because of exchange rate changes. There has been no adjustments to those.

Terrific, thank you.

Ann Duignan, Bear Stearns.

Just two quick follow-ups. On currency, are we looking at this the wrong way? Should we be thinking about a weaker dollar as being a competitive advantage for U.S. farmers, and particularly also for Brazilian farmers, and that indeed, the outlook for agricultural income might improve in an environment of weaker dollar?

Certainly, I think it could help the U.S. farmer, but as it relates to the Brazilian farmer, it's a negative because they are selling in dollars but their costs are in real. And so it is a negative to their income.

Negative to their income, but it may spur export demand. And with the inventory levels of soybeans where they are at, they need all the exports they can get.

Well, I think we are more focused on the income side of it, but you have a good point there.

Okay. And just a follow-up for Martin. Martin, we were fortunate enough to see your release of your new products, the new Challenge products, recently. What has been the market reaction to the breadth of products that you're planning to introduce under the Challenger brand name? And when do you expect to start actually delivering those products for sale?

Well actually when we announced the product, everybody was quite impressed and our dealers are very motivated. We are launching the product, the combines will start to launch -- or let's say start selling end of this year, so in fall. And the big 4-wheel drive articulated, we will start selling early 2007.

So the investment that you're making today is an investment in these products? Is that correct?

Partially, yes. We have of course also more to come. We have more very interesting products in the pipeline.

Can you give us a sense of how much you are investing in the Challenger product line. Do you break that out from your entire --?

That's difficult, because we do -- let's say most of our products, we use -- at least the platforms we develop, we're also using for our other products. So therefore, I'm not in a position to give you this number now.

Okay, but we should look for product introductions for combines in the fall and for the large 4-wheel drive in '07?

Exactly.

Thank you, thank you.

Andrew Obin, Merrill Lynch.

Just a follow-up question on Brazil. How is Deere's in the Brazilian market is impacting your relationship with dealers down there? Because now, Deere will have both tractors and combines. And will that force some of your Valtra dealers I guess to make a decision between the two brands, and what have you been hearing from them?

Actually in Brazil, the situation is a little bit different than in most of the other countries of the world. A dealer has to be exclusive by law. So there is not such a thing as a multi-brand dealer. Our dealers will get, Valtra dealers who only do tractors right now will get combines from AGCO also end of this year. So they will have a fully diversified and differentiated product available for the next season.

So let me understand it correctly. So the dealers who carry John Deere combines right now do not carry Valtra tractors at the present, right?

Exactly.

Okay, thank you.

(Operator Instructions). Barry Bannister, Stifel Nicolaus.

I know it's a tough question, but the acquisition of Valtra of course was I think a lower margin than your past peak margins in Europe. But you did a 12.5 margin in Europe, 6.5 a couple of years ago at the bottom. What is the potential over there, given all the changes that you have made if sales continued to be as strong in the next few years as they have in the last year?

Barry, I don't have a specific number for you. They are right, that the mix of what we're doing and products we're selling and brands is a little different from historic periods you quoted. But we do think that we have continued and potential margin improvement projects that go on in Europe on the product side. Also, efficiency within the organization that we're working on. So we would like to think and are targeting further margin improvement as we hope to continue to grow in that marketplace.

And then I recall a few years ago, you wrote off the deferred tax asset in the United States and that was the reason why the United States contributed to a higher tax rate in the first quarter.

We wrote off some of them in the past, and then we wrote the rest of the asset off at the end of the fourth quarter of 2005. But over probably the last two to three years, I would say the last two years, we had not ever been benefiting losses in North America. So this is not something new, it's consistent with the last couple of years. It's all relative to the level of income or loss in North America which fluctuates the tax rate since. But since we lost more money in North America on the U.S. in the first quarter, that reflected a higher tax rate.

Okay, thanks. Good quarter.

[Rich Romy], private investor.

I would like to know if you have any plans of resuming the dividend?

We are still focusing on generating cash flow and reducing our debt. We are in a situation right now where our debt is lower than it was a year ago. And we hope to continue to generate cash here this year and we'll again focus on debt reduction with the cash flow that we achieve here or hope to achieve here in the 2006 year. Beyond that, we will look for other alternatives to use our cash. We'd probably still look at debt reduction, but we'll also look at other alternatives, such as a share repurchase and dividends as a possibility, depending on what other investments that we think we would like to make. So that's something that's we don't anticipate in the short-term but are looking at it for the longer-term.

As long as you have debt, then you have to bypass any dividend?

No, that's not the case. We would look at what our target level of debt would be, and beyond that, we would look for other uses of our cash.

That does conclude the question and answer today. Mr. Richenhagen, I will turn the conference back to you for additional or closing remarks.

In closing, we appreciate your time and interest in AGCO. Should you have further questions, I encourage you to contact Greg Peterson, our Director of Investor Relations. Thank you for joining us this morning and have a nice day.

That does conclude our conference call for today. Thank you all for your participation.