AGCO Corp (AGCO) 2007 Q2 法說會逐字稿

Good morning. My name is Teketria, and I will be your conference operator. At this time, I would like to welcome everyone to the AGCO Corporation's 2007 earning release and conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this conference is being recorded Tuesday, July 31, 2007. Thank you. I would now like to introduce Mr. Peterson. You may begin.

Thank you, Teketria, and good morning. Thank you for joining us for AGCO's second quarter 2007 earnings conference call. During this conference call, we will refer to a slide presentation. These slides, earnings press release, and our financial statements are posted on our website at AGCOCorp.com. The non-GAAP measures used in the slide presentation are reconciled to GAAP measures in the appendix to the slides. On the call with me this morning are Martin Richenhagen, our Chairman, President and Chief Executive Officer; and Andy Beck, our Senior Vice President and Chief Financial Officer. Before we get started this morning, let me remind you that during the course of this conference call, we will make forward-looking statements including some related to future sales, earnings, production levels, supplier constraints, farm income, working capital improvement, cash flow, and strategic initiatives. We wish to caution that you these statements are predictions and that actual events or results may differ materially. We refer you to periodic reports that we file from time to time with the Securities & Exchange Commission, including the Company's Form 10-K for the year ended December 31, 2006. These important documents discuss 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. I would like now to turn the call over to Martin.

Thank you, Greg, and good morning everybody. I will begin my remarks with slide 3 which summarizes AGCO's sales and earnings for the second quarter and the first six months of 2007. In the second quarter, we posted record quarterly sales that were up approximately 11% compared to the second quarter of 2006 excluding currency translation. Our South American business led the growth, with second quarter sales up nearly 48% from the same period last year, excluding currency translation as well. With this farm equipment industry continued its strong recovery in the Argentina market, also improved from last year. The Europe/Africa/Middle East segment delivered another strong quarter, with Massey Ferguson, Valtra and the Fendt brand all performing well. Our sales were relatively flat in both our North American and Asia Pacific segments. Operating margins were improved both in the second quarter and for the first six months of 2006, while (inaudible) sales growth and improved sales mix in the second quarter allowed us to leverage the cost improvements we are making in our business. The sales mix improved in Europe, while production at our Fendt plant in Germany returned to more normal levels. The supplier constraints that limited our production and sales in the first quarter improved in the second quarter, but remain a concern for the balance of the year. Strong global demand for (inaudible) and farm equipment appears to be putting pressure on the industries and AGCO's supply chain. This situation requires gross monitoring of the remainder of the year. We are working diligently with our existing suppliers to prepare them for expected demand levels, and we're also working to qualify new suppliers to mitigate future supply constraints. Our strong sales and margin improvements drove the increase in adjusted diluted earnings per share of 49% for the second quarter and 45 for the first six months of 2007 compared to the same period last year.

Slide 4 now shows our production schedules for 2006 and 2007. Our production efforts for tractors and combines were up about 18% in the second quarter of 2007, compared to the second quarter of 2006. Production was up to a greater extent in South America and Europe in order to satisfy the increased demand in those regions. Our production for North America continues to be less than retail demand in order to improve dealer and company inventory levels further. In the third quarter you will see the normal seasonal decline in production due to the annual summer holiday shutdown that takes place in some of our factories. We do, however, expect third quarter production levels to be higher than 2006 levels, and for the full year our total production of tractors and combines is expected to be up between 10 to 12% compared to 2006.

Slide 5 -- look at industry retails farm equipment volumes by region for the first six months of 2007. Industry tractor sales in North America were up 1% compared to 2006 levels. We saw sales decline in tractors under 40-horsepower and sales growth in all categories above 40-horsepower. The highest growth rates occurred in the over 140-horsepower segment. The combine market has grown nearly 6% in the first half of 2007 compared to the first six months of 2006. AGCO tractor and combine sales were down in the first six months of 2007 compared to the same period last year. AGCO had strong growth in hay product sales during the first six months of 2007 due to new product introductions and strong industry conditions. Industry tractor volumes were up approximately 3% in Europe during the first half of 2007 versus last year. Strong market conditions in the UK, Russia, and eastern and central Europe are offsetting weaker markets in Spain and Italy. In 2007, we look for continued growth in Russia and eastern and central Europe, with relatively flat market demands in western Europe. South American industry tractor volumes have grown steadily during the first six months of this year compared to 2006. Reserved industry tractor volumes were up 43%. In Argentina, tractor sales increased 15% compared to the first six months of 2006. Combine sales grew significantly in Brazil and also showed improvement in Argentina. We expect higher farm income in Brazil during 2007 and improved conditions in Argentina will result in South American industry equipment demand growth over 20% compared to 2006. In summary, the markets are healthy and our order boards remain well ahead at where they stood this time last year. With that, I will turn the call over to Andy Beck, will who will provide you more details on our results. Andy?

Thank you, Martin. Slide 6 highlights our regional net sales. The charts on the right show our regional sales performance, excluding the impact of translation. For the second quarter of 2006 currency translation had a positive impact of approximately 7% and year-to-date translation for 2007 also had a positive impact of approximately 7%. During the second quarter, the Europe/Africa/Middle East segment had sales growth of approximately 10%, excluding the impact of currency translation compared to the second quarter of 2006. The growth in our Europe/Africa/Middle East segment in the second quarter was led by eastern Europe, France, and Russia. Second quarter sales in North America decreased approximately 1% compared to the second quarter of 2006, excluding currency. Year-to-date sales in North America were up approximately 1%. Retail inventory reduction efforts continued to lower our dealer shipment. At the end of the second quarter, dealer inventories in North America were approximately 14% lower than the same point last year. In South America, second quarter sales improved approximately 48% from last year. Excluding currency translation impacts, strong commodity prices have improved the outlook for farm income in Brazil and have led to higher sales in both row crop and sugar cane sectors. We have also seen strong growth in sales in Argentina. Second quarter sales in our Asia/Pacific segment declined approximately 2% from 2006, excluding currency translation. Year-to-date sales are flat compared to last year. Part sales for the second quarter of 2007 were $241.5 million, up 7.1% compared to the same period in 2006 after removing the impact of currency translation. Strong growth in Europe and South America was partially offset by part sales declines in the Asia/Pacific region. For the first six months of 2007, part sales were $418.3 million compared to $397.4 million in 2006.

Slide 7 highlights our sales and margin performance. Operating margins for the second quarter and first six months of 2007 were up from 2006 levels due to sales growth, improved product mix in Europe and cost control initiatives partially offset by currency impacts in North America. As a reminder, in the first quarter of 2007 our Europe/Africa/Middle East margins were unusually low. The Europe/Africa/Middle East product mix was weighted more towards mid-range and lower horsepower tractors, due to the initial production of Fendt's new high horsepower tractors as well as supplier constraints at our German plant. In the second quarter of 2007, these factors did not impact our results, and our Europe/Africa/Middle East margins improved. In North America, the appreciation of the Brazilian real and the Euro pressured margins on the Brazilian and French-made tractors sold in North America.

Slide 8 highlights the success we've had reducing our investment in working capital. At the end of the second quarter, AGCO's working capital to sales ratio stood at 10.4%, down from 14.7% one year ago. Our focus for the first half of 2007 was to minimize the seasonal build we traditionally have in our inventories. Despite the sales growth we experienced this year, our inventories were down approximately $80 million from last year's levels when you remove the impact of currency translation. In North America, our dealer inventory month supply has improved for tractors and hay equipment. At the end of 2007 -- end of June 2007, our dealer month supply on a trailing twelve-month basis was as follows. Approximately five months for tractors, nine months for combines, and six months for hay equipment. Other working capital details are as follows: outstanding funding under our accounts receivable securitization program was approximately $435.4 million at the end of June 2007, compared to $440.2 million at the end of June 2006. Wholesale interest-bearing receivables transferred to AGCO Finance, our retail finance joint venture in North America, as of June 30, 2007, was approximately $99 million. Losses on sales of receivables primarily under our securitization facilities, which is included in other expense net, were $10.2 million and $16.8 million for the second quarter and first half of 2007 respectively. These amounts compare to $7.3 million and $13.8 million for the same periods in 2006.

Slide 9 addresses AGCO's free cash flow, which represents cash flow from operations less capital expenditures. Improved earnings drove a $45 million increase in free cash flow for the second quarter of 2007, compared to the same period last year. Our seasonal demands for working capital are greater in the first quarter of the year, and thereby generated negative free cash flow in the first six months of 2007 and 2006. Our improved cash flow allowed us to repay approximately $100 million of debt near the end of June, further strengthening our balance sheet.

Slide 10 reflects annual free cash flow for 2006 and our projection for 2007. The light colored portion of the bars reflect the working capital impact on our cash flow. Our working capital reduction progress made a significant contribution to our annual free cash flow last year. We are continuing to focus on our working capital, but expect to have a smaller benefit in 2007 compared to 2006. Even after covering increased spending on strategic investments, we expect to generate strong free cash flow in 2007.

Slide 11 shows the improvements we made to our capital structure over the last two years measured by our net debt to capital ratios. Our net debt to capital ratio was approximately 21% at June 30, 2007, compared to 39% at June 30, 2006. Total debt was up $680 million at the end of the second quarter of 2007. Interest expense net for second quarter 2007 was $7.5 million versus $14.3 million in the second quarter of 2006. In the first six months of 2007, interest expense was $14.2 million compared to $27.9 million for the same period in 2006. The interest savings were generated by lower debt levels compared to 2006.

Slide twelve reminds you of the expected 2007 impacts of our strategic initiatives. In 2007 we will be making significant investments in the form of increased engineering expense to support a growing list of new product programs, plant restructuring costs in our Hesston and Fendt manufacturing facilities, costs associated with with our information system initiatives, and spending associated with developing new markets and improving our distribution. We will be relying on sales and margin growth to pay for these investments while generating an improvement in earnings in 2007 compared to 2006. In the first six months of 2007, spending on these strategic initiatives was less than half of our full year expectation. So we will see heavier spending on these initiatives in the second half of the year.

Slide 13 lists our updated 2007 financial outlook. We are projecting 2007 sales to increase 12 to 14%, driven by improving market conditions in South America, market share improvement and impacts of currency translation. Our revised forecast for 2007 earnings per share is a range between $1.55 and $1.60 per share, and includes funding for our longer term strategic initiatives. We expect our free cash flow to range from $120 million to $130 million. For the third quarter 2007, we're forecasting sales growth of approximately 13 to 14% from 2006 levels, with a typical seasonal dip in operating margins. During the third quarter, we expect pending income tax reform in the United Kingdom to be finalized. The tax reform is expected to result in a one-time negative impact on our income tax expense in the third quarter of approximately $5 million. Germany's income tax reform is also expected to be completed before the end of the year. However, the timing and impact of those results -- timing and impact on our results are less certain. That concludes our comments. Operator, we're now ready to open the call for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from Ann Duignan.

Hi. Good morning, guys.

Good morning, Ann.

Nice job on the working capital, at least. It's trending in the right direction in an environment where sales are growing, so good job there. My question is if you could give us kind of a waterfall charge on your operating profit in North America year-over-year? What was the contribution to the losses? How much was currency and how much was pricing? How much was mix? Give it some color on that and I would appreciate it.

Well, on a year-to-date basis you can see our North American operating income was lower than last year by approximately $19 million. About 10% of that -- excuse me, about $10 million of that was the impact of foreign exchange on the imports that we have from foreign sources sold in North America. We had engineering expense increases of about $3 million for some of the new projects that we have going in North America, and another $1 million approximately for some of the projects costs associated with the restructuring of our operations in Hesston and some other projects. The balance is really relating to some pricing pressures that we've seen that where we're not being able to offset our costs in the first half of the year because of price competition, and we also had a little higher warranty and some negative mix as well.

On pricing -- you said pricing didn't offset your higher import costs. Was pricing negative in the quarter or were you able to hold pricing at least flat but not able to offset higher input costs?

On a companywide basis, our pricing was up a little under 1.5%, but in North America the pricing was slightly negative in the second quarter.

Was that in any particular product area or just across the board?

This was caused by some competitors. We decided not to buy market share.

Okay. That's consistent with what we heard last week, but just a follow-up question real quick. I don't want to monopolize the call. Supply chain issues -- we noted when we were down in Brazil you were having problems with Eaton's Pigozzi transmission business. That seems to be working itself out. What other supply constraints are you seeing out there, Martin? Or what supply constraints are you anticipating now that the market's ramping up in different regions?

Actually, with Eaton, we came to a very good solution, and we are also working towards further improvements in the future. We're very satisfied. And then in some of the other manufacturers still have problems -- capacity problems, some quality problems and so on. But we are optimistic that we can actually develop a stronger relationship with those guys in order to avoid problems for the future. Because we are also shooting for more growth with regard onto our strategy. You remember that we were launching $7 billion in revenues. Now we are a little more optimistic, and we just did take a pretty top down approach, and we're going into that action of $8 billion in the same period of time, which is a five years plan through [a business where I do] get strong signs here through 2011. I still believe mainly we can do it earlier.

You're taking your five-year goal for revenues and your $5 million just on the strength of the secular trends?

Yes.

Okay. And just real quick if you could address capital allocation. You talked previously about potentially introducing a dividend. What are you thinking now, given in fact that you're raising your five year outlook?

We're actually discussing that every Board meeting, and we did not -- we're not in a position yet to announce what we want to do in the future.

Okay. I will get back in line. Thank you.

Your next question comes from Stephen Volkmann with JPMorgan.

Good morning.

Good morning, Stephen.

I think Ann asked all my questions.

Yes, but she didn't come to our last meeting in New York, so she missed it.

I am kidding. The North American operations here, I guess what has to happen before you can break even there? Maybe I will leave it at that.

Well, Steve, we just completed our planning process again for looking at our initiatives and what impacts we think those can deliver. Certainly with a focus of trying to get our North American operations improved, we keep getting hit with further problems because of the currency. And just to remind everyone, we're certainly seeing that impact as I said already on the North American side of the operations because we're importing products from Europe and Brazil into North America. We are seeing offsetting benefits in our margins -- not our margins but our income levels in Europe and in Brazil to offset that on a consolidated basis. But it certainly gives us an uphill battle when we look into the North American operation. But our focus in North America is really on trying to improve our margins. We talked already about trying to restructure our Hesston plant. We're also aggressively looking at cost reduction and our other plan in North America because those plants aren't impacted by currency. And so we need to focus on margin improvement in there in those markets, like hay equipment, sprayers, high horsepower tractors. We're also we're also looking at trying to grow the business, and our focus has been on our distribution -- trying to improve that distribution network so that that we can take advantage of our strong market and grow the business over the next few years, and that will allow us to get much more leverage over the operating costs. Our operating costs as a percentage of sales in North America are too high. And we think that we can generate sales growth off of that base, which will allow us to get closer to break even and in fact profitability in the future.

Stephen, you can imagine that my directors and my board are carefully looking into this every meeting, and we are fully aware on the problem. We do not want to change the strategy. When you take exchange rate out, we're pretty much on the strategic plan wants to be. And I think Andy described very well what we are doing. We are just launching the tractors we sourced from India, which will help us certainly with some of the problems with regard to the exchange rate for types of very doable low horsepower tractors we want to sell here in North America.

Okay. Just sort of rough sense of timing, is '08 sort of a break even year or is it further off than that?

Actually, we wanted to do that, and question of course -- the difficult question to me is the exchange rate, and certainly you know much better where the dollar will be next year than I do.

I am not sure about that. Let's assume you make a little money in North America next year. I assume that would have a pretty positive impact on your tax rate.

That's correct. Any improvement in North America for the -- if you want to generalize it pretty much falls to the bottom line.

We also just moved our European headquarter to Switzerland. We didn't make a big press announcement here, but this is also one part of our tax optimization program.

And Andy -- tax rate in the full year guidance?

In the low 40% range, and that includes this $5 million charge that we anticipate taking in the third quarter.

Thanks.

Your next question from Terry Darling with Goldman Sachs.

Thanks. Hi, Andy. I think you answered my question. Sounds like the $5 million hit in U.K. is in the $1.55 to $1.60 -- it is inclusive of that, is that correct?

That's correct.

I want to make a comment with regard to Germany. I do not believe the impact will be negative. It is rather an opportunity than a risk. I think it is not a risk, so -- we don't know yet how big the opportunity might be.

And can you put any kind of brackets around that, in Germany?

On Germany we're hopeful it would offset at a minimum the UK impact.

And on the cost of the strategic initiatives -- Andy, wondering if you can lay out for us what the exact was in 1Q and 2Q, and obviously you mentioned that there is a bigger hit in the second half and the first half and when you do the math thereafter.

In the second quarter we spent about almost $4.5 million on these various items. Year-to-date we spent about a third of the money. We have about two-thirds to go in the second half.

What were you expecting to spend in 2Q and why was there a delay there?

Well, for the most part I think anything that was maybe a little behind would have been some of the engineering expenses. We're ramping up some of our teams and some of the projects. And that's what I would say is where the spending is probably a little behind. The rest is right about what we expected. Some of the planted rearrangement expense associated with the restructuring of the Fendt plant and the Hesston planted -- a lot of that is going to be in the third quarter because that's when we have our summer shutdown period and that's when you have the opportunity to make some of the changes that we're making.

That's helpful. As we think about the strategic initiative expense for 2008 versus '07, is that a flat comp or do you see that number going higher?

I don't really know. We haven't gone through our planning process yet, so really can't give you much guidance on that. Currently the system projects is going to continue but that's about all I can say.

I would think it's kind of flat.

And then, Andy, wondering if you can give us the operating income benefit for EAME, South America, Asia/Pac in the quarter as you did for North America, which was obviously negative?

They would offset that currency impact.

So it all totaled $10 million in other areas.

Yes. Exactly.

And in the first quarter, North America was impacted by currency by how much?

It was about $5 million per quarter.

You were at $10 million this quarter, right?

That's year-to-date.

That was year-to-date. So it's $5 million this quarter.

Correct.

Got it. Thanks very much.

Your next question is from Andrew Casey with Wachovia Securities.

Good morning, everybody.

Good morning.

Question kind of following on what Terry was talking about with the two-thirds of the strategic initiatives investments going in -- looks like it is somewhere in the $0.07 to $0.08 range for the second half. And could you comment what the offset -- is about $0.02 for the reduced interest expense because of the debt reduction?

Well, I think we're seeing debt reduction and interest expense savings -- going to impact us fairly similarly as we've seen in the first few quarters.

I am sorry, Andy, the $100 million debt reduction you did at the end?

That's about $3 million.

Okay.

Yes. Sorry about that.

No problem. Now, when you look at the outlook kind of less what seems to be around $0.10 impact with the debt reduction, the strategic initiatives that were more pushed into the second half than the first half and then the $0.05 or so tax issue in the third quarter -- other than seasonality, and I believe if I go back to the third quarter of last year, South America was still relatively weak, and as you're going in out into the third quarter, you should get into kind of the peak period for tractor sales down there -- what is going on that the back half of the year is relatively subdued versus the first half of the year?

Andy, I think you touched on a number of the items. Certainly the South America market in the fourth quarter of last year was strong, and so we don't really expect to see those big improvements that we saw in the first half of the year so far. We also have this additional spending on engineering and these other projects in the second half that are going to impact the results as well, and some of these tax items that we talked about. So I think those are the major items that somehow somewhat put some pressure on the second half.

Okay. And then if I could ask a couple more longer term questions. The $8 billion revenue goal that you talked about, Martin, which increased from the $7 billion -- are you still targeting 8 to 10% margins against that, or given the incremental growth should we look for a little bit lower margin?

We didn't change that.

Okay. Thank you. And then from last week, one of your competitors was talking about uncertainty related to the debt moratorium down in Brazil. Can you add any comments?

The situation in Brazil on the debt moratorium is that they have -- in June they gave all the farmers relief until the end of August, and it is effectively buying some time for them to come up with a more structured program. And the debt payments that the farmers are facing right now in Brazil are -- what we think will happen is that they will provide some incentives to the farmers to get current on all their debt and maybe provide some relief to certain farmers and certain maybe under certain crops or certain regions, and push some of that principle requirements maybe in the back latter part of their loan payments structures for their tractors or combines or other farm debt that they have. Right now, we're really in a wait and see period until we see what this new restructuring will look like, and then we'll know more about that in the third quarter.

Okay. Thank you very much.

Your next question is from Mark Koznarek with Cleveland Research.

Hi. Good morning.

Good morning, Mark.

We've spoken about some of the issues that are impacting the second half a little bit more significantly than the first half. My general question is the outlook revision for the full year. It seems like looking at the midpoint, you're raising the revenue outlook only -- not only about $250 million but the income only goes up $10 million or $15 million. So you talked about the tax, talked about some additional spending. Are there any other dynamics that impact the second half mix, pricing deterioration, supply chain related costs, any other things like that address the second half?

Well, you certainly relook at those things, and I would say, Mark, that our outlook includes a little less pricing than we thought we would have earlier in the year, reflecting what current competition's doing. And also we are reflecting some increases from some of our suppliers. We mentioned in our comment that the supply chain is getting stressed a little, and we are seeing some additional costs from some of our suppliers that we're having to live with right now. But we're also trying to aggressively offset those with our purchasing teams of resourcing products, resourcing parts, things like that. But probably a little of that is included as well trying to make sure that we've got those items covered in our outlook.

Andy, how would you characterize the price versus costs ratio now in terms of your outlook relative to where was it at the beginning of the year?

Well, I think we've lost close to 0.25 or to 0.5 point on that.

25 to 50 basis points?

Yes, and that's looking more on the pricing side I think, but we are increasing our production, things like that, which is offsetting some of that. So we're still targeting an operating margin improvement this year, and so we're trying to offset some of these things with the higher production and some of our other cost reduction efforts offsetting the currency impact and some of the pricing pressures that we're seeing.

Okay. Can you clarify what is the net earnings, either contribution or impact from currency in the quarter and year-to-date EPS line?

Yes, very neutral.

Neutral for both.

Neutral for both quarters, quarter and year-to-date.

So that operating income impact you talked about in North America is solely offset by better income in the the manufacturing regions?

Exactly, that's correct.

Got it. Thank you.

Your next question comes from Jamie Cook with Credit Suisse.

Good morning. A clarification. I understand the cost related to strategic initiatives are heavier in the back half. But should we assume that's equally waited third quarter versus fourth quarter or is one quarter more heavily impacted than the other?

Well, I think it is going to be fairly equal. Maybe as I said we'll have some heavier costs in the third quarter at the plant, but for the most part everything else should be fairly equal.

Okay. And then just I think you mentioned in your prepared remarks when you were talking about the forecast and maybe your sales forecast that you assumed some market share gains? Can you just sort of elaborate on that and which regions you're assuming and how you're achieving the market share gain?

We're doing well in both Europe and in South America on market share at this point in time, and I think those are the markets because of our quality of our distributions and some of the new products that we have where we're comfortable that we can achieve that on a full year basis.

Okay. But you're not -- I mean, you're not being aggressive on price in order to achieve the market share gain?

No.

Okay. And then just lastly you mentioned -- can you just give a little more color on the order book? You mentioned -- I think in your prepared remarks -- it was up relative to last year?

It is up in every region fairly significantly right now.

All right. And then my last question, Martin, you said you were going to take your sales forecast -- when we think about the five year plan up to $8 billion, but you're not really changing your margin assumptions. That's a pretty significant change in the top line. So does it give you any more confidence perhaps that we could achieve the higher end of your operating margin targets?

We don't talk about a forecast as a strategic target. We launched a year ago, which we are now making a little bit more aggressive, and of course we would do everything to shoot for the 10%. That's clear. Do we make it? Let's talk about it in 2011.

All righty. I will get back in queue.

Your next question comes from Andrew Obin with Merrill Lynch.

Good morning. Just a question on contribution from eastern Europe. What percentage of the growth did eastern European markets account for your Africa/Middle East region?

Hold on just a second. In our year-to-date basis, our eastern Europe and Russian businesses are up in the nature of somewhere between about 35% or so.

I guess now what I was trying to figure out -- did it represent a third of the growth? Did it represent half of the growth? How significant a driver is it?

Okay. About a quarter of it.

Okay. So it is significant. I apologize if I missed it. Could you talk about the possibility of Challenger and where we are versus the final Challenger? And if you could separate the currency versus the core performance for Challenger specifically, and I apologize if you addressed that already.

No, we haven't. On the Challenger sales side we're relatively flat compared to the -- compared to our results a year ago from this point, but we do project that our sales will be substantially higher by the end of the year on Challenger. All I have in front of me is the sales. We kind of blended those businesses into our operations a little more. So it is much more difficult to give you total income at this point, and I would project that the income is relatively flat or maybe a little better than where we were a year ago.

And not to beat sort a dead horse here, but in terms of North American possibilities, is there a point at which point the Company can make a decision just to exit the North American business? What would it take for you to exit it?

Well, will not give up on our strategy, so I think we have a pretty good strategy in place, and we do not discuss to exit this market. It is a very big market. It is an important market, and I think for us it is a kind of growth opportunity.

Would you consider reallocating costs between Europe and North America just to give North America more benefit of production volumes that you benefit from in eastern Europe?

This would be cosmetic. So our guide in North America work on the basis of a exchange rate assumption. We agree upon together with the budget, and so we are -- let's say the advantage AGCO have is that this is overcompensated or at least compensated with the result in Europe. Of course we would like to see North America being break even with regard to as I said with any exchange rate, but this is very difficult and a little theoretical also. But we look into that, and we discuss what we can what we can do with regard to some financial engineering and so on. So it doesn't help. It would look great for some guys to only -- here in America people tend to look at our American business only, and while AGCO is clearly a global player, and you should focus on the other part of our business as well in order to understand AGCO better. I am not that concerned about North America because we have a pretty good new management in place. We are working on substantial reengineering programs in our factories with which include also some new guys we managed to hire. And therefore I think my guys don't give up on their strategy, and we work hard towards break even in the first [half] and then to get this business possibility in the future.

And the final question and I apologize if you've covered it once again -- in terms of where are we in terms of rationalizing our dealer network in North America?

We are heading into the right direction. We are down to about maybe 1,000 (inaudible) or something like that. We do that without any major legal problem. We do that in agreement with our dealers, and it is not a target as such. The plan behind is it to strengthen the existing network, and so we could of course get rid of dealers immediately, but that's not the plan. We to want get into a more exclusive, more focused network with actually bigger and better dealer providing better service to our customers.

I appreciate the answers. Thank you very much.

You're welcome.

Next question from from Charlie Rentschler with Wall Street Access.

Good morning, everybody. Can you talk about where you are with restructuring the sprayer business in the States? Last time you talked about having some problems there. I wonder in terms of distribution of manufacturing if you can give us an update.

Charlie, good morning. Qualitywise, I think we're heading into the right direction. We are also working very hard on some very interesting new technologies and [facelift] of some of our products, and so everything is pretty much according to the plan. We agreed upon (inaudible) problem last year and Andy, you might give us some numbers on that, also how is the sprayer business is doing?

On the sprayer business our sales are up in the first half about 9% and our income is up about $3 million or $4 million in first half. And expect to at least hold that for the balance of the year, so we're making some improvement. We're also making improvements with our distribution, working more closely with the Caterpillar dealers in North America. And so we have plans to really continue to improve this operation not only this year but in the next few years.

That sounds positive. Moving to the southern hemisphere, Martin, can you look in your crystal ball and talk about the potential for Brazil over the next few years? I think if I remember the record tractor sales was in 2002 and they hit about 33,000, and I think currently it is running at an annual rate of 25,000. Where do you see that market going the next three or five years?

Charlie, my problem is I don't have a crystal ball. When you talk to the experts -- and we just went to New York and made a presentation to the American-Brazilian Chamber of Commerce -- we are rather optimistic about the future of Brazil, specifically and what I could imagine is that Brazil does become less volatile than we saw this market in the the past. And the main reason is strong demand and most probably a very strong focus on sugar cane. That is how I see the market, but we do not have let's say -- it is difficult to judge about it seen from to date. We have just a big discussion going on now on a global level almost with regard to the price increase for certain products like milk, like meat, like certain crops. So I am not sure -- I don't think that this will have an impact on the production of alternative fuels. But I think we're just starting to understand what this growth in the farm industry means and how it impacts consumers all over the world. And you remember -- we launched this vision three years ago, so we were pretty much ahead at that time when we talked about the growing population and also the alternative fuel situation without getting excited about it or unreasonable about it. I think the industry is heading towards a very interesting future, and I am very proud to be AGCO Chair.

And related to that, where do you stand now with your sugar cane harvester project?

Pretty much in plan, so we will have -- we have already kind of a markup. Not really a prototype, but we will have a prototype soon, and we are maybe different from some of our competitors. We're working together with some of the sugar mills in order to make sure that this product does fit perfectly to the demand of the customer. Some product was developed outside Brazil and so customers will have certain expectations and we want to make sure that we meet those.

Thank you very much.

You're welcome.

Next question is from Robert Wertheimer with Morgan Stanley.

Good morning, everyone. I wanted to ask about Europe, which I am not quite sure I understand yet. It seems to me you were up 13%, which is quite solid, and maybe if I understand it right 10% in EMEA. And I am wondering if you can break down how you outperformed the market -- whether the 3% tractor number is representative of the market growth or whether it is not, whether it was more the eastern Europe and Russia that outperformed or whether you're gaining shares from across products and lines.

Our sales were up in most of the markets in the first half of the year, pretty strong performance across our brands. Certainly as we said before, higher percentage growth in eastern central Europe, Russia market. But really across the board we had pretty good sales increases. Certainly the market if you look at it is up to 3% that we've said. That's a certain mix depending on where you're selling and things like that. But I think as we talked before we did see some share improvement in the first quarter, first half of the year. And also, as we said, our order board's very strong, so our dealers continue to be optimistic and are demanding us to ship product in anticipation of some strong retail activity in the second half.

We have pretty good distribution in Europe, one. Second, we invested in research and development during the last years already and now we launched a lot of products, new products, and therefore of course we are in a position to gain market share in the one or the other market. I don't like to share that so much because this is something you would like to discuss after the fact more than just when you are doing it.

Okay. And let me ask an unrelated follow up. The price competition you're seeing from your competitor, is that just North America or is it Brazil and other areas as well?

It is mainly North America. And this is mainly coming from one competitor.

Okay. Thanks.

I forgot the name.

Your next question is from Brad (sic) Bannister with Stifel Nicolaus.

Barry Bannister with Stifel Nicolaus. How are you?

Fine.

When you were talking about Europe you didn't mention Germany, and I know that in the previous quarter there was a sellthrough issue with suppliers on a high horsepower German tractor. Could you talk a little bit about whether those suppliers caught up and how Germany did as a market?

First of all, Germany does do very well. Second, we have a very strong position there. Third, you remember the discussion we had -- whether the change in the sales tax would have an influence. We already said most probably no and that was reconfirmed by a strong market demand. The harvest as such is a little difficult. Prices of course are up, but the conditions are extremely bad, so we had a very dry spring which didn't -- wasn't very good for most of the crops. And during this period of time where normally you should harvest the crops, it is very wet and very difficult harvest conditions. So the farmers are struggling a little bit. When it comes to the relationship with our supplier, engine supplier, in Germany, everything is going into the right directions. We are facing the one or the other problems here and there, but we also try to improve our forecasting system and our internal skills in order to make sure that our suppliers know better what we need and get into [two] just in time delivery relationship with our suppliers.

And regarding investors' perceptions of what you've been saying, it seems like they're concerned with second half '07 when it has been known for a long time this was a transitional restructuring year. Your earnings clearly [veed] in the first half, and more importantly I notice your sales guidance has climbed from 5 to 9 to 14% on the upper end each of the last three quarters. And volume, as you know, pretty much solves all problems related to even competitors and pricing. As people fill up, they stop discounting because they have no capacity. Could you talk about the character of your guidance and then compare it to your free cash guidance where your free cash in the third quarter was exceptional and normally it is not in the quarter, it is more of a fourth quarter loading. So why the downplaying on your potential, or are you just not ready to talk about '08 or is it just the way the Company operates?

First of all, we never talk about '08, and before we have done our internal homework so to say. Second -- and we are starting to do that end of August. Second, as you might know and as you know exactly I think -- our guidance normally is conservative, less realistic. So we want to make it and we want to be sure we deliver. And you know my philosophy -- I believe that it makes sense to walk the talk and therefore we do not want to be unrealistically optimistic. We have to take into consideration all chances and risk and that's the best guidance we could give at all today. [Andy.]

Andy, what about the free cash flow? It is exceptional in the quarter and normally it is not. What's your take on that?

Right. We certainly are happy and pleased with what we've done, particularly in the second quarter and managing our working capital and the seasonal requirements and so we are pleased with that. You're right. We really haven't raised free cash flow guidance. As we are increasing the sales forecast, we're a little worried that we'll have some of our working capital requirements go up as the sales are in receivables at the end of the year, and we haven't collected the cash yet. Certainly we'll be looking to try to beat that number as well, but as in a similar fashion of Martin's statement, that's the number we're comfortable with right now.

Okay. Thank you.

Your next question comes from (inaudible).

Hello.

Hello. Can you hear me?

Yes.

Hello. It is (inaudible) for [Westerby]. With respect to your free cash flow target of $120 million or $130 million, does that include potential acquisitions or investments in joint ventures?

No, that does not.

Along those lines, could you tell us how much you paid for the 50% stake in Laverda?

About 50 million euro.

5-0.

5-0, yes.

Martin, you were quoted just recently in German newspaper that you were looking into a bigger acquisition in China, and I was wondering whether you could elaborate a bit on that, and particularly interested in the magnitude of such a potential acquisition with respect to your balance sheet.

You know that our focus -- part of our strategy is to become a tall player in the so-called BRICK countries, and we work into the direction step by step. We announced the strategy about more than a year ago and the question was how to get -- to exit to China, and we talked to one of the leaders in our industry and China we are -- that everything is working according to plan. The decision making process in China is a little slow, so we think that we will be in a position to give you more detailed information about this towards the last quarter of this year.

Okay. And in terms much marketing can you give any indication?

In what?

Magnitude.

Magnitude. No, that's actually part of the negotiations so that means we are of course interested in getting into some kind of interesting deal and therefore it is too early to disclose something here.

Okay. If I look at your leverage at the moment, which is [one] times excluding your (inaudible) liabilities, would you consider a releveraging up to a higher level to finalize acquisition or would you also consider to bring in some new equity?

Again, trying not get into many details, but I think that where our current balance sheet is, any JVs we're looking at right now -- we wouldn't expect to have to use any additional equity.

Okay. Finally, a technical question. Your revolver was under -- undrawn for the end of Q2?

That's correct. It is at undrawn.

I have a question -- from where do you call in?

Westerby Investment Management in Germany.

Okay. So most probably you are the first foreign guest on our conference call and welcome.

Okay. Well, you had issued Euro bonds at some point.

Yes.

And it is amazing how little coverage there is over here for your credit, but obviously we're looking at your name and it is important to have this conversation from time to time.

Thank you very much.

Pleasure. Thanks a lot.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. I will now turn the conference back over to Mr. Greg Peterson for any closing comments.

We just like to thank you for joining us today, and encourage to you get back to me later on with any additional questions. Thanks, and we'll talk to you soon.

This concludes today's conference call. You may now disconnect.