AGCO Corp (AGCO) 2007 Q3 法說會逐字稿

Good morning. At this time I would like to welcome everyone to the AGCO Corporation third quarter 2007 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 today, October 30, 2007. Thank you. I would now like to introduce Mr. Greg Peterson, Director of Investor Relations. Mr. Peterson, you may begin your conference.

Thank you, and good morning. We appreciate you joining us for AGCO's third quarter 2007 earnings conference call. During this call, we'll refer to a slide presentation. These slides, our earnings press release and our financial statements are posted on our website at AGCOCorp.com. Then on-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 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 with the Securities and Exchange Commission, including the Company's Form 10-K for the year ended December 31, 2006. These 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 will now turn the call over to Martin.

Thank you, Greg, and good morning, everybody. Please turn your attention to slide three, where I begin my remarks. You can see from the slide that AGCO's earnings and sales growth both accelerated during the third quarter. We posted record quarterly sales and earnings with our sales up approximately 37%, compared to the third quarter of 2006 and our adjusted earnings per share in the third quarter were up nearly ten-fold compared to a weak third quarter last year. The strength of our end markets continue to produce very positive results. The (inaudible) farm economy has significantly improved and drove strong growth in farm equipment sales.

Our South American business posted third quarter sales growth of approximately 60%, excluding currency translation from the same period last year. The Europe, Africa, Middle East segment delivered another solid quarter with our FENDT brand doing exceptionally well. We also saw improved sales in both our North American and Asia Pacific segments. Our profitability showed improvement in both the third quarter and the first nine months of 2007. Sales growth improved, sales mix and ongoing cost improvements, all contributed to a 4% growth in our third quarter operating margins, compared to third quarter of 2006. Sales of FENDTs new high horsepower tractor models has done very well and the sales of these high margin products improved the sales mix in Europe.

On the second quarter call, I mentioned that we were beginning to see signs that the strong global demand for industrial and farm equipment was putting stress on the industry's and AGCO's supply chain. This situation is persisting and we expect it will continue to be a focus for the fourth quarter and into next year. We are working with our existing suppliers to prepare them for expected demand levels and we are also working to qualify new suppliers to mitigate future supply constraints.

On slide four, you can see our production schedules for 2006 and 2007. Tractor and combined production level productions were up 29% in the third quarter of 2007 compared to the third quarter of 2006. Production was up to support the strong growth in global demand. Also of note, for the first time since early 2006 third quarter production for the North American region equaled retail demand.

In the fourth quarter we expect production to be up from last year's level to accommodate the strong market conditions we have seen during the first nine months of 2007. Total production of tractors and combines for the full year is expected to be up between 17 and 19% compared to 2006.

Industry retail farm equipment volumes by region for the first nine months of 2007 are displayed on slide five. Industry tractor sales in North America were up 1% compared to 2006 levels. We continued to see declines in tractors under 40-horsepower and sales growth in all categories above 40-horsepower. The highest growth rates secured in the over 140-horsepower segment. The combined market has grown over 11% in the first nine months of 2007 compared to the same period in 2006. AGCO tractor sales were down in the first nine months of 2007 compared to the same period last year, but combined sales were higher. AGCO also had strong growth in hay product sales during the first nine months of 2007. The successful introduction of a new large square bailer have delivered 38% growth in hay equipment sales for the first nine months of 2007 compared to the same period last year.

Industry tractor volumes were up approximately 5% in Europe during the first nine months of 2007 versus last year. Strong market conditions in Central and Eastern Europe, the UK, France, and Scandinavia, are offsetting weaker markets in Spain and Italy. We look for these trends to continue for the remainder of the year. South America industry tractor volumes have accelerated during the first nine months of this year compared to 2006. Brazil's industry tractor volumes were up 51% and Argentina tractor sales increased 26% compared to the first nine months of 2006. Combined sales more than doubled in Brazil and also showed improvement in Argentina. For the full year of 2007, we expect higher farm income in Brazil and improved conditions in Argentina will result in South American industry equipment demand for tractor and combined growth approaching 40% compared to 2006.

In summary, the markets are very healthy and our order books remain well ahead of where we stood at this time last year. With that, I'll turn the call over to Andy, who will provide you some more details on our results.

Thank you, Martin. Referring to slide six, it highlights AGCO's regional net sales for the third quarter and first nine months of 2007, the charts on the right show our regional sales performance excluding the impact of currency translation. For the third quarter of 2007, currency translation had a positive impact of approximately 9%. Year to date currency translation for 2007 had a positive impact of approximately 7%.

During the third quarter, the Europe, Africa, Middle East segment had sales growth of approximately 19%, excluding the impact of currency translation compared to the third quarter of 2006. The growth in our EAME segment in the third quarter was led by Eastern Europe, Germany, France, and the UK, a majority of the sales increases in the third quarter was in our FENDT brand and parts sales. North America sales increased approximately 34% compared to the third quarter of 2006, excluding translation currency impacts. The shipments to our dealers and our wholesale volumes were much more in line with retail sales during the third quarter of 2007 compared to 2006, when dealer inventory reduction significantly reduced our wholesale volumes. Year to date sales in North America were up approximately 10%.

Increased sales of combines, bailers, four wheel drive and high horsepower tractors were responsible for the growth in the quarter. Third quarter sales in South America improved approximately 60% 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 the row crop and sugar cane sectors. We've also seen strong growth in sales in Argentina. Sales in our Asia Pacific segment increased approximately 5% in the third quarter versus 2006, excluding the impact of currency translation. Year to date sales are up slightly over the prior year.

Part sales for the third quarter were $238.7 million, up 13% compared to the same period in 2006, after removing the impact of currency. Growth was strongest in Europe and South America, and we also had growth in the North America and Asia-Pacific regions. For the first nine months of 2007, part sales were $657 million compared to $572.5 million in 2006.

Slide seven highlights our sales and margin performance. Operating margins for the third quarter and first nine 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, particularly in North America. Our EAME margins, which hit 11.3% in the third quarter, have improved as the year has progressed. Sales of our high margin FENDT tractors were up significantly from the third quarter 2006 levels. Supplier issues and the ramp up of our 900 series production pushed back FENDT sales from the first half of the year into the third quarter. The FENDT plant was at full production during the third quarter, was able to work through some of the backlog, but the order board still remains strong.

The sales of mix at FENDT during the third quarter was also improved from last year. Sales of high horsepower models, which carry a better margin, were up significantly compared to 2006 and part sales, which also carry higher margins, were strong in Europe during the third quarter. Operating margins in North America continued to be pressured by the appreciation of the Brazilian real and the euro on the Brazilian and French-made tractors sold in North America. Net income in the third quarter of 2007 also benefited from a reduced tax rate. The governments of the UK and Germany lowered their respective corporate tax rates effective 2008. Our effective tax rate for the three and nine months ended September 30, 2007 reflect the impact of the lower European rates and had an impact of approximately $0.08 per share on our third quarter EPS. We expect our fourth quarter effective tax rate to be in the low 40% range.

On slide eight, you can see the success we are having with our working capital reduction initiatives. At the end of the third quarter, AGCOs working capital to sales ratio stood at 9.5%, down from 13.4% one year ago. Our focus this year has been to minimize the seasonal build we traditionally have in our inventories. Despite the sales growth we experienced this year, our inventory was down approximately $35 million from last year's levels, when you remove the impact of currency translation and acquisitions.

In North America, our dealer inventory month supply is also improved for tractors, combines, and hay equipment. At the end of September 2007, our dealer month supply on a trailing 12-month basis was as follows. Approximately 5 months for tractors, 6.5 months for combines, and 4 months for hay equipment. Other working capital details are as follows. Outstanding funding under our accounts receivable securitization programs was approximately $433.5 million at the end of September 2007, compared to $387.3 million at the end of September 2006.

Wholesale interest-bearing receivables transferred to AGCO finance, our retail finance joint venture in North America as of September 30, was approximately $90 million. Losses on sales or receivables primarily under our securitization facilities, which has included an other expense net, were $8.7 million and $25.5 million for the third quarter and first nine months of 2007 respectively. These amounts compare to $6.5 million and $20.3 million for the same periods in 2006.

Slide nine addresses AGCO's free cash flow, which represents cash flow from operations, less capital expenditures. The graph on the left side of this slide shows the free cash flow during the first nine months of 2007 compared to the same period in 2006. Our seasonal demands for working capital are greatest early in the year, as we prepare for the selling seasons and as you can see, we generated negative free cash flow in the first nine months of 2007 and 2006. The fourth quarter is the seasonally strongest when the dealer and Company inventories are sold down by the end of the year.

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

We used some of our existing cash during the third quarter to complete two previously announced investments. In September, the Company acquired a 50% interest in Laverda for 46 million euro, the Laverda joint venture strengthens AGCO's position in the European harvesting market. Also in September, AGCO paid 38 million real for the purchase of SFIL, who manufactures and distributes a line of farm implements, including drills, planters, corn headers, and front loaders in South America.

Slide 10 shows the improvements we have 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 22% at September 30, 2007 compared to approximately 39% at September 30, 2006, or 2005. Total debt was $691 million at the end of the third quarter of 2007. Interest expense net for the third quarter of 2007 was $3.4 million versus $13.3 million in the third quarter of 2006. The first nine months of 2007 interest expense was $17.6 million compared to $41.2 million for the same period in 2006. The interest savings were generated by lower debt levels and increased interest income earned compared to 2006.

Slide 11 reviews the targeted 2007 spend on our strategic initiatives. We are making significant investments this year in the form of increased engineering expense to support a growing list of new product programs, plant restructuring costs, and our Hesston and FENDT manufacturing facilities, costs associated with our information system initiatives, and spending associated with developing new markets and improving our distribution. The sales and margin growth we have achieved in 2007 has enabled us to pay for these investments while still generating an improvement in earnings in 2007 compared to 2006. In the first nine months of 2007, spending on these strategic initiatives was less than three quarters of our full year plan. So we expect to see heavier spending on these initiatives in the fourth quarter.

Slide 12 lists our updated 2007 financial outlook. We are projecting 2007 sales to increase approximately 20%, driven by better market conditions in most of the world's key agricultural markets and the impact of currency translation. Our revised forecast for 2007 earnings per share is in a range between $2.10 to $2.20, and includes funding for our long-term strategic initiatives. We expect our free cash flow to range from 130 million to $140 million. That concludes our comments. Operator, we are now ready to open the call for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Ann Duignan with Bear Stearns.

Hi, good morning, guys.

Good morning, Ann.

Martin, you noted on the call that your order boards are higher, significantly higher than a year ago. Can you be a little bit more specific and give us an overview by region of what your early order programs look like for next spring delivery?

Well, Ann, I can tell you, I'll try to help out with that. Order boards are up about 25% from where they were last year, so they are very healthy right now. A lot of those orders are really more focused on deliveries here in the fourth quarter, so we probably don't have very good visibility yet into the first part of next year. We're also really working, particularly in North America, on, as you point out, the early orders, trying to get more orders in hand so that we can build to order more and manage our inventories better, so some of that order board increase is a change in some of our business practices as well.

And also, next week, we, we have -- we will have Argitechnica in Europe, the big trade show, which means that we know a little bit more after that show.

Okay. I look forward to seeing you over there. Can you comment then, just, my follow-up, on your tax rate going forward? I know you gave us guidance for Q4. What about '08 and beyond? How should we think about your tax rate? I know it's early, but could you give us some color on that?

Sure. Our tax rate's a function obviously of income and various jurisdictions around the world. We're getting some good news from the lowering of the tax rates in England and in Germany, where we do have income and so that should help us on a positive side, starting next year, when those tax rates become effective. But again, it really depends on the mix of our income. As we improve our, work to improve our income in North America as well, that should bring down our tax rates going forward, but I don't have any specific numbers to guide you with at this point until we get our budget put together.

So would you expect them to be lower than this year's tax rate?

Well, as we've commented in our comments here, we did get a favorable tax benefit of about $7.5 million here in the third quarter resulting from adjusting the tax assets and liabilities we have on our balance sheet. If you -- let's exclude that. I would expect our tax rate to be better next year, but I can't really tell you how much at this point.

And you remember that one of our strategic initiatives is also that we moved our European headquarters to Switzerland and that might help, but we didn't do the precise calculation yet.

Okay, thanks. I'll get back in line.

Your next question comes from Jamie Cook with Credit Suisse.

Hi, good morning, and congratulations. I guess my first question, can you just talk about what you're seeing on the pricing front by region?

Sure, Jamie. What we -- our pricing was up about 1.5% for the quarter. Pricing has been the strongest in, I would say Europe and some areas of South America because of some of the currency pressures. We've seen some pricing there. In the main market of Brazil, it's been relatively tight still and in North America, the pricing has been very tight as well. So -- but overall, 1.5%.

Okay, and then Martin, I just guess based on your third quarter here, and I guess as you look at the strength in the markets, they seem to be surprising on the upside. Can you -- any new thoughts on sort of your longer-term guidance that as you look out throughout the cycle, the 8 billion to $9 billion in sales, the margin improvement?

We actually work on our plan for 2008 right now and like last year we don't want to comment on that yet, so we first need to do a diligent budget for 2008 and then we start talking about it.

Okay, and at that point, you'll give us new, a new look for sort of beyond 2008 as well? I'm just sort of asking when you -- at your analyst meeting you talked about over the cycle, I think achieving 8 billion to $9 billion in sales and margin improvement over the cycle as well. I'm just trying to get a feel for your thoughts there.

That is what we do and what we did last time we gave you a long-term plan, so to say, or some long-term vision, and the idea was to generate $7 billion in 2000 -- within five years and we changed that to $8 billion already last quarter, in the light of the achievement of 2007. So therefore we actually do that more or less rolling.

Okay. All right. And then just my last follow-up question, can you guys just talk about on supply chain side areas of concern for 2007 or that you're working on in order to meet demand?

Yes, we have -- as Andy mentioned, a lot of problems and I do get more involved in that right now and we have concerns more or less all over the place in Europe. Those are mainly the factories in Germany, Denmark, and France, and the U.S. is doing better so far, but we also are starting to have problems in Hesston, and we have problems mainly in our factory (inaudible) in Brazil. And it's not only one supplier, so we have quite, quite a group of suppliers that create problems and it's actually more or less every day something new is coming up, so that means this is a ongoing challenge for the rest of the year, which also makes us focus on getting that fixed and a little bit concerned, or a little bit more conservative maybe on the guidance for this year.

All right, great. I'll get back in queue.

Your next question comes from the line of Terry Darling with Goldman Sachs.

Thanks, Martin. You may have addressed part of my question, but just looking at the implied fourth quarter guidance, it looks like your margins, you are looking for them to be down again on a year-over-year basis after having a substantial swing from negative to positive, first half versus 3Q. Wondering if you can talk about what you're seeing there, are you assuming that the FENDT mix turns more negative? You've already talked about the higher tax rate, but I think that's already in consensus, which is above your implied guidance. Is it really just boiling down to the supply chain concerns that you have?

Andy gave some more information already during the call, but Andy, maybe you get into it again.

Yes, I think some of your points are correct. In terms of the mix, the third quarter was somewhat of an exceptional mix, as I pointed out and it will get back into more of a normal mix in the fourth quarter, so that, that does have an impact that we won't expect to see the same margins in the third as in the fourth. Also, keep in mind that in the fourth quarter of last year, the comps start to get a little tougher. The South American market started to pick up in the fourth quarter of last year I believe and Brazil was up about 50%, and so we obviously did a little better in that fourth quarter, but certainly the other aspect to keep in mind is we, as I pointed out, some of the additional expenses that we expect to incur in the fourth quarter, both in engineering and some of these project expenses that we've highlighted, will be rather heavy in the fourth quarter and probably outpace some of the sales increase that we have forecasted. So that will also impact our margins in the fourth quarter.

And Andy, you talked about in the third quarter that you were actually weighed down by some of the change-overs and other plant restructuring in Europe at the margin level. Can you quantify for us what that impact was and the extent to what that impact declines, stays the same, or decreases as we move through the next, through the first half of '08?

Well, in third quarter in our factories actually did an excellent job working through a lot of the constraints that we had. As you can tell from the sales volume and what we were able to get out and deliver to our dealers. In terms of some of the project money that we spent in the third quarter on, you can see where the engineering increases were on other projects, like our plant rearrangement, we probably spent only 2 million to $3 million during the third quarter, so it wasn't a material amount, and also spent probably 2 million or $3 million associated with systems initiatives and some of our distribution initiatives.

Sounds like that we should, that number should be going higher then actually in the fourth quarter?

It is going to go higher in the fourth quarter, particularly on engineering and some of the other project expenses that we have, and also our incentive compensation, stock compensation expense, you can see was higher in the third quarter and it will remain at about that same level in the fourth quarter.

Okay, and then as we look out to 2008, I'm sure you, as you mentioned earlier, you need to do the bottoms up. But I'm wondering if directionally you can tell us where you see the strategic initiatives total spend relative to the $35 million that we're talking about for '07. I would presume that goes higher in absolute terms, but perhaps you can also characterize that in a sort of percentage of sales basis.

I don't think we're really ready to do that. We're just working through those details, working through our engineering budget for next year, looking at all the programs that we have. So really premature to give any information out at this point.

Okay, thanks very much.

Your next question comes from the line of Andrew Obin with Merrill Lynch.

Yes, good morning.

Good morning.

I'm just trying to understand the impact, how much of the volumes in Europe that were shipped to North America, is there a way you can quantify how these volumes helped your cost absorption in Europe so we could get a better sense of what the true impact of North American upturn is on AGCO? Right, because you're manufacturing stuff in [Bouvet] and you're shipping it to the U.S., it's helping your absorption, but then because of the currency translation, it all gets buried in the U.S. Can you separate the two?

I'm not sure I can do that, that well. I think from a production standpoint, you can see where our production improvement was in the quarter. On an overall basis, that probably improved our margins in the third quarter by about 1% or so, just from the nature of the, or the improved production levels. Certainly most of that does stay in the Europe, Africa, Middle East segment, because that's where the majority of our production volumes are, but certainly some of that is also in the other regions. But, Andrew, I don't have a split for you. But conceptually, you're right, that when we grow our sales in North America, with the -- and that product's produced in Europe, it is benefiting the European operations as well.

Let me ask another question. How much of the current European production is destined for North America?

In our Bouvet facility, it's about 20%, 15 or 20%, and so that's -- that Bouvet production is--.

That's 95% of what's going over to U.S.

Yes.

All products come from Bouvet. We also work on -- we just discussed a strategy for North America with our Board and we are focusing very much on improving the situation in North America. I mean we are planning to have some assembly, very light assembly operations in America in the future. We bring product over from India, so we try to, let's say, to improve mainly North America. That's a very big focus of the management team.

And just a follow-up on, you noted supply chain issues. Could you know what specific components are in short supply? I apologize if I missed it.

It will not help you a lot, but tires, wheels, hydraulics, engines, almost some of the electric and electronic parts, so it's pretty much all over the place.

Thank you very much.

Your next question comes from the line of Andy Casey with Wachovia Capital Markets.

Good morning, everybody.

Good morning, Andy.

If I could follow-up on the constraints question, and it's a little bit more philosophical, can you talk about how you approach the constraint issue on a plant level, when a, specifically when a part is not available, do you you stop the line until the part's available, or do you move the machine to the side for completion later?

Well, actually we have a very good system in place, which means that every day we give you what's going on in our factories, then we have a weekly meeting where we discuss what's going on and then we have monthly reviews. That means we are tracking every single factory very diligently and very much in detail. What we then are doing depends pretty much on the problem, so sometimes we -- we normally wouldn't slow down the line. But sometimes we reschedule a line in order to get into a better mix or to make sure that the productivity doesn't suffer so much. Sometimes we have unfinished goods at the end of the line, so (inaudible) as time goes down and we have to rework the product as soon as the part of the component is coming in, and sometimes we also put -- let's say, close the line down for a day or two and try to then speed up over a Saturday or Sunday or something like that, depending on the local laws and the possibilities we have and the agreements we have with our employees.

Okay. Thank you for that color. And then, I'm trying to understand the sequential changes in inventory and the balance sheet and then--?

It's not -- normally those changes are never positive, so that means when you have problems like that, you're right, first time goes down, so you have rework, you might have overtime, and also sometimes you also end up with higher inventories. So that means overall, and this is why the whole management team that's focused so much on that area, you would like to get your parts in just in time. That's not new, so to say, but this year certainly is not, not the best year you could think of.

Okay, but your expectation is on a cash flow basis we should get the seasonal uptick in Q4 still?

Yes.

That's correct.

Okay, thank you very much.

Your next question comes from the line of Barry Bannister with Stifel Nicolaus.

Hi, nice quarter.

Hi, Mr. Bannister. Thank you very much.

When I look at press reports, it looks like you're going to have 116 new product launches in 2008, and that compares to 60 in '07 and 43 in '06, so it's a nice year for AGCO in product development, but will there be a commensurate effect on higher R&D and SG&A from the roughly 2.3% first nine months effect this year and R&D versus 2.5 a year ago and SG&A was 9.4 versus 10.4 percent of sales?

Actually, I don't know exactly how we will end up in percent of sales, but the spendings overall will be around $140 million.

On engineering?

On engineering.

Probably above 150.

Above 150. So that compares to--.

A little under 130 last year.

Last year, so you see a light increase and we do not yet have the figures for 2008, but with the higher revenues, a percent that might not be a big change, I would guess.

That's good. And then on the 100 basis point year-over-year improvement of SG&A as a percentage of sales, is there any way to break out currency and acquisitions effect on that as to what was the core improvement and what was attributable to things that are related to currency and acquisitions?

On SG&A?

Yes, just SG&A.

Just SG&A, well, I think the numbers I have include engineering as well, so I apologize for that. But on a year to date basis the currency impact on all the operating expenses were about $27 million.

And then lastly, Brazil, what happened with the changes down there in terms of the amount of reserves for bad debt associated with changing financing terms? I think that was going to be a third quarter event, but we didn't see anything in the affiliates income line.

No, the situation in Brazil is the government has put out a program for the farmers to try to incent the farmers to make their 2007 installment payments, but they have now given them until December to make those payments, and depending on whether they make those payments or whether they defer those payments until next year will be dependent on whether they get an incentive from the government or, and also whether they will be eligible for future credit under the subsidized financing programs in Brazil, but they have now delayed any action or any requirement to pay until December. So we thought that would be in the third quarter. That's why we thought we would have a little more information at this point, but now that those payment schedules have been delayed until December, we won't know that until we see what the payment history and payment performance is in the fourth quarter now.

Okay, so it sounds like a good carrot and stick and also the industry is improving down there, so maybe it's a little less of an issue. That's nice. That's all I had. Thanks a lot.

Thank you.

Your next question comes from the line of Mark Koznarek with Cleveland Research.

Good morning.

Good morning.

Could you review again the North American sales activities relative to the slide that shows relatively modest tractor and combine sales, retail sales for the month of September?

Well, for the retail, the information that we provided is on the year to date basis on tractors. The industry is slightly up, but when you look and break down that, it's down in the lower horsepower range under 40-horsepower, but start to see double-digit improvements in the industry once you get above 140-horsepower, and then obviously on the combines, it's up as well over, on a double-digit basis.

Our performance has been mixed on the tractor side, where our retail sales are a little down, and that's because of some of the changes we're making in our product lineup, as well as some of the impact of the currency and being a little more cautious with discounting, and then -- but we are doing very well on combines and hay products this year. So kind of a mixed performance, but on a lot of the new products, we are very pleased with our performance so far in North America.

On the wholesale side, you can see our sales are up and that's on chart number six, up about 34% for the quarter and 10% for the year. If you go back and remember, Mark, last year we were pulling down our dealer inventories pretty significantly, particularly in the third quarter, and so a substantial amount of that increase in this third quarter of the 34% is the fact that we didn't -- we're not bringing down dealer inventories as rapidly as we were a year ago.

And I think earlier you had said, Andy, that your North American dealer inventories actually fell year-over-year, so the -- this wholesale surge actually loads through into retail sales.

That's correct.

Okay, and hay, was hay equipment selling stronger than the combination of tractor and combine? Is that a large part of the 34%?

Yes.

Yes.

Okay, and then--?

It was higher.

Okay, and maybe I missed this, but why is the free cash flow outlook up only $10 million when the reported earnings are revised up so sharply?

Well, with the higher sales that we're forecasting and some of the supplier issues that we discussed already, we are -- we do anticipate carrying more inventory and certainly having some of those additional sales remaining in our accounts receivable at the end of the year. So we've had to revise the amount of working capital up, partially offsetting the increase in earnings.

Okay. Thank you very much.

Your next question comes from the line of Joel Tiss with Lehman Brothers.

Hi, sorry, but maybe the last supply chain question, hopefully. Can you just talk about in 2008, do you think we could have more volatility in earnings in '08, like one quarter things will run smoothly and one quarter it won't, or do you think that we'll have more of a ramp? Just sort of philosophical that the first quarter will be more difficult than the fourth quarter. Do you have any sense?

This morning everybody is philosophical in New York, so we don't want to see volatility, of course, but you never know, so that means we already said that we work on the plan for 2008, and a lot depends, of course, also on the performance of our supplies. We talked to them right now. We have people, even people from some -- engineers from some suppliers being in our factories in order to understand what the situation is, so that means we certainly want to make sure that that doesn't happen next year, but it's not 100% under our control.

Okay, and then again, can you just talk about sort of trends in 2008? Do you think that they are going to be more in line with the end market demand, or do you think you need to still build a little bit of inventory to prepare yourself for maybe a longer-term upturn?

No. Well, actually people are going to build to order project for most of our factories, and therefore I don't think that we should build up inventories in order to cope with market demand. The markets in general, I see being stable to positive and that is not new because we talked about that already two, three years ago. So I think the business is facing a more -- less volatile phase than it did in the past, and I think farm business becomes less cyclical than it has been maybe for the last 20 years.

Okay, but still, the first half of '08 we could maybe see positive comps because you're not reduce -- you were reducing a lot of inventories in the first half of this year, is that fair?

We don't -- again, I don't think it's -- I think it's too early to talk about that. We're continuing to have goals to improve inventory levels as well, so until we, we sort all that out, don't really want to give you any more information on the first half next year.

Okay, and lastly, just to clean up, the R&D, the incremental R&D expenses, does that come out of earnings, or is that more of an infrequent expense?

That comes out of earnings.

Earnings.

Okay, thank you.

Your next question comes from the line of Robert Wertheimer with Morgan Stanley.

Hi, good morning, everyone. You've been pretty helpful on the margin front, but I'm still not sure I understand a couple of things, so I just wanted to dive into EAME margin, where you had sort of a sequentially higher margin on sequentially lower volume, which is maybe 300 bips better than the typical seasonal pattern, let's say and I think you were at a 10-year record, if I'm not wrong. So obviously excellent execution, but what's causing the margin gain? I'm having trouble picturing whether the FENDT 900 was a big enough portion of your mix to drive that?

If you look at the sales improvement in the third quarter, as we said in our comments, a significant amount of that improvement was in the FENDT business, with the high horsepower equipment, and on part sales, and so that's -- those are two very rich margin parts of our product portfolio, and as a result, that really drove the margins up. In addition, we have higher production. We have the increased sales providing us leverage on our operating costs, and all that added up to a very strong performance on the margin side, for the Europe, Africa, Middle East business.

What did the parts grow versus the total sales? I was thinking they had grown strongly, but less than total sales.

Parts grew about 13% for the quarter.

I would like to make a comment on FENDT. First of all, I believe that the FENDT technology will have more -- we'll see more market demand in the future. We are prepared for that market demand because we launched the FENDT add project already almost two years ago in order to have enough capacity and then within FENDT, you see a trend and that is actually also the market trend to what's bigger tractor. So that's certainly our strength and you see the same, by the way, in North America. So you see a growth in the big tractor segment, while the middle segment is somewhat slow and maybe even partially going down, which might be a problem for some of our competitors. Actually, the market is growing, where we are strong.

Fair enough. And then in the North America, let's say, you had very strong sales growth and the margin is improved, but still not strong. Are you -- let's see, is the hang equipment a solidly positive margin business, or no?

Yes.

Yes.

That will do it. Thank you.

Your next question comes from the line of David Bleustein with UBS.

Good morning, and congratulations.

Thank you, David.

Quick question, on the balance sheet stronger, working capital starting to contribute cash, certainly did a great deal last year, big backlog, at what stage of the game do you start thinking about share repurchases and/or dividends?

We do that in a kind of regular pattern so that means we talk about that maybe once a quarter and discuss this with our Board, and we will do so over, also with, for the next Board meeting.

Okay. I'm really looking, Martin, for your bias. Do you believe there's a tremendous amount of internal growth to generate, and you need your capital for CapEx and internal initiatives, or do you believe that at this level of profitability, there's excess cash that the Company's going to be throwing off?

Very good question.

I think from my perspective, we'll take it year by year. This year with the, these couple of transactions that we just completed, we are using a substantial amount of the expected free cash flow within the Laverda transaction and the little acquisition we did in South America. As we look into the next few years, I agree with Martin. We're going to take that on a year by year basis, looking at, as you say, David, we've got to look at whether we're going to need that capital internally, whether there's going to be some projects, or other uses of that cash, if not, we'll have to look at alternatives. But as we sit today, we're not ready to make that move.

And then last question, on the Germany, Martin, are you saying that you gained share in the quarter, or you expect to gain share over the next 12 months with the new FENDT products?

Well, in that segment of high horsepower tractors, we actually have a very leading position already right now and we're gaining market share and this is pretty much, let's say, that this, this is a new product, so the market didn't have it so far. And we see that it's very well received by professional farmers.

Terrific. Thank you.

Your next question comes from the line of Seth Weber with Banc of America Securities.

Hi, thanks. Good morning, everybody.

Good morning.

In North America, in addition to the currency issue, in the past you have talked about operating costs being too high and some issues with the distribution network. Can you give us a view of what you're doing there to make, make progress in North America, and whether you think it's fair to assume that that business will be break-even next year?

We have a very detailed plan on how to get, let's say, break-even in North America and without the latest change in the exchange rate based on the exchange rate of the budget 2007, we would be break-even. So that means we certainly generated a pretty good improvement and the new guy, we hired Bob Crane, is doing a great job in getting that problem fixed, and the exchange rate is somewhat turning against us so that means we need to certainly come up with additional initiatives and that's what we work on. It's a challenge, but I think also we are heading into the right direction.

Any comments on the distribution network and how the Challenger product's going?

Yes, well, actually the distribution network, we do it in a very smooth way, so we avoid major confrontation with our distribution network and with our dealers. Our dealers buy in and we are pretty much on track. The CAT dealers, we just reviewed last week and we see a improvement in their engagement level and so overall everything is on plan.

So you think break-even or profitability next year if currency is, behaves itself?

This is a question I don't want to answer. As we mentioned already several times, what the plan or the target of course would be to be break-even as soon as possible.

Okay, thank you.

You could help us by getting a stronger dollar in place.

Thank you. We have time for one more question, and that question will come from the line of Ann Duignan from Bear Stearns.

Most of my questions, follow-up questions have been answered, but Martin, maybe you just comment on your outlook for Q4. Looking at regions of the country and where the strength is coming from, do you have any insights into how much of that strength is farmers' aversion to paying taxes, so your end spending, versus how much is farmers in the South maybe switching out of cotton and into things like winter wheat or getting prepared for corn next year? Do you have any sense of what's driving the strength in the backlog in North America for Q4?

I think the tax situation didn't change so much, so that means those farmers that need tax write-offs will certainly invest, what changed is that maybe some farmers are more profitable than the years before, so therefore the need to do something in order to get into a better tax situation is higher than in previous years. With regard to changing crops in North America, actually I don't see a big trend. You can see a trend in South America, where it's going pretty much towards sugar cane, so you see more farmers changing from soybeans or corn towards sugar cane, where it's possible climate-wise. I don't -- maybe somebody has, but I do not have information about, let's say, a change in the crops here in North America.

So, Martin, just to clarify, you're seeing strength in all regions of the United States for Q4?

Well, yes, I think the markets are pretty stable.

Most of the expected growth is in the, what we call the row crop area, where high horsepower equipment's being used.

Okay. Thank you. That's helpful. I appreciate it.

Okay.

Thank you. That does conclude today's AGCO Corporation third quarter 2007 conference call. We thank you for your participation, and you may now all disconnect.