AGCO Corp (AGCO) 2007 Q4 法說會逐字稿

Good morning. My name is Kimberly and I will be your conference operator today. At this time, I would like to welcome everyone to the AGCO Corporation 2007 fourth quarter earnings release conference call. (OPERATOR INSTRUCTIONS)

I would now like to turn the conference over to Mr. Richenhagan, President and CEO.

Hi. This is Greg Peterson. I will start off, Kimberly. I would like to wish everyone a good morning and thank you for joining us for AGCO's fourth quarter 2007 earnings conference call. During this conference call, we will refer to a slide presentation. The slide presentation, earnings press release and our financial statements are posted on our website at agcocorp.com in the investors and media section. 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 represented 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 or predictions and that actual results may differ materially. We refer you to the periodic reports that we file from time to time with the Securities and Exchange Commission, including the company's form 10-K for the year ended December 31, 2006. These documents discuss important factors that could cause 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.

Good morning, everybody. I think, in the light of the breathtaking performance of AGCO Corporation, I somewhat lost my voice this morning. I'm sorry for that. Thank you, Greg. Good morning again.

Please turn your attention to slide three, where I'll begin my remarks. You can see from the slide that we had a strong finish to the year. We posted a record quarterly sales, record earnings, and record cash flow. Our sales increased approximately 33% compared to the fourth quarter of 2006, and our adjusted earnings per share in the fourth quarter were up 100% compared to the fourth quarter last year. We used our well-positioned brands to leverage very healthy market conditions and produce strong results in the quarter. Our Europe, Africa, Middle East segment continues to outpace market growth and improve its profitability. In Europe, Massey Ferguson, Valtra and Fendt all performed well in 2007, with Fendt and Valtra both showing the best sales and margin improvement.

The recovery of the (inaudible) farm machine industry continued in the fourth quarter, and was the key to the 59% growth we saw in our South American sales, excluding currency translation. In North America, our record foreign income produced an increase in our sales of nearly 30%. Our profitability showed improvement in both the fourth quarter and the full-year of 2007. Volume growth improved sales mix and ongoing costs improvements all contributed to expansion in our operating margins for the fourth quarter and full year compared to the same period in 2006. In the fourth quarter, AGCO's supply chain continued to feel the stress produced by the strong global demand for industrial and farm equipment, and we see some of that also this year I guess. We didn't experience any extreme issues as we finished 2007, but we are working with our existing suppliers to prepare them for expected demand levels, and we're also working to qualify new suppliers to mitigate further supply constraints.

On slide 4, you can see our production schedules for 2006 and 2007. Tractor and combine production levels were up 27% in the fourth quarter of 2007 compared to the fourth quarter of 2006. Production was up to support the strong growth in global demand. In both Europe and South America, our production matched retail demand to include 2007. Production for the North American region was below retail demand and we saw further improvement in our dealer inventories at year end. We finished 2007 with production of tractors and combines up approximately 20% compared to 2006 levels. Our account 2008 forecast calls for production of tractors and combines to increase 5 to 8% compared to 2007 levels in order to satisfy the forecasted increase in the global market demand.

Slide 5 details industry retail farm equipment volumes by region for the full-year of 2007. Industry tractor sales in North America were up 1% compared to 2006 levels. We continue to see decline -- declines in tractors under 40 horsepower and sales in all categories above 40 horsepower the highest growth rates secured in the over 100-horsepower segment. The combine market has grown over 13% in year 2007 compared to 2006, and total unit tractor sales were down in the full year of 2007 due to the market weakness in compact tractors. However, AGCO unit sales of tractors over 100 horsepower were higher in 2007 compared to 2006. AGCO had strong growth in combine and hay product sales during the full year of 2007.

For 2008, we expect a record level of U.S. farm income in 2007 and continued high commodity prices in 2008 to produce continued growth in the North American market. Industry tractor volumes were up approximately 4% in Europe during the full year of 2007 versus last year. Strong market conditions in central and Eastern Europe, the UK, France and Scandinavia are upsetting weaker markets in Spain and Italy. Our forecast for 2008 calls for market conditions in Europe to remain healthy as continued strong growth in Central and Eastern Europe offset some softness in Western Europe. South American industry tractor volumes increased significantly in 2007. Brazil's industry tractor volumes were up 53% and Argentina's tractor sales increased 34% compared to the full year of 2006. Combine sales more than doubled in Brazil and also showed improvement in Argentina. In 2008, we expect the market in both Brazil and Argentina to remain strong and contribute to an increase in South America industry demand compared to 2007 robust levels. Globally, the markets are very healthy, and our order (inaudible) remains at of where they stood at this time of last year. I will now turn the call over to Andy Beck, who will provide you more detail on our results.

Thank you, Martin. Slide 6 details AGCO's regional net sales for the fourth quarter and full year 2007. The bar graph shows our regional sales performance, excluding the impact of currency translation. For the fourth quarter 2007 translation had a positive impact of approximately 12%, year to date translation for the full year of 2007 had a positive impact of approximately 9%. During the fourth quarter, the Europe, Africa and Middle East segment had sales growth of approximately 13%, excluding the impact of currency translation, compared to the fourth quarter of 2006. The growth in our (inaudible) segment in the fourth quarter was led by France, Germany, the UK, Spain and Eastern Europe. North American sales increased approximately 28% compared to the fourth quarter of 2006, excluding currency.

We were encouraged by the progress made by our dealer inventories, and with our strong sales growth. Increased sales of high horsepower tractors, bailers and hay equipment were responsible for the increase in the fourth quarter. 2007 full-year sales in North America increased approximately 15%, excluding currency. Fourth quarter sales in South America improved approximately 59% from last year, excluding currency translation. In Brazil we saw significant pick up in sales to row crop farmers and continued strength in the sugar cane sector.

Sales in Argentina increased approximately 65%, excluding currency, where higher commodity prices improved market demand. Sales in our Asia-Pacific segment increased approximately 6% in the fourth quarter compared to 2006, excluding currency. For the full year, sales were up 3% compared to 2006. Parts sales in the fourth quarter of 2007 were $226.5 million, up 15% compared to the same year in 2006 after removing the impact of currency. Growth was strongest in Europe and North America. For the full year of 2007, parts sales were 883.6 million, compared to 752.8 million in 2006.

Slide 7 highlights our sales and margin performance. Operating margins for the fourth quarter and full year of 2007 were up from 2006 levels due to sales growth, improved product mix and cost control initiatives partially offset by currency impacts primarily in North America. Our E-markets, which reached 10.4% in the fourth quarter, finished the year up 165 basis points compared to 2006 full-year operating margins. We were able to accomplish the margin improvement while we increased research and development expense nearly 50% in Europe, Africa, Middle East during the quarter. We saw strong quarter improvement in our Valtra and Fendt brands which both have been experiencing growth in the high horsepower tractor segment.

Strong volume growth in our South America business produced profit margins of 9.3% for the full year of 2007 and an improvement of approximately 40 basis points compared to the full year of 2006. In our fourth quarter, our margins felt pressure from two sources. First, currency impacts associated with sales of equipment manufactured in Brazil and exported to other countries in South America, and second, acquisition impacts from our (inaudible) acquisition. Operating margins in North America, while improved in the fourth quarter, continue to be pressured by the appreciation of the Brazilian real and the euro on the Brazilian and French tractors made in Brazilian and French tractors sold in North America. Net income in the fourth quarter of 2007 also benefited from a reduced tax rate primarily related to improved results in North America and Europe. We expect our 2008 effective tax rated to be in the mid 30% range.

Turning to the next slide. Working capital continues to be an important focus for us as we concentrate on improving the returns on our assets. Slide 8 reflects the progress we've made in reducing our investments in inventories and receivables. We finished 2007 with our working capital to sales ratio at 8.4%. Our business volumes grew considerably in 2007. Sales for the full year were up over $1.4 billion compared to 2006, and we look for more growth in 2008. However, as a result of our focus working capital management that began in 2006, inventory levels ended 2007 approximately flat with last year when you exclude currency impacts. In North America, our dealer inventory month supply improved for tractors, combines and hay equipment. At the end of December 2007, our dealer month supply on a trailing 12-month basis was as follows: Approximately five months for tractors, four months for combines and five and a half months for hay equipment.

Other working capital details are as follows: Outstanding funding under our accounts receivable securitization programs was approximately $446.3 million at the end of 2007 compared to $429.6 million at the end of 2006. Wholesale interest-bearing receivables transferred to AGCO finance, our retail finance joint venture in North America as of the end of December 31, 2007, were approximately $73.3 million. Losses on sales of receivables, primarily under our securitization facilities which is included in other expense net were 10.6 million and 36.1 million for the fourth quarter and full-year of 2007 respectively. These amounts compared to 9.6 million and 29.9 million for the same periods in 2006.

Slide 9 address AGCO's free cash flow which represents cash flow from operations less capital expenditures. Free cash flow for the full year of 2007 improved to $363 million. In December, we shared our plan with you to invest more in 2008 for future growth. We expect to increase research and development expense, new product-related capital expenditures as well as system development costs. We are projecting that 2008 will be another year of strong free cash flow even after covering our increased investments and receiving a smaller benefit from our working capital initiatives.

Slide 10 shows the improvements we've made to our capital and our net debt to capital ratios have improved over the last two years. Our net debt to capital ratio was approximately 5% at year end 2007 compared to approximately 31% at the end of 2005. Total debt was $697 million at the end of the fourth quarter. We are pleased with the progress we made on our balance sheet and overall leverage. Most importantly, we believe we're in good position to fund our strategic investment requirements in the future.

Interest expense net for the fourth quarter of 2007 was $6.5 million, versus there are $14 million in the fourth quarter of 2006. In the full year of 2007 interest expense was $24.1 million compared to 55.2 million for the same period in 2006. The interest savings were generated by debt refinancing, lower debt levels and increased interest income earned in 2007 compared to 2006.

Slide 12 quantifies the impacts of our 2007 and '08 initiatives. In 2008, we will be making significant investments in our future in the form of increased engineering expenses to support a growing list of new product programs, costs associated with our European system initiative, 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 2008 compared to 2007. Our initiative spending is focused on long-term growth and profitability improvements for the company.

Slide 12 lists our view of our selected 2008 financial goals. We are projecting 2008 sales to increase 11 to 13% driven by a pricing, strengthening markets North and South America and Eastern Europe, market share improvement and the impact of currency. Our 2008 results are very important to us. However, we're also focused on AGCO's long-term profitability. We are targeting 2008 EPS of $2.75 be a goal to reach $3 per share while making investments in our long-term initiatives. We expect increased capital expenditures to be in the $190 to $209 million range and our free cash flow to remain strong in the $175 to $200 million range. For the first quarter of 2008, sales growth is expected to be in the 15 to 20% range, and while we are projecting full-year 2008 EPS growth in the 10 to 20% range, we expect first quarter 2008 EPS growth in the 40 to 50% range. 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 Jamie Cook from Credit Suisse.

Hi. Good morning. Congratulations on a nice quarter. My question, I guess, has to do with the guidance for 2008. At your December analyst meeting you sort of suggested that EPS should be up 25% off of the base in 2007 and the base came in higher, and you're keeping the EPS number the same. So should I view your guidance as an actual -- should I view this as basically your lower-end guidance? Because I would have assumed we should have taken the higher base and grown EPS 25% off of that.

No. You should see it as a kind of conservative guidance and the reason for that is that previous management was talking about the $3 EPS for many, many years and, unfortunately, there were good reasons why they never could make it. And this actually then wasn't that well received by you guys and, therefore, I and my team personally decided to be more on the conservative side and we actually want to make sure that 2008 we will reach the $3 plus maybe, but we want to be conservative and want to make sure that you don't get carried away.

Let me ask another question. If I use your -- I think you said, in your prepared comments that your tax rate will be in the mid 30s, I'm taking your interest expense down, if you've seen other expenses sort of flat with '08, it implies that your margins at the midpoint of guidance would be down to flattish, depending on how you play with the model. I guess why wouldn't your margins be going up? Are there any mix issues or anything else that I should be aware of when I'm thinking about '08 versus '07?

No. I believe that we have our model rolling up, and our expectations as we will see some margin improvement at the gross margin line. Some of that will be offset a little engineering and other investments that we talked about, the $50 million of additional R&D and system project investments as well as the distribution expenses that we have. But we're certainly anticipating that our operating margins will be improved in 2008 over 2007. So not sure where the disconnect is, but we're expecting volume growth as well as some margin improvement was well. The margin improvement is held back a little again by currency or we would have a higher number in 2008 than 2007.

And then just last, what are you assuming -- and how should we think about North America and potentially achieving profitability in '08?

I think, as we said in December, we're making lots of improvements in our North American operation, but they constantly get pushed back down by the impact of currency. We're going to expect that situation to again occur in 2008, where we don't expect to see significant improvement in the earnings in North America all because of currency. Currency is going to impact us probably in the $30 to $35 million range. If you look at where the exchange rates are today, and a fair amount of that is in North America and so, as a result, we're making improvements in the base operations of the company in North America, but are struggling to offset the currency, but we'll try to keep it flat to maybe a little better. Just continue to reiterate that currency, although it impacts our North American operation, there are off sets primarily in our Europe, African and Middle East business where we're getting the benefit currency translation on the stronger euro versus the dollar on our European profits as well as we're starting to see more and more of our product that's exported from our U.S. plants into Europe and they're enjoying better margins on those products. Those are particularly bailers and some combine.

Thank you. I'll get back in queue.

Your next question comes from the line of Ann Duignan of Bear Stearns.

Hi. Good morning guys. I just wanted to step back again and talk about the outlook. I think you said you're looking for EPS growth of about 40% in Q1. Is that correct?

40 to 50, yes.

40 to 50. Now given that you've guided for full year of 10 to 20, let's take midpoint 15, that implies that somewhere in the back half of the year you're expecting earnings to be down 20 to 25% for both Q3 and Q4. In our world, just looking at the fundamentals in your industry, that seems a little bit ridiculous. What would have to happen, Martin, for your earnings to drop so quickly and so negatively in the back half of the year?

Ann, let me handle that, because you have to think back to what happened in 2007 to a little to give you some evidence this. First of all, the percentages are high but they're on the lowest quarters we have, in terms of EPS. The first quarter is seasonally low sales and earnings quarter, but think back in first quarter 2007 we talked about the Fendt business ramping up production slowly of its 900 Series new production introduction, and we also had some issues with our engine supplier in the first quarter. So we did not have kind of a normal amount of sales in Fendt in the first quarter. In 2008, we expect to see that be more normal spread of sales for the year. So if you recall, in 2007 we had kind of a normal -- a lower than normal sales level in the first quarter and then we caught it back up primarily in the third quarter and had a very strong third quarter as we got that production through and met our customers' demands. So I think what you'll see in 2008 is a shifting back to a more normal spread. So the first quarter is going to look better as a result of that, and the third quarter is going to look worse.

Yes. But down 20 or 25% because of Fendt is not in my mathematical model possible. Can we talk a little bit about the stimulus bill, Bush's stimulus package? If that were to take effect with accelerated depreciation and a higher limit on Section 179, could you guys take up production to meet stronger demand in the back half of the year in the U.S. or are you at capacity limitations right now?

We do not have capacity restrictions.

Okay. So if we did get a stimulus plan and we saw demand pick up in the U.S. as we did in 2004 when accelerated depreciation was expiring last time, you would be able to keep up with your schedules?

Yes. Under the assumption that we wouldn't face problems from the supply chain.

Okay. So your outlook is not constrained by your capacity?

No.

Okay. Thank you. I'll get back in line.

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

Good morning, guys.

Good morning.

I wonder if you could just talk a little bit about in the fourth quarter, this may not be fair, but looking at what Deer did and said and C&H also, it seems like the pull-through into your profitability wasn't as strong as what we saw in some of those other guys. Is that -- can you give us a little color there? Is that due to mix more international, or anything in there you can help us with?

Well, I think the only thing that I would point out, Joel, is that the currency did impact us pretty significantly. We indicated in our comments that in South America we had some impact of some lower margins on some of the products that we sell. We produced in Brazil but sell into the other South American markets. Those sales are typically -- or pricing is typically dollar based. Usually we can catch back up, but we did feel an impact in the fourth quarter. So our estimate is that margins were impacted by about seven-tenths of a percentage point in the fourth quarter. Obviously, again, offset by the currency translation benefit of the higher sales. So that would be the main thing. Other than that, we did have some issues with supplier delays and inefficiencies, but I would not say that those were very significant, but it did cost us some minor amounts. But other than that, I would say it was a fairly normal quarter with performance that we're very pleased with.

Okay. Can you also zero in on Brazil for a second because it seems that C&H's forecast for Brazil to be up more than 50% in '08 and for Deer --

If you want to talk about Deer and C&H, please call them.

Okay. I'm just saying there's a big divergence between what those two guys are looking for.

Yes. It's not something we want to discuss with you.

Okay. And can you talk a little bit about what the focus of the new product introductions are? Are they on the smaller side or larger side? And geographically can you help us out on that, too? Thank you.

On the products, Joel? New products -- it's across the board. We've got some of the longer-term new products, some products that we don't even have yet, a sugar cane harvester, forge harvester in Europe. We're -- R&D expense is for some high horsepower tractors that we'll be introducing out of our facility this year that we're very excited about. We also have some R&D, particularly in the harvesting section of Europe, relating to some new combine offerings. So it's really across the board. It's refreshing our product lines, adapting them to the emissions requirements as well as some of the newer products that I touched on just now. In terms of the Brazilian industry, they had a market that was almost at peak levels this year, so I would so I would be extremely surprised if the market increased 50%. That would be well above any market that they've ever seen in that market. So I think that our forecast is supportable.

Okay. Thank you very much.

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

Thanks. Good morning. Andy, wondering if you can quantify for us what the FX impact on operating income in 2007 was? You had mentioned the 9% at the revenue line. And then what your guidance is assuming for 2008.

Okay. For 2007, again, on the margins, it impacted us about half a percentage point, but in terms of our overall operating income, or EPS, it was slightly positive because of the translation benefit. So we picked up probably $0.03, $0.04 a share as a result of currency in 2007. In 2008, we expect again to have margins impacted by about 0.5%, but from an earnings standpoint, to be fairly neutral, at least right now our model suggests we will be losing $0.03, $0.04 a share as a result of currency.

Okay. And I wonder, on your discussions around supply chain stress, if you can characterize for us what you think that level of stress will be in '08 versus '07? Is it the same? Is it alleviating? Could it get worse? Take us through your views on that.

Well, actually we face some problems with various suppliers all over the world. So to say -- I think first of all we could fix some of those problems, we also identified some other sources in order to be less depending from some suppliers that didn't perform that well and, therefore, I think we will be in a position to fix it during the year. Certainly at the beginning of the year it's a little bit difficult, because you still have some overlap from last year. But I'm optimistic overall, and then we see certain signs from other industries, not our industry, that their business is maybe a little flatter from previous year, so the AG industries may be doing better than some of the other industries will do in 2008.

So sounds like on balance somewhere between similar to less stress in '08 versus '07; is that fair?

Yes, I think that would be -- I hope it's lower than last year.

Okay. And lastly, can you talk a little bit about what you're seeing and expecting in terms of pricing in the business?

Yes. In terms of pricing, the forecast is about 1.5 to 2% for 2008.

And where were you in '07? Similar?

Similar, about a point and a half.

I guess given all the new products, given everyone's plant capacity loads are higher, why would we not see more price in '08 than '07?

Well, the reason is that the market is still very competitive. That means there are some very aggressive players in the market. Big ones and small ones. So, therefore, we think most probably it's not realistic to expect more. We take a leading position so in some of the markets where we have a strong position we certainly ask for more than 1 or 2%. But that doesn't mean that we can finally make it.

Thanks very much.

You're welcome.

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

Good morning. Just a question on South American market. If you could separate the impact of currency and [SFIL], that would be very useful.

Currency was about a point and a half, and the SFIL impact a little under a half percent, a half a point.

And going forward, you noted you were lagging pricing when you were exporting stuff out of Brazil. I assume it's primarily to Argentina, right?

It's Argentina, but also other markets.

Chile.

Chile. Peru, those kind of markets.

When do you expect to catch up on pricing in those regions?

Well, it's a matter of the marketplace. So we'd like to catch up very quickly, but as Martin said, it's highly competitive in those markets. There are products now being introduced in those markets that are not Brazilian sourced, so it's probably a little more difficult, but over time we expect to be able to get that -- those margins back up and get the prices back up. We again will take a leading position in attempting to do that, but it will be determined by the market.

And as I look at '08 in South America, how much of an impact on margin or pricing or however you want to quantify it, do you expect from the dealers entry into the market?

Don't expect anything.

Okay. So what should I do -- as I model it out for '08, what should I do with this 1.5 percentage points drag from Brazilian currency?

Well, we're hoping that our operating margins in South America will be relatively flat '08 versus '07. So the impact of currency we're going to offset with improved productivity and other cost performance.

But it's relatively flat given your production forecast.

Correct.

Okay. Thank you very much.

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

Hi. Good morning. Can you guys hear me?

Yes. Good morning.

Good morning. I want to ask again about the outlook, just putting it in pretty basic terms. In December you were looking for the 25% increase and off of the expected results for '07 that would have been $0.55 of increase, and now we're looking at $0.20 to $0.45 and, Martin, you said earlier that it's a conservative forecast but I don't suspect that it was an aggressive forecast a month and a half ago. I presume that you -- you're a pretty conservative management team. Has there been any softening anywhere of any markets across, across your marketing environment that you can point to that would, that would lead you to reduce the outlook like this?

Legally, no.

We didn't -- we didn't reduce the outlook. We have a bottoms-up budget that we do, and that was communicated to you what those results were. Certainly we did a little better in the fourth quarter than we had communicated to you. Some of that was in taxes. Some of that was in the higher sales levels that we were able to achieve. But we did not think anything had significantly changed to where we should add that to the base, as you suggest. But certainly don't believe that that we're reducing our outlook. We're working against our plan and hope, as Martin suggested, to out-perform it. But we are sticking with the information and the guidance that we suggested to you about six weeks ago.

It's all about consistency.

Well, is there -- I mean, what -- is there anything worse, in terms of foreign exchange or internal spending or any -- any issues like that that would be a take away of $0.10 to $0.20?

No, I don't think any of our assumption have changed that dramatically.

Okay. And then a follow-up question on capital allocation. With the leverage and the balance sheet now so low and your outlook for free cash flow pretty robust next year, what do you think about disposition of that free cash flow with regard to the possibility of dividend or share repurchase?

We will discuss that in the upcoming board meeting, and we work on several scenarios and let you know after that meeting.

When is that board meeting?

In March.

Okay. Thank you.

Your next question comes from the line of Andy Casey of Wachovia Securities.

Good morning, everybody.

Good morning.

A question -- and this is kind of short-term and I apologize for that, but I'm trying to understand the Q4 to Q1 sequential change given your guidance, if I could give some prelude to it. Your Q1 is up 40 to 50% year over year. That implies about a 54% decrease at the midpoint in Q1, '08 from Q4 '07 versus about a 38% decrease from a year earlier and that's despite better expected vent performance, lower tax rate, likely still positive FX benefit. Why would the sequential decline be higher this Q1 versus Q1 '07? Is there a regional shift or something internal that I should consider?

Nothing comes to mind except for the fact that we did have a relatively weak fourth quarter of 2006 -- 2006, yes. So I do believe that might be a part of it. Things were picking up in the first quarter of 2007. Other than that, when we look at our first quarter, we do, we do forecast and get some hit on currency, primarily in the North American market. That's probably more weighted to the first quarter because of where the currencies were year over year. So that might be another reason why you're seeing a little lower result than you might expect. But other than that, we're looking for a positive improvement in our results in 2008 versus 2007. The mix can change a little. We're obviously looking at, when we do these forecasts what our production is for those products, what our demand is, and rolling those out. But you can have differences in mix between quarters that can impact the kind of analysis that you're doing.

Okay. Thanks for that. And then in the first half of '08, should we expect an overproduction versus retail for the North American market, given what seems to be significant demand increases there?

Well, on a seasonal basis we always overproduce retail in the first half. So for the full year, I think we would expect to have some, produce under retail again, but in the first half you're building your dealer inventories and then they get sold throughout the second half. So that's a normal situation. I would say that the pattern is going to be very similar to 2007.

Strategically, we just implemented a build to order logistical approach to our business. So that means we normally want to underproduce or say to compare or to let's say reduce our inventories further.

Okay. Thank you very much.

Your next question comes from the line of Robert [Wortheimer] of Morgan Stanley.

Hi. Good morning, everyone. I had two questions I wanted to follow up on pricing. And the first is, are raw materials trending where you thought they would be when issued your preliminary thoughts on the 1.5 to 2% pricing or are they higher?

I guess they're about the same. We're seeing pressure particularly on steel and copper right now, but we have some of those prices locked in for the year, and so I don't think it will impact us that dramatically. So I would say that it's pretty consistent.

Okay. And the second question is -- I know you don't like to talk object your competitors, but, Martin, you referenced the competitive environment. One of your competitors had weaker gross margin in 4Q and has had weaker pricing. Are you seeing any change in the pricing environment in let's say December to January?

Unfortunately, not yet. Maybe you need to push the guys a little.

Thank you. I'll stop there and get back in line. Thanks.

At this time there are no further questions. Do you have closing comments?

Yes. We would just like to thank everyone for their participation today, and we encourage you to get back with us later if you have some additional detailed questions. Thanks and have a great day.

Ladies and gentlemen, this concludes today's conference. You may now disconnect.