AGCO Corp (AGCO) 2008 Q1 法說會逐字稿

Good morning. My name is Cynthia and I'll be your conference operator today. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this conference is being recorded today, Tuesday, April 29, 2008. I would now like to introduce Greg Peterson, Director of Investor Relations. Mr. Peterson, please go ahead, sir.

Thank you, Cynthia. Good morning and thank you for joining us for AGCO's first quarter 2008 conference call. During this call we will refer to a slide presentation. The 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 and production constraints, farm income, working capital improvement, cash flow, margins, effective tax rate, capital expenditures and strategic initiatives. We wish to caution you that these statements are predictions and actual results may differ materially. We refer you to the periodic reports we file from time to time with the Securities and Exchange Commission, including the company's form 10-K for year ended December 31, 2007. These document 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'll turn the call over to Martin.

Thank you, Greg, and good morning. I'll begin my remarks on slide 3 where you can see we have a pretty good start to the year. We posted record quarterly sales and earnings. Our sales increased approximately 34% compared to the first quarter of 2007 and our adjusted earnings per share in the first quarter were up 142% compared to the first quarter last year. We used our well-positioned brand to leverage very healthy market conditions and produce strong results in the quarter. Our EAME segment continues to grow strongly and improve its profitability. In Europe, our FENDT brand performed well showing the best margin improvement. Recall that during the first quarter of 2007 our FENDT sales were artificially low as we were initiating production on our new horsepower series tractors and experienced supply constraints. Both of these events negatively impacted our sales during the first quarter of 2007.

The south American market continues to respond to strong commodity prices. In Brazil, acreage devoted to corn, soybeans, and sugar cane has expanded and production is expected to be up from 2007 levels. Market conditions in Argentina were also very good in the first quarter. However, government restrictions on grain export resulted in a disruption in the market late in the quarter that may impact industry demand there in the coming months. In North America, record 2007 farm income is driving strong sales in high horsepower tractors and combines. The slowing in the general economy softened demand for compact and utility tractors that are more often used in non-farming applications.

On slide 4 you can see our production schedules for 2007 and '08. Combine production levels were up 25% in the first quarter of 2008 compared to the first quarter of 2007. Production was up to support the strong growth in global demand. We increased production across all regions with merely all of our production facilities experiencing double-digit unit growth compared to the first quarter of 2007. Our current 2008 forecast calls for unit production of tractors and combines to increase 12 to 14% compared to the 2007 levels in order to satisfy the forecasted increase in the market to demand. The strong global demand for industrial and farm equipment continued to put stress on AGCO supply chain. As we told you last quarter, we are working with our existing suppliers to prepare them for expected demand levels and we are also working to qualify new supplies to mitigate future supply constraints. The strong market conditions have at or near capacity in some internal assembly and production operations and we are making investments in some of our facilities to expand capacity.

Slide 5 details industry retail farm equipment volumes by region for the first quarter of 2008. Industry tractor sales in North American were down 11% compared to 2007 levels. The weakest segment continued to be tractors under 40 horsepower that are more closely tied to the general economy. We also experienced declines in the 40 to 100 horsepower category. The professional farming segment continues to benefit from higher commodity prices which contributed to an increase of approximately 30% in the over 100 horsepower tractor segment and growth in the combine market of over 12% in the first quarter of 2008 compared to the first quarter of 2007. AGCO total unit tractor sales were down in the first quarter of 2008 due to the market weakness in compact and utility tractors. Consistent with the market, however, AGCO unit sales of tractors over 100 horsepower and combines both showed strong growth during the first quarter. For the full year of 2008 we expect weakness in practice under 100 horse horsepower and strong growth in the high horsepower tractors in the North American industry (inaudible) market. Industry tractor volumes were up approximately 3% in Europe in the first quarter of 2008 versus last year. Strong market conditions in France, the United Kingdom, central and eastern Europe and Spain are offsetting weaker markets in Finland and Scandinavia.

Our forecast for 2008 calls for market conditions in Europe to remain healthy with continuous strong growth in central and eastern Europe and modest growth in western Europe. South American industry tractor volumes increased approximately 45% during the first quarter of 2008. Brazil's industry tractor volumes were up 47% and Argentina's industry tractor sales increased 64% compared to the first quarter of 2007. Combine sales more than doubled in Brazil and also showed improvement in Argentina. In 2008 we expect the markets 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 boards remain at where they stood at this time last year. I'll turn the call over to Andy who will provide you with more details on our results.

Thank you, Martin. Referring to slide 6 which highlights AGCO's regional net sales. The chart on the right shows our regional sales performance, excluding the impact of currency translation. For the first quarter of 2008, currency translation had a positive impact of approximately 13%. Excluding the impact of currency translation, the Europe, Africa, Middle East segment had sales growth of 20% during the first quarter of 2008. The growth in our European region was led by sales increases in Germany, France and eastern Europe. North American sales increased approximately 10% in the first quarter 2008 compared to the first quarter of 2007, excluding currency translation impacts. As Martin mentioned, sales increases in our high horsepower tractors and combines were responsible for much of the growth. In South America, first quarter 2008 sales improved approximately 44% from the prior year, excluding currency translation impacts. Robust farm economics and expanding plantings in Brazil have led to strong demand for tractors and combines. We also saw improved sales in Argentina.

Our first quarter 2008 sales in our Asia Pacific segment increased approximately 28%, excluding the impact of currency. Significantly improved harvest in Australia and New Zealand are producing better sales. Part sales for the first quarter of 2008 were 225 million, up 15.4% compared to the same period in 2007 after removing the impact of currency translation.

Slide 7 highlights our sales and margin performance. Operating margins for the first quarter of 2008 were up from 2007 levels due to sales growth, improved product mix in Europe and cost-control initiatives partially offset by currency impacts in North America. Our Europe, African, Middle East margins, which reached 9.3% in the first quarter of 2008, were up approximately 330 basis points compared to 2007 due to improved volumes and product mix. In the first quarter of 2008 we had a relatively normal mix of products whereas the mix in 2007 was weighted more towards mid-range and low horsepower tractors due to the initial production of new high horsepower tractor series as well as supplier constraints at our German plant. Last year FENDT sales and production were high in the third quarter due to delays experienced in the first six months of 2007, especially for the margin-rich high horsepower models. In 2008 we expect this impact to reverse in the third quarter and we expect our margins and earnings in the third quarter of 2008 to be negatively impacted.

Volume growth in our South American business produced operating margins of 10.7% for the first quarter of 2008, up slightly from 2007 despite pressure from currency impacts associated with sales of equipment manufactured in Brazil and exported to other South American markets. Operating margins in North America continue to be pressured by the appreciation of the Brazilian real and the euro on the Brazilian and French made tractors sold in North America. Our effective tax rate was 36% in the first quarter of 2008, and we expect the tax rate to be in the mid-30% range for the full year.

Moving on to slide 8 highlights the progress we are making with our working capital production as we focus on improving our return on assets. At the end of the first quarter AGCO's working capital to sales ratio stood at 7.7%, down from 11.3% one year ago. Our goal this year will be hold the line on working capital despite the strong sales growth we're expecting this year. Compared to the first quarter of 2007, we saw improvement across all categories in North America dealer inventory month supply. At the end of March 2008, our dealer month supply on a trailing 12-month basis was approximately five months for tractors, three and a half months for combines and six and a half months for hay equipment. Other working capital details are as follows: Outstanding funding under accounts receivable securitization programs was approximately $497.8 million at the end of March of 2008 compared to $419.8 million at the end of 2007. Wholesale interest bearing receivables transferred to AGCO finance, our retail finance joint venturer in North America as of March 31, 2008, were approximately $76.5 million. Losses on sales receivable primarily under our securitization facilities, which is included in other expense net, were $6.2 million in the first quarter of 2008 compared to $6.7 million for the same period in 2007.

Slide 9 addresses AGCO's free cash flow which represents cash flow from operations less capital expenditures. Our seasonal demands for working capital are greater in the first half of the year and thereby generate negative free cash flow in the first quarter of 2008 and 2007. As you saw in slide 8, we are continuing to focus on our working capital, but we expect to have a smaller benefit in 2008 compared to 2007. On our Q4 '07 earnings call in February we shared our plan with you to invest more in 2008 and for future growth. We expect to increase research and development, new product-related capital expenditures, and system development costs. Even after covering increased spending on the strategic investments, we expect to generate strong free cash flow this year.

Slide 10 shows the improvements we made in our capital and how our net debt-to-capital to total capital ratios improved over the last two rears. Our net debt-to-capital ratio was approximately 18% at quarter end 2008 compared to 36% one year ago. Total debt was $719 million at the end of the first quarter of 2008. We are pleased with the progress that we've made with our balance sheet and overall leverage. Most importantly, we believe we're in a good position to fund our strategic investment requirements in the future. Interest expense net for the first quarter of 2008 was 5.1 million versus 6.7 million in the first quarter of 2007. The interest savings were generated by lower debt levels and increased interest income earned in 2008 compared to 2007.

Slide 11 quantifies the impact of our 2008 strategic initiatives. We'll 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'll be relying on our 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 our company. Our first quarter results were impacted by approximately $13 million of this strategic spend.

Slide 12 lists our latest view of selected 2008 financial goals. We are projecting 2008 sales to increase 20 to 22% driven by pricing, healthy market conditions and a positive impact of currency. We are targeting 2008 EPS to range from $3 to $3.15 while making very significant investments in our long-term initiatives. We expect increased capital expenditures to be in the $190 to $200 million range and our free cash flow to remain strong in the $175 million to $200 million range. For the second quarter of 2008, sales growth is expected to be in the 25 to 30% range compared to the second quarter of 2007 with the second quarter margins expected to be similar to those seen in the second quarter of 2007. That concludes our comments. Operator, we're now ready to open the call for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Stephen Volkmann with JPMorgan.

Good morning. I was hoping you might comment on your capacity utilization and I'm really focused in the higher horsepower equipment here. Maybe if you could by region, and give us a sense of what you're doing with respect to increasing capacity in those regions as well.

Actually, all our high horsepower tractors on wheels so the conventional tractors are made in factories in Europe and in South America. We have some projects we work on in our factory in Finland in order to prepare this factory for the growth that we might see in 2009. We have, I think, no major problem within our big factory in France. And we already decided on some investments in the area of $13 to $15 million in our German FENDT factory to cope with this growing demand. Here in the U.S. we actually have a factory in Jackson, Minnesota, for the big high horsepower four-wheel drive articulated tractor and the track tractor with no restrictions in capacity. So, overall, we are fine and we are actually trying to make reasonable investments in order not to change our break-even point too much. And also we have in mind of always not only capacity but also the return on invested capital. The important achievements we so far generate is we are in very close contact to key suppliers and my overall summary is that we do pretty well. We certainly have the one or the other little problem here and there, but I think we do very well and maybe better than the industry.

Okay. Great. And then just a quick follow-up, Martin, on central and east Europe, could you sort of size that opportunity for us maybe with respect to what you do in Europe so we can get a sense of how big that's become for you and what the growth rates look like there and any market share shifts that you sense might be happening there.

We are using -- let's say I'm always using kind of simple numbers. The market in Russia and the countries of the former Russian Union, Russian Federation in combines and tractors only 100,000 units. The population (audio cut out) in the marketplace has been cut in half since 1995. So the major reduction that is a burden to the Russian farmer and the population also between 10 and 15 years of age. So that means in theory this market should show substantial growth. We see it and it depends pretty much on how farmers are in a position to finance retail. And we seen an improvement after the change in Russian laws that made now -- that changed it in a way that farmland can be owned by farmers. And so farmers are in a position to securitize their business and the banks seem to be also in acceptable good shape so, therefore, we think this market will be more and more important in the future.

When it comes to our existing organizational setup, we are working -- we took over the 100% of our importer and distribution network. So I think this is a pretty good situation and we are now having the best distribution network you could think of in this market. And when it comes to investments in the future, I think our strategy will be to rather think about localizing certain components before we do assembly because the problem in Russia is there's no local supply and the tax subsidies you only get when you have localized your product. So what we will do, and we have a very good experience on how to do that coming from our investment in Brazil, we'll probably start with things like engines and so on before we go there with an assembly operation. The situation in 2008 first quarter I would like to hand over to Andy because he has some numbers for you.

Our sales in that region were about 10% of our European sales for the first quarter. And our sales growth in that region was about 60% for the first quarter.

Six-zero?

Yes.

Great. Thanks very much.

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

Hi. Good morning, guys.

Good morning, Ann. How are you doing?

So far so good. My question, first question, your production was up 25% in Q1, but your outlook is for production to be up 12 to 14%. It looks if I look at the bar charts like in Q2 you are forecasting at least 25% year-over-year increase in production. Why the slow down in the back half of the year, particularly given the stimulus package which we would expect to actually stimulate demand in the back half?

Well, Ann, I think you can kind of look at that chart and see that last year the production shape was maybe a little unusual in that we did ramp up production throughout the year as the demand started growing. So I think the comparables by quarter are -- become tougher throughout the year. So we are expecting our production to remain up. But it will be at a lower percentage as we go throughout the year.

Okay. And so it's just because of the rampup last year.

Right. You've got our sales outlook. That obviously includes some impact for stimulus package and things like that. We do think all the markets are going to remain very strong. But it's tempting to level the production out a little more this year than last year.

Okay. And two quick follow-ups. What was the impact of currency on your operating profits or on your earnings?

Well, on -- we always talk about two offsetting impacts. The positive impact being the currency translation which grosses up our sales and our earnings, particularly in Europe and somewhat in South America, offset by the impact of importing tractors particularly from Europe and Brazil into North America. And if you net those two out, currency was probably positive by a couple cents a share this quarter.

My final follow-up is just you have taken up your sales growth, you've taken up your earnings growth, you kept your CapEx the same, but you didn't change your free cash flow. I'm curious to why that is. Do you include dividends in there and you may be anticipating introducing dividends for the first time or is it just working capital? Maybe you can explain that to me.

Sure. No, it doesn't include any plans for a dividend or anything like that. The fact that there's no change reflects the fact that our inventory levels are a little higher than we would want at this point in the year. Some of the delays that Martin talked about with some of our suppliers are impacting inventory levels even though we are able to get the product out, it affects the timing and our ability to manage inventories as well as we'd like. We're probably being a little cautious there and expect to manage those inventories down throughout the year. But at this point we didn't want to raise that guidance because of that fact.

Okay. Any comments on a potential dividend? When's the next time you might doctor?

We so far decided not to do it. The reason is we see certain opportunities to invest in our business generating pretty good return. So we actually, therefore, do not plan to pay dividend this year, at least that is my position right now. Of course we review that every quarter. As soon as we think that this is feasible, we certainly will keep you posted.

Okay. I'll get back in line. Thanks, guys.

Thanks.

Your next question comes from Terry Darling Goldman Sachs.

I had a couple questions on the guidance as well. Andy, the revenue guidance, can you tell us what was in for currency before and what's in for currency now?

Yes. Currency was about 4% of the increase before. And now is about 9%. So 5% increase -- 5% of the increase relates to currency.

Same question for price and raw material inflation, please.

Yes. On pricing we had said at the beginning of the year about 1.5 to 2%. I think our pricing in the first quarter was about 2%. And now for the full year we're looking at probably 50 to 75 basis points better. So we're up at about 2.5% now of what our expected pricing is. That is we're putting that in as a result of the material price increases that are coming on that we see right now as it primarily relates to steel and steel-related components that we have. And we continue to see rising inflation in those components. So there could be a reason that we have to increase prices even more from that 2.5%.

Do you have a raw material inflation number in total for us?

No, I don't have that. I don't have a number that -- but I guess what you can say is from what our earlier expectation is that 50 to 75 basis points in increase in pricing is all to cover the additional inflation in the material cost.

I guess where I'm going with it is if you look at your margin guidance for the second half of the year implied by the first quarter result in your comment that you'd expect the second quarter to be flattish, looks like you're assuming your margins will be down year-over-year in the second half and yet the production is up and you're pushing price here. What am I missing in that translation?

It's part of that. The one thing you have to keep in mind and was in our prepared comments was there is an impact of mix change. A year ago our sales in Fendt in the first quarter were unusually low and even had a very unusual mix in terms of all low and medium horsepower tractors and this year we're back to normal. And so our production in Fendt was significantly higher in the first quarter and that levels off and effectively reverses itself in the third quarter where last year was a bit unusual in terms of the numbers of high horsepower tractors sold and the amount of units sold in that third quarter. So we're seeing some benefit of the mix here in the first quarter primarily, a little in the second quarter, and then it offsets more in the third. So the third quarter will show the impact of that. Fourth quarter we expect again our margins to be back up.

If we pull Fendt out of the equation, are you still expecting the rest of the business to be down? And if so, why would that be?

No, I don't think we're expecting the -- the margins are impacting more and more by currency. Again, going back to the comments we made about what's happening with our overall currency picture, we're getting this big increase in sales as a result of currency. The offset is the fact that the dollar continues to weaken and we have to continue to change our forecast relating to margins. So we do expect our margins to be lower than what we probably would have said a quarter ago. But it's really relating to currency. The other impact again is the material cost increases that we're seeing. But, again, we're focused in targeting that our pricing will offset that.

So the net price raw material is sort of a push for the year.

That's the challenge and it is a big challenge, but that is what we're targeting to do.

Again, a conservative approach.

Last question. Can you tell us what the average horsepower of the tractors sold in the central and eastern Europe market for you is in ballpark terms?

Actually, we don't have that number here. But it's above what we typically sell in other markets because we mainly sell higher horsepower tractors. So we could actually -- we could provide that number, but not now.

Okay. Thank you.

You're welcome.

Your next question comes from Andrew Obin with Merrill Lynch.

Yes. Good morning. Just more of a longer term question on South America. As I look at your incrementals back in '99 to '03 and compare them to what we're seeing now, it seems sort of bang for the buck as we raise production is not as good as it used to be. I was just wondering thinking a couple years out, does it come back or do we stay at current levels because of more competition?

I think one of the reasons you're seeing that, Andrew, is two factors. One is, again, currency, at least for us. When we're selling the products outside of the Brazilian market we are impacted by the strong Brazilian real in relation to those currencies and to the dollar in some of those markets.

So Argentine sales -- so sales in Argentina hurt you because of (inaudible)?

They're incrementally not as favorable as they would have been years ago.

Andrew, I just want to make sure that you understand our position. We are in Brazil -- we were in Brazil as the first player in the industry. And we do have two brands with a complete product offering and we have exclusive distribution. So, therefore, competition does hurt us less than in other markets. And some competitors have a much different image in this market with regard to brand and product and so on. Some, of course, are very aggressive because they decided to buy market share. I'm not sure whether that's a good strategy. You can see that also reflected in their results.

Just to segway into market share, what do you expect by the end of the year now that we've seen a little bit more of your competition, what they're doing in terms of pricing and discounting, I mean, what do you think in terms of your market share change in South America by the end of the year and by the end of next year?

We will gain market share.

You believe you can gain market share in South America?

Because of better product, better service, better distribution and we see that also with other brands we own, that we differentiate ourselves by our product and not by price.

And just a final question, how did Challenger do in the quarter?

Challenger sales were up significantly in the quarter. Our Challenger sales were up 50% in the quarter.

And what about profitability?

Profitability was improved by a few million dollars. About $4 million or $5 million for the quarter.

$4 million or $5 million positive?

Yes.

Thank you very much. Congratulations on a good quarter.

Thank you, Andrew.

Your next question comes from Andy Casey with Wachovia Securities.

Thanks. Good morning, everybody.

Morning, Andy.

On the North American margin pressure that's primarily the currency impact that you talked about, can you update us on the initiatives to reduce the currency impact going forward?

Actually, as you might remember we replaced the management team -- we have a new guy in charge, we have a new team in charge. And we have a very important portfolio to specific initiatives that will show results soon and that should generate already results. I do not want to go too much into detail here because we think we have some very good ideas we don't want to share with everybody. The improvements so far, Andy after taking exchange rate out compared to the previous years, can you give us a number?

I think what we have been able to do is offset currency to a major extent. I think we would have been -- this is off the top of my head, probably $20 to $30 million improvement last year. And this year looking about the same amount of improvement. However, the currency continues to be offsetting those internal improvements that we're making so we're looking at relatively flat results in the North American market. Again, all because of currency impacts that we're offsetting with cost reduction, programs, the growth that we're seeing in the market. So there's lots of things that we're doing. In reference to your specific question, some of the structural things we're changing are we're starting to get more and more tractors from our Indian supplier which moves products from Brazil to India. That's a move that we're making in the short-term. And long-term we have another project to look at. Other moves of products as well.

Okay. Thanks for that. And then I just want to, if you can, an update on a past strategy to increase the penetration of [sesue] engines in your products. How is that going? You alluded to potential engine plant in the future somewhere east of where the plant is today?

That's pretty much on plan. That means we install or we in steps install a capacity of around 50,000 engines. Last year we were at about -- was it 25?

Last year it was about 40. We were about low 40s last year and growing again this gear.

Compared to 25 maybe in 2006 I would say.

Okay. Thank you very much.

Your next question comes from Jamie Cook with Credit Suisse.

Hi. Good morning. To get back to the guidance question, if you take -- if you look at what you're implying for the second quarter, it looks like earnings in the back half of the year will sort of be flat to down modestly. I appreciate the comments that you talked about relative to mix in the third quarter. But I'm just trying to get a better feel are on there any other issues looming out there that you're concerned about or should we view your estimates for 2008 as your traditional sort of AGCO conservative estimates?

Yes. That would be my proposal.

Okay. And then do you care to comment on your longer term strategy of increasing your margins, I think your margins and I guess a new revenue forecast given where we sit today in 2008?

We are reviewing that. You know how my approach is. I prefer instead of giving you big numbers, I prefer to do my homework first. What we do is we are just sitting together here. Last week we met with a management team in order to define a more aggressive strategy for the coming years. We have a pretty good internal target now. And the next step is that we need to define those actions that support the achievement of the strategy. So when we come to work next time, we will go into detail and let you know how we see things and what we want to shoot for.

And then I'm sorry, last can you just give us an update on the spryer business in terms of how sales are tacking and what we are seeing on a profitability basis.

We have some good news for you.

The sprayer business our sales were up a little over 10% in the first quarter and earnings were up about the same. So we had a pretty strong first quarter and for the full year we were seeing a good sales improvement. Even more dramatic earnings improvement. We've had some issues there but appear to be turning the corner with our new distribution strategy and some of the new products we're introducing.

Care to give us the margin target for '08? For sprayer.

Sprayers. It's going to be in the 4% to 5% range.

All righty. Thanks. Congratulations.

Thank you.

Your next question comes from Mark Koznarek with Cleveland Research.

Hi, good morning.

Morning, Mark.

Just wondering if you folks could clarify a bit more --

We lost you.

Hello. Do I still have you?

Now you do. Start again, please.

I'll start again. The second quarter margin comment being flat. You've already pointed out the production will be up 25% and the Fendt mix will be positive. So what are the offsets there besides currency?

The offset is primarily currency as well as higher -- some of these initiatives in terms of engineering, higher engineering expense, some of the system project expense we talked about heavier here in the second quarter which makes as an offset to some of the other benefits that you discussed.

On those investments in initiatives, that was 13 million in the first quarter. Is that a similar amount or even larger in the second quarter?

Let's see here. In the second quarter it's going to be a little larger, I believe.

Okay. So like 15 to 20?

Exactly.

You were front-end loading those expenses.

That's correct.

Okay. Then you also mentioned a situation develop in Argentina with the export-related issues. Could you talk about exactly what's going on down there and how that changes the outlook for ag equipment demand?

Actually, this is an interesting situation. We saw that already last year. Not only that Argentina does not pay subsidies to farmers, they also add quite a big tax or customs on all product exported to different countries. So that means farmers do get a little penalty. And this is a kind of income stream for the government coming from farming. And the higher those taxes or those customs are, the less competitive, of course, the farmers in Argentina might become. Now, how I see it is, yes, those customs went up again. But on the other hand you see this big demand and, therefore, I'm not 100% sure whether that really will slow down our business in Argentina. But it's at least a question you have to go a little bit more into detail. Andy, we target let's say we're a little bit more conservative on the business in Argentina, right?

Yes. I think what we've seen is some disruption relating to some of the actions going on down there and are a little cautious. So far the market's held up and continues to be strong. But it is, again, something to watch for.

Kind of ramping that together into your forecast, what -- you've raised your overall forecast to 20 to 22% growth. Has the Latin American revenue forecast excluding currency actually increased as well as part of this forecast revision or have you otherwise modified it in a different direction?

No. Part of the increase was an expectation that the market would be stronger in South America compared to what we had said a quarter ago.

Despite this Argentina, there's enough growth in Brazil and elsewhere to offset that?

Yes.

Correct.

Okay. Thank you.

Your next question comes from Charlie Rentschler with Wall Street Access.

Good morning. I wonder if you could tell us where you might be with sugarcane harvester for Brazil?

Charlie, good morning. First of all, you saw the improvement in the sprayer business, so you were always looking for that.

Thank you.

Yes, with regard to the sugarcane harvester we decided not to do an investment, not to buy a company. The only company that is available is a very tiny little business and the product actually doesn't look that well. As you might know, you'd like to remember that everybody that we have a very strong position in the sugarcane industry with Valtra tractor and the reason is the durability, reliabilitry and quality of that product. Now, what we decided is to buy the intellectual property of a design that has been developed between a very well-known engineer and inventor in Brazil and some of the sugar mills. We own it 100% and this guy is now working for us. And so we somewhat could leap frog with regards to the development of that product. And I'm sure that -- well, we'll have a prototype, we have already one which is mockup and we'll have prototype consisting more of parts coming from our platforms very soon.

Very good. Are you any closer to thinking about building wheel tractors, non-articulated wheel tractors in North America to overcome the FX headwinds?

We think about intelligent little steps to go in that direction. And we plan to have some, it's actually three light assembly operations in the U.S. as a first step.

Okay. So you're moving along that direction.

Exactly.

And then finally, shifting from product, the ERP system that's going in, are you starting to see some benefits and do you see the end of the --

You see problems, costs and complexity and a lot of work. The good news is we're on budget financially and on plan more or less timewise. The benefits we will not see this year and most probably not next year. But this is a project which will generate some important cost reductions due to a reduction and complexity.

Thank you.

Your next question comes from Barry Bannister with Stifel Nicolaus.

A question about the comment earlier, you'd mentioned the Argentine issues. What about Brazil? Were there policy changes you alluded to that would affect the balance of the year?

The only discussion, Barry, you can see in Brazil right now is whether the government would put a program in that allows the refinancing of existing deal. So -- but we don't think that will have an impact on the demand and the market as such. We need to carefully follow up on that because you want to make sure that you don't run into a problem of payments.

Yes, I read about that $80 or $90 billion. You haven't assessed whether it has any affect on your finance JV yet?

We so far believe that we have the right reserves in place, but we're tracking that carefully during the year in order to make sure we're in good shape.

You mentioned Finland and Scandanavia were weak and I assume those are Valtra strongholds. Had they been more normal, can you give a rough basis effect on the margin in EAME?

Actually, I'm not sure wheather we can do that. A weakness in the first quarter. The reason for that is actually more or less weather. We had a very late spring in some parts of Europe. And, therefore, that might change. Do we have a number?

No, I don't. I don't think there have been that significant -- the Valtra brand still performed relatively well. Again, a lot of the improvement in EAME for the first quarter was the FENDT brand, but we're on track with the rest of the brands as well.

Okay. You mentioned lastly Challenger was up 4 to 5 million. Was that a positive level? And if so, meaningfully positive?

It's up and it's positive but still relatively low because obviously most of those sales are in North America and the products that they're selling are mainly European source products. We're constrained by the currency again.

On the other hand, since you always asking good questions, this is actually the right direction. So you'll remember that we were not always positive in the past.

Would you characterize that business is seeking critical mass so it can earn a better margin or is it competitively under pressure because there are other entries in those products?

No. I think the first one is the right approach. Needs volume.

Volume. Thanks.

You're welcome.

Your next question comes from Robert Wertheimer with Morgan Stanley.

Good morning, everybody.

Morning.

Try and do three quick definitional ones if I can. On the increase pricing you mentioned earlier, I think in response to Terry's question, if you put that through already, do you put that through on orders in the books and can you do another one given your sort of order books in the balance of the year? Or is it getting to be late in the game?

First of all, I think when you -- I think everybody in the industry normally should have the same problem. It looks like that some forget about putting the right pricing in place. Second, I believe that we can do more for the remaining month of the year. And, third, you, of course, can do also some -- you can generate some improvements for the -- for your order book via the discounts you give.

That's fair. Okay.

Or don't give maybe.

Second question -- thank you. The second question, in Europe, I just want to understand the gap between tractors flat for AGCO in Europe and then EAME sales up 20%. You may have explained part of it with the central and eastern Europe. I'm not sure how that ties in up 60, but that's only 10% of the mix. Was the rest just a shift to bigger tractors or was it Africa and the Middle East? Or what was the gap?

I think the issue there is that, again, it's some about wholesale versus retail and what got delivered to customers and registered as retail. But I believe we'll see those retail numbers will increase. So I don't think we really have an overall issue there. And a lot of that growth, as you say, is mix related in terms of the rotation to higher horsepower tractors as well.

How much could that mix have added? Do you have an estimate?

I don't have an estimate for you.

Last one, sorry for the detail here, but for Andy, in South America your revenue growth gap between total revenue growth and the currency neutral was I think 26%. The real only appreciated 21% versus a dollar and the Argentine peso was flat. I'm trying to understand if there's anything else in that revenue gap or if I'm misunderstanding the currency flow somehow.

So that -- yes, it's 26%. I think it depends on how you calculate that, to be honest with you. We're looking -- the way we calculate that is we say what is -- if our current sales were using last year's exchange rate and what's that different? So I believe our number's correct.

You do it on a quarterly average?

Do it on an average, yes.

Okay.

Your next question comes from Ann Duignan with Bear Stearns.

Hi, guys. I just have a quick follow-up. Back to the question on ERP implementation. Have you actually gone live anywhere yet with SAP?

No, we have not.

When do you anticipate that will happen?

We're targeting second half of the year.

It would be in (inaudible) first?

Yes.

I wish them luck.

Thank you.

Ladies and gentlemen, we have reached the end of the allotted time the question and answer session. I'll turn the call back over to management for closing remarks.

Thank you, Cynthia. We just want to take an opportunity to thank everyone for their interest in AGCO. If you have follow-up questions, feel free to call me later today. Thanks and have a great day.

Ladies and gentlemen, this concludes AGCO's corporation 2008 earnings release corporate call. You may now disconnect.