AGCO Corp (AGCO) 2008 Q2 法說會逐字稿

Good morning, I'll be your conference operator today. At this time I would like to welcome everyone to the AGCO Corp. 2008 second quarter earnings 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, Tuesday, July 29, 2008.

Thank you and I would now like to turn the call over to Mr. Greg Peterson. Mr. Peterson, you may begin your conference.

Thank you, and good morning. We appreciate all of you joining us for AGCO's second quarter 2008 earnings conference call. On the call this morning, we'll refer to a slide presentation, the slide presentation, earnings release and our financial statements are posted on our website at www.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 Richehagen, our Chairman, President, and Chief Executive Officer; and Andy Beck our Senior Vice President and Chief Financial Officer.

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, inflation, foreign 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 that actual events or results may differ materially. We refer you to the periodic reports that we file from time to time with the Securities and Exchange Commission including the Company's Form 10-K for the year ended December 31, 2007 and Form 10-Q for the quarter ended March 31, 2008. 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'll now turn the call over to Martin.

Thank you, Greg, and good morning, everybody. Please turn your your attention to slide three where I'll begin my remarks. You can see from this slide that we have continued our momentum through the second quarter of 2008 which resulted in record quarterly sales earnings and cash flow. Our sales increased approximately 40% compared to the second quarter of 2007 and our adjusted earnings per share were up 100% compared to the second quarter of last year. We saw exceptionally healthy market conditions during the first half of the year and our customers continued to respond favorable to our full line of technology based products and our strong dealer networks. Our Europe, Africa, Middle East segment reported impressive sales growth and margin expansion during the second quarter. Expectations of good harvest and elevated grain prices kept demand robust across Europe in the first two months of 2008. Expanded acreage and better farm economics in Brazil have generated market demand for tractors ahead of the prior peak levels.

Improved operating results in our North American segment contributed nearly $0.15 to our second quarter earnings per share growth. Healthy markets and ongoing enhancements to our distribution channel are driving higher volumes at our North America plants and more operating leverage which is offsetting currency head winds. In our east Asia Pacific segment improved wheat crops in Australia and New Zealand resulted in sales growth of approximately 51% on a constant currency basis in the second quarter of 2008 compared to the same period in 2007. Strong demand for our high horsepower tractors and combined helped our sales mix and drove consolidated operating margins 140 basis points higher in the second quarter 2008 compared to the same period last year. I was also pleased with our cash flow production in the second quarter despite the healthy sales growth we saw in second quarter, we were able to hold the line on working capital and produce improved free cash flow. For the first six months of 2008, AGCO sales grow over 37% and our earnings per share grew to $1.97 compared to $0.93 for the first half of 2007.

Slide four illustrates our production schedules for 2007 and 2008. Tractor and combine production levels were up 19% in the second quarter of 2008, compared to the second quarter of 2007. Production was up to support the increased demand across the globe. Our current 2008 forecast calls for unit production of tractors and combines to increase 16 to 18% compared to 2007 levels in order to satisfy the forecasted increase in the market demand. The strong market conditions have us at or near capacity in some internal assembly and production operations and we are making investments in some of our facilities to expand capacity. The elevated demand for industrial and farm equipment continued to put stress on AGCO's 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 suppliers to mitigate future supply constraints.

Slide five details industry retail (inaudible) volumes by region for the first half of 2008. Industry tractor sales in North America were down 6% 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 capacity, while the professional farming segment continues to benefit from higher commodity prices which contributed to an increase of approximately 24% in the over 100-horsepower tractor segment and growth in the combined market of approximately 18% in the first six months of 2008 compared to the same period in 2007. While AGCO's total unit tractor sales reflect in the first half of 2008, AGCO's unit sales of tractors over 100 horsepower and combines both showed strong growth during the first half of 2008. For the full year of 2008 we expect weakness in tractors under 100-horsepower and continued growth in high horsepower tractors in the North American industry retail market. Industry tractor volumes were up approximately 8% in the first six months of 2008 versus the same period last year. Strong market conditions in France, Germany, the U.K., and Central and Eastern Europe are offsetting retail markets in Italy, Finland and Scandinavia.

Our forecast for 2008 calls for market conditions in Europe to remain healthy with continued strong growth in Central and Eastern Europe and more modest growth in Western Europe. South American industry tractor volumes increased approximately 42% during the first half of 2008. Strong conditions in Brazil and Argentina are driving most of the South American growth. Combined sales more than doubled in Brazil and also showed improvement in Argentina. For the full year of 2008 we expect the markets in both Brazil and Argentina to remain strong and contribute to an increase in South American industry demand compared to 2007 robust levels. Globally the markets are very healthy and our order books remain ahead of where they stood at this time last year. I will now turn the call over to Andy Beck, who will provide you with more details on our results.

Thank you, Martin, and good morning. Slide six details AGCO's regional net sales for the second quarter and first six months of 2008. The bar graph shows our regional sales performance excluding the impact of currency translation, for the second quarter and first six months of 2008, translation had a positive impact of approximately 13%. During the second quarter, the Europe, Africa Middle East segment had sales growth of approximately 23% excluding the impact of currency translation compared to the second quarter of 2007. The growth in our Europe, Africa, Middle East segment was led by Germany, France, the United Kingdom, Scandinavia and Central and Eastern Europe. North America sales increased approximately 34% compared to the second quarter 2007, excluding currency translation impacts. Strong sales results in tractors, pay tools, sprayers, implements and parts contributed to the improvement. First half, 2008 sales in North America increased approximately 22%, excluding the impact of currency translation.

Second quarter sales in South America improved approximately 27% from last year, excluding currency translation impacts, higher commodity prices are driving double-digit sales growth across nearly all of the markets in South America even after excluding currency translation. Sales in our Asia Pacific segment increased approximately 51% in the second quarter compared to 2007, excluding the impact of currency. Improved harvest in Australia and New Zealand have sales well ahead of drought impacted 2007 levels. Year-to-date sales were up 40% compared to 2007, excluding currency. Part sales for the second quarter 2008 were $303.9 million, up 15% compared to the same period in 2007. After removing the impact of currency. Growth was strong in all four of our reporting segments. For the first half of 2008 part sales were $529 million, compared to $418 million in 2007.

Slide even highlights our sales and margin performance. Operating margins for the second quarter of 2008 were up from 2007 levels due to sales growth, improved product mix and cost control initiatives partially offset by currency impacts in North and South America. Our Europe, Africa, Middle East margins which reached 11.8% in the second quarter 2008, were up approximately 140 basis points compared to 2007 due to improved volumes and product mix. Particularly related to the timing of sales of FENDT tractors compared to a year-ago. Our South America business reported operating margins of 9.6% for the second quarter. Strong volumes were offset by negative currency impacts associated with sales of equipment manufactured in Brazil and exported to other countries in South America. Operating margins in North America, while still negative improved 400 basis points compared to 2007 due to improved sales volumes, pricing and cost reduction efficiencies. Our affective tax rate was approximately 32% in the second quarter of 2008. We expect the rate to be in the low to mid 30% range for the full year.

Moving on to slide eight, which illustrates the seasonality we've seen in our operating margins for last four years and what we're expecting for our margins for the remainder of 2008. I want to emphasize that we're expected more normal seasonality in the remaining quarters, 2008, which will differ from last year, which was more favorable in the third and fourth quarters. As you can see from the light blue bars on the graph, our margins historically have been strongest in the second quarter and then lower in the third quarter. Many of our plants have extended maintenance shutdowns during the summer months, lowering our absorption rates and our margins in the third quarter. He had an exceptionally strong quarter in 2007 as the sales of our high margin FENDT tractors were weighted toward the back half of 2007. Supplier issues and the ramp up of of our new 900 Series production push backed FENDT sales from the first half of the year into the third quarter of 2007. As a result we expect to see sales of FENDT tractors to be lower in the third quarter of 2008 compared to the third quarter of 2007, resulting in a reduction in margins in the third quarter of 2008 compared to last year.

In the second half of 2008 the impact of our pricing action and material cost inflation will have a more significant affect on our margins than during the first half of 2008. During the first six months of 2008 AGCO had been successful in passing through price increases to our customers from our margin progress demonstrated in the first half of 2008, you can see that we have not seen significant material cost inflation yet. We have benefited from contracts we have in place with our suppliers that help defer some of these increases. As we indicated on our first quarter call we expect material cost inflation to accelerate in the third and fourth quarters. We've introduced price increases to compensate for the material cost inflation and we expect to see some benefit in the third quarter but will see a more significant benefit in the fourth quarter. We expect third quarter 2008 operating margins to be negatively impacted by between 50 and 100 basis points due to the lag in the benefit of our pricing benefits. In the fourth quarter we expect margins to rebound due to normal seasonality and a larger impact from pricing. We expect our 2008 pricing actions also to put us in a net positive position going into 2009.

Slide nine highlights the progress we're making with working capital reduction as we focus on improving our return on assets. At the end of the second quarter AGCO's working capital to sales ratio stood at 6.7%, down from 10.3% one year ago. Our goal this year is to hold the line on working capital despite the strong sales growth we're experiencing. Much of our working capital focus is aimed at lowering dealer inventories in North America. Compared to the second quarter of 2007 we saw improvement in tractors, combines, and hay equipment in North America dealer inventory month supply. At the end of June 2008 our dealer month supply on a trailing 12 month basis were just under five months for tractors, four months for combines and five months for hay equipment.

Other working capital details are as follows. Outstanding funding under accounts receivable securitization programs was approximately $497 million at the end of June 2008, compared to $435.4 million at the end of June 2007. Wholesale interest bearing receivables transferred to AGCO finance, our retail finance joint venture in North America as of June 30, 2008 were approximately $71.7 million. Losses on sales or receivables primarily under the securitization facility which is included in other expense net was $8.3 million in the third quarter -- second quarter of 2008, compared to $10.2 million for the same period in 2007. For the first six months of 2008, losses on sales or receivables were $14.5 million, compared to $16.8 million in the first half of 2007.

Slide 10 addresses AGCO's free cash flow which represents cash flow from operations less capital expenditures. You can see from this slide that our sales and earnings growth translated to an increase of $106 million in our second quarter 2008 free cash flow compared to the second quarter of 2007. Our seasonal demands for working capital were greater in the first half of the year and generated negative free cash flow in the first half of 2008 and 2007. We are experiencing strong free cash flow in the second half of the year that would allow us to fund some of our additional investments in production capacity. Our long term view of the markets is very positive. And to keep pace with expected growth in the market demand, we have recently initiated investments in a number of our production facilities, totaling in excess of $100 million. These new investments are projected to require an additional 30 million to $40 million in capital expenditures during 2008.

Slide 11 quantifies the impacts of our 2008 initiatives. We'll be making significant investments in our growth 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 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 or latest view of selected 2008 financial goals. We're projecting 2008 sales to increase 26 to 28% driven by healthy market conditions, pricing and the positive impact of currency. We are targeting 2008 EPS to range from $3.60 to $3.70 while making significant investments in our long-term initiatives. We expect increased capital expenditure including the additional investments in production capacity to be in the 220 million to the $230 million range and our free cash flow to remain strong in the 175 million to $200 million range. For the second half of 2008, sales growth is expected to be in the 26 to 28% range with the third quarter sales growth expected in the 27 to 28% range compared to the same periods in 2007.

As previously discussed, operating margins in the third quarter of 2008 are expected to be lower than the third quarter of 2007 by 100 to 150 basis points due to a more normal mix of sales as well as the impact of material cost inflation. Operating margins in the fourth quarter of 2008 are expected to be higher than the same period last year due to the benefit of our pricing actions. That concludes our comments. Operator, we're ready to open the call for questions.

(OPERATOR INSTRUCTIONS) Our first question comes from the Ann Duignan of JPMORGAN.

Hi. Good morning guys, you can hear me okay.

Good morning, Ann. Yes, we can.

Hi. Good to be here. Can we talk a little bit more about pricing in the back half and going forward, can you give a little bit more specifics in terms of how much you're increasing pricing on average? And then could you talk a little bit about what you might do on your early order programs this year? Are you going to include something like an inflation clause or how are you going to protect those prices going into next year?

Well, Ann, in terms of the second half of this year, when we started the year, we were looking at pricing somewhere between right around 1.5% up to 2%. Now our full year pricing we're expecting to be over 3%, between 3 to 3.5% and the second half of the year pricing to be around 4%. And that pricing does escalate as you go throughout the second half of the year. We're still in a situation with our strong order bank that we can't put the pricing in as quickly as perhaps we'd like. But as we get throughout -- by the end of the year, we've had a substantial increase in pricing from where we were at the beginning of the year.

In terms of covering our costs, we think that overall our cost inflation that we're fighting against in terms of increased steel cost and other factors will be covered overall by the end of the year. But as we discussed in our comments, we'll have a impact here in the third quarter because of some of the price protection we have an our existing orders. In terms of what we're going to do on our presale programs and orders for next year, we're certainly increasing our list prices. At this time, I think in most cases, we're not putting surcharge or something like that on there. We're going ahead and putting it into the base price of the unit. We continue to monitor what is going on with costs and to make sure that we think this will be adequate. In some cases we're slowing down the order intake that we're experiencing in order to make sure that we do not cause ourselves problems as we go into 2009.

So just to summarize, by the end of the year, going into '09, how much would your pricing be up, do you think?

Well, in our fourth quarter, our pricing is up about over 4%, so between 4 and 4.5%.

Okay. So that's what we should assume for '09?

Well, you'll have a certain amount of carry-over and then there will be additional pricing in '09 as well. Again, I don't have an '09 forecast for what pricing will be, but suffice to say that we think we're in pretty good shape going into '09.

Okay. And then just on a follow-up. You almost broke even in North America, Martin, how should we think about the profitability of North America going forward? Is volume a wonderful thing and you'll be able to sustain the kind of performance you delivered this quarter? How should we think about that both for the back half and going into '09?

If you would exclude exchange rate, you could certainly -- and you did that, you can see that (inaudible) did a brilliant job in order to get the -- come closer to a turn around in North America. What is helpful is that we started to export more products to euro companies from our American factories that will certainly help also next year and we actually could have done more if we would have had the right capacities and also the supply base wasn't actually helping us all of the time. And in addition to that, we now start the second phase of our North American project by getting in several light assembly operations. In total we will end up to have three or four assembly operations. And maybe this puts us in the position to one day also think about a tractor factory for higher horsepower tractors in North America. So that's all a question of capacity of break even point. We know exactly where the break even point is and the closer we come with our sales volume into that direction, we are certainly looking into this. I think overall the new management team does a great job and I think we will be much more profitable in North America in the future.

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

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

Thanks, Andy. A question on the free cash flow guidance. I think if you take the delta between your new and old high end of the EPS range, net income has gone up by about $55 million, CapEx up by 30, where has the differential gone to keep the cash flow flattish? Is that working capital? Is that getting steel in place for 2009 or where is that going?

It's mainly in working capital. We're still -- we'll have to use a little more working capital than what we expected because of the increase in our sales guidance that we're giving. So it's primarily just keeping enough -- it's going to impact receivables to an extent because it's the higher sales volume.

We also might have a little reserve here.

Okay. And then, Andy you mentioned 50 to 100 basis point impact on year-over-year margins from the raw material pressures in the third quarter and very clear on that. Can you tell us what the assumption is for the fourth quarter assumed in the guidance, please?

In terms of material cost impact, we would actually be over -- north of where we need to be. So we'll get some benefit in the fourth quarter if we achieve the pricing we have in our forecast.

So net positive.

Yes.

And then lastly, the foreign currency impact on South America margins in the second quarter, can you tell us what that number was? Maybe what was in the first quarter? Maybe what you're assuming for the second half?

Yes, the South America impact in the second quarter was about 4 million or $5 million. And I think that would be pretty similar to the first quarter. And then that should probably extend on to where we'll probably have a 15 million to $20 million impact for the full year in South America. Thanks very much.

Our next question comes from the line of Jamie Cook from Credit Suisse.

Hi. Good morning and congratulations. I guess my first question, I'm just trying, when I look at your implied sales forecast for the back half of the year relative to what we saw in the first half, it's lower than I guess I would have expected. You can just help me think through how much of that is supplier constraints or your internal capacity constraints and at each of the major plants how many shifts you're operating at and what we can ramp up to?

Well, actually we do not have real capacity restrictions right now. We produce more or less what we sell. This includes also the supply base. We have certain problems here and there as you can imagine. But I think overall we believe that we do better than some of our competitors so we started to work on the supply situation already early enough and so we see improvement and then of course we do get hit backs here and there. Sometimes we do get a little quality problems -- a qualify problem that hits you more than it would be in a slower market. But overall, we have the capacities we need.

Okay. And then just my follow-up question just to follow-up again on the pricing front. I'm just trying to get a feel for your pricing approach by region. You talked about the South America margins were down and yet you sort of talked about the FX issue but we also have some of your competitors who are trying to enter into that market and I'm wondering if you're seeing any more competitive actions from the other players in South America? And then just your price to pricing in the U.S., generally you're at a disadvantage but we did see some good improvement in the second quarter.

South America, as you can imagine, the price pressure from competition is maybe a little bit higher than in other markets. I do not think that this works long term because in South America you face the same supply or material price increases than in other markets so I don't think that the idea to buy market share is excellent. We want to keep our position in South America and I think when you look at our situation, the numbers reported are wholesale numbers, retail looks a little bit better. We had some little capacity issues. We are reducing inventories here and there. Overall our strategy is to keep our market position and also work or let's say try to get the margins in as scheduled. In order to do so, you have to look into your processes and you have to look into your cost situation and we have several projects going in that direction. We also see some very successful situations. You remember or you might remember that we bought that planter business (inaudible) last year and when you see what -- how this is developing, more or less we sold about twice the volume than before the acquisition. So that means our biller network is very strong. And with some new products, we are launching and I think the right programs I'm very optimistic that we can defend our position.

All right. Thanks. I'll get back in queue.

So I answered Ann's question already, up front so to stay.

Our next question comes from the line of [Andrew Casey] from Wachovia Securities.

Good morning, everybody. A question back on a comment you made a little bit earlier about slowing down your order intake to kind of preserve price net of cost and all that, are you looking at an earlier incremental price announcement than you typically would do going into '09?

Well, we are very careful in booking orders already now without knowing exactly where our cost base will be 2009, so therefore, we have a very close loop between purchasing and sales. And I can tell you, we didn't slow down our order intake and do not intend to do that, so we just want to make sure that we have the right pricing in place and I think this -- we are working on that. We can't tell you exactly yet how the pricing -- the sales prices for 2009 will look like, but we are very careful in confirming orders too early.

Okay. And then a follow-up on that, if I may, Martin. The input cost inflation that you're talking about, have you seen any sort of plateauing at all, or is it just continuing to kind of go up linearly?

That depends on the product. So you could say everything which is steel and oil related didn't plateau yet. Maybe oil is closer to that situation. I also would believe that slowdown in the car business, in the automotive sector finally will have an impact on steel prices, but we don't see that yet.

Okay. Thank you very much.

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

Yes. Good morning.

Good morning.

Can you hear me?

Yes, we can.

Great. Just a question on EMEA margin. You noted that in the third quarter of last year, you benefited from I guess better FENDT sales but shouldn't you be benefiting in the second half of the year from growing Eastern European sales which I understand are sort of horsepower, high margin equipment versus last year? Shouldn't the mix in the EMEA be improving towards larger equipment?

I think there's a -- certainly a general trend there that we're seeing and if you look at some of our margin improvements over, really the '07 and '08 period overall, I think that is one of the factors that is driving our margin improvement as the mix is improving. We're seeing more sales growth in that sector that you mentioned and growth in the high horsepower sector, so I think that's certainly a factor. But as we get into the third quarter, that is being offset dramatically by this change in mix of the FENDT volume. We were very heavily weighted in the third quarter of last year. Big 900 series high horsepower tractors which carry some of our strongest margins. So that again is more normal spread of sales in 2008 and we're going to see the impact as we look at our margins in the third quarter.

And am I correct you're in FIFO, right.

Yes, we are.

So any way to quantify what the incremental costs for raw materials would have been in second quarter if you were actually using LIFO?

No. Andrew, I'm sorry, I have not done any calculations like that.

Okay. Thank you very much.

Our next question comes from Mark Koznarek of Cleveland Research Company.

Hi. Good morning.

Good morning.

Good morning, Mark.

Andy, I was wondering if you could review the second half revenue expectations again? I'm just wondering if I -- if those numbers, the ones that you articulated a little bit earlier, they just don't seem to add up. Because with the revenue growth you talked about for the second half and the first half we're up 37%, comes out to more than your full year guidance.

Okay. Well, what we're seeing in the third quarter is 27, 28% growth. And then it does come down in the third quarter -- fourth quarter, maybe I misread the number that we had. And so then in the fourth quarter we're looking at growth between 15 and 20%. So overall when we get to the end of the year, it's about 26 to 28%.

Which is excellent.

Yes. It certainly is. Okay. It seems like those number still come up to something higher than 26, 28 but we can pursue that further offline. The improvement in North America profitability, was really striking I thought and you mentioned there is exports that have helped and I'm wondering if you could help us understand what production volume was like relative to your actual reported retail sales and whether that export is likely to continue in the second half?

Well, production, as we said overall, was up I believe 19% in the second quarter. It was up over 20% in the first quarter. When you look at those North American factories, those were up even more than the average. So we are seeing some very significant production growth in those factories and as Martin mentioned, a lot of that is the result of more exports for particularly our Eastern European markets. So we're selling a number of combines, selling implements into those markets and that is helping our cost structure in our U.S. factories.

Is that a seasonal thing or will that continue in the second half?

I believe that will continue.

This is a strategy. So that is something we started to work on already two years ago. Before you actually are in a position to sell, you need to demonstrate the new products, you need to actually go get the local (inaudible). You need to get your dealers behind you and I think we will grow that business in the future.

Okay. And then the assembly that you talked about for North America, is that happening this year?

Yes. We opened the first assembly factory in Baltimore I think a -- two weeks ago, or I think a week ago.

What product is that for?

Mainly for smaller tractors, (inaudible) tractors.

All right. Thank you.

Our next question comes from Charlie Rentschler from Wall Street Access.

Picking up on that last comment, could we expect another plant to open, to make bigger wheel tractors or not?

First of all, you could expect two more smaller -- two more assembly operations for smaller tractors. And then of course we also look into the situation of big tractors. As I said, we know exactly where the break even point for such a factory is and the more successful we are in sales, the closer we come to that. So we certainly watch that carefully, but we would of course inform you earlier enough about an investment like that

Okay. But skipping over to Europe, which is such an important market for you guys, Martin, can you give us a bit of detail on what is happening to your share and also some comments about how business is in Western Europe versus Central and Eastern?

Well, actually, our sales, we have of course in many countries of Europe, a very strong market position, being number one or two. But we still try to grow market share in Europe. And we also work on the -- since quite some years now already on the repositioning of Massey Ferguson. As you might know Massey Ferguson's position was very strong years ago and then we somewhat -- we somewhat lost track. We are very successful with this.

So in some markets we see market share gains of Massey Ferguson, but also in some other markets like Scandinavia, due to a broader Corporation with our dealers, we now combine the Valtra brand with FENDT and see market share -- very positive market share development of FENDT tractors which can be seen also in some of the Southern European markets, so that means the FENDT technology with the growing farm size and more professional farmers, that is becoming more and more attractive. And as you remember, we also work on repositioning our combines. We have just come back from Denmark where I saw the new facelift of the Classical Massey Ferguson conventional combine. So that means our combine business does develop into the right direction, in (inaudible) in total we will produce about 1,000 combines end of this year and plus about 200, 300 combines coming from Denmark. So that means, this helps us of course to also gain market share in Europe and the development of the hybrid combine and the self propelled [Troy's] Harvester is pretty much progressing according to schedule.

Which would you say would be your strongest countries in Europe for your sales?

The biggest countries?

The strongest, yes. Most--?

Well, actually, for us, Germany is very important. The biggest market in Europe for farm equipment is France. And in Eastern Europe, for us, the big -- the biggest market is most probably Poland. The biggest growth will come from countries like Belleruth, Ukraine and Russia.

Thank you.

Our next question comes from the line of Barry Bannister from Stifel Nicolaus and Company.

Hi. Jamie touched on it earlier, but when I look at the South American foreign exchange, $5 million, it doesn't really explain the 5% incremental operating margin on 48% sales growth. So when you think about the competitive conditions down there in South America, would you say that it's maybe a competitor who is green with envy of your market share or one that is feeling blue about their nonag business and trying to make Brazil grow for them?

I think it's -- my impression is that it's a little bit local management that -- when you read official announcements of the main players, everybody talks about the need to pass over material price increases via higher sales prices and I think some of the locals didn't get that message yet. Or by intention, one is a lip service, while some try to buy market shares. That's something you have to ask the other guys. We actually -- my idea is to optimize our cost position in order to be strong enough to defend both, our market position and our margins.

And then changing gears, when I look at the Brazilian farmers, they're pretty highly leveraged. They have got over $50 billion of debt dating back to '80s and '90s and they keep rolling it over but rates are starting to rise, inflation is high. So what I don't understand is the opaque rabble bank JV where the income jumped up to $14.6 million versus $6.3 million a year ago, I have no insight into things like age of your receivables, bad debts from the recent deferral of payments, credit terms. Could you give us some information on why that jumped and how the conditions are on the credit side down there?

Andy will answer that question.

Sure, Barry. In terms of starting with the increase in the equity and earnings, certainly a portion of that was related to our finance joint ventures around the world, including Brazil. But the large increase was relating to the Laverda joint venture that we initiated -- closed in the third quarter of last year. Laverda for background information as a combine harvesting manufacturer in Italy and we bought a 50% interest in that business a little -- about a year ago. And so that was the major source of the increase in income, this was one of the peak seasons for the combine business and they had very good performance this year. But our JV business is improving.

When you talk about Brazil, certainly some of the points that you made are correct, that the farm sector there is leveraged to some extent. Mainly with subsidized financing, sponsored by the government. There have been a number of restructurings of the debts in Brazil and the latest one occurred in the second quarter, whereas some of the debt was subsidized and rates lowered to help the farmer with his cash flow. Looking at our equipment debt, I think some positive things came out of the last -- the last work that the government did. They did not extend any more payments. They're putting the control back with the finance companies to help work out any problem situations they have, but also start a normal flow of collections of payments. So the first installments of 2008 payments, which will not be deferred, will be due in October. And so we'll get our arms around our situation much better by the end of this year.

Every quarter we do a portfolio review of our portfolio in Brazil. It's about $1.5 billion. Certainly we use the credit criteria that is driven by Rabobank and we feel comfortable that we're doing everything we can to assess the situation in Brazil. We did make a small increase to the reserves in the second quarter to reflect the changes in the government programs and how that affects our collectability, but again, we're staying on top of it and we think our reserves are adequate.

Okay. I'll follow-up with you later on that. And then why did the tax rate guidance go from mid 30s down to low to mid 30s?

It's the improvement primarily in the North America business. We're expecting to do better than we had in the earlier year as a result of the stronger market and in terms of things we're doing in terms of margins and as a result that pulls down our overall consolidated tax rate because we're not benefiting those losses and so as you reduce those losses that produces a benefit to your tax rate.

Thanks a lot.

If there are no further questions, we'll turn the call back over to Mr. Peterson for any concluding remarks.

Thank you very much for joining us today for our call. And we encourage you to follow-up with us later today if we haven't answered all of your questions. Thanks again, and have a great day.