AGCO Corp (AGCO) 2008 Q3 法說會逐字稿

Good afternoon, I will be your conference operator. At this time I would like to welcome everyone to AGCO, your agricultural company, 2008 third 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, today's conference is being recorded today, October 29th, 2008. Thank you.

Mr. Greg Peterson, you may begin.

Thank you. Good morning. We appreciate you joining us for AGCO's third quarter 2008 earnings conference call. Joining me this morning are Martin Richenhagen, our Chairman, President and Chief Executive Officer and Andy Beck, our Senior Vice President and Chief Financial Officer. 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 www.agcocorp.com. The non-GAAP measures used in the slide presentation are reconciled to GAAP measures in the appendix to the slides. 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, 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 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 31st, 2007, and Form 10-Q for the quarter ended June 30th, 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 will now turn the call over to Martin.

Thank you, Greg, and good morning, everybody. We appreciate your attention this sunny October morning. We have experienced volatility over the last few weeks and we will likely see more in the weeks and months ahead. We believe AGCO, your agriculture company, is well positioned financially, strategically and operationally to serve our customers and execute on the positive long-term fundamentals of the agriculture sector.

We have maintained a high level of financial discipline and it's reflected on our balance sheet with our low level of net debt. Given our overall financial health, we are comfortable that we have the right policies in place to protect and grow our business even through this current financial climate.

In general, our dealers and our farm customers are in their healthiest financial condition in recent memory. Their balance sheets are strong and in general their access to credit remains very good.

Today AGCO Finance, our joint venture with Rabobank, provides financing for about 50% of AGCO's retail sales. AGCO Finance is well capitalized. It does not rely on the commercial paper or securitization markets for its funding and it stands ready to increase its participation in financing our retail sales should other credit sources tighten.

I also am pleased to tell you that despite the challenges in the financial markets, AGCO's backlog remains strong and we have not seen a significant change in the flow of orders. 2008 harvests are at or above last year's robust levels and we expect healthy farm income in all the world's major agricultural markets.

Let's turn our attention now to AGCO's third quarter results. I will begin my remarks on slide 3.

You can see from this slide that we have continued our momentum through the third quarter of 2008, which resulted in record quarterly sales and earnings. Strong demand for our high horsepower tractors and combines produced an increase in our sales of approximately 29% compared to the third quarter of 2007 and our adjusted earnings per share rose to $1.04.

We managed through significant material cost increases during the quarter and experienced no deterioration of our operating margins. This is quite impressive given the rich mix of sales in the third quarter of 2007 with an unseasonable high percentage of our sales coming from our premium [price and products.]

Slide 4 now illustrates our production schedules for 2007 and 2008. Tractor and combine production levels were up 11% in the third quarter of 2008 and compared to the third 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 18 to 19% compared to 2007 levels in order to satisfy the forecasted increase in the market's demand. The elevated demand for industrial and farm equipment continued to put stress on AGCO's supply chain. We are working with our suppliers and focusing on key internal processes to meet our production schedules by the end of the year.

Slide 5 details industry retail farm equipment volumes by region for the first nine months of 2008. Industry tractor sales in North America were down 5% compared to 2007 levels. The weakest segment continued to be tractors under 40 horsepowers that are more closely tied to the general economy. We also experienced declines in the 400 to 100 horsepower category.

The professional farming segment continues to benefit from positive cash corp economics and sales are up approximately 33% in the over 100-horsepower tractor segment and the combine market grew approximately 25% in the first nine months of 2008 compared to the same period in 2007. While AGCO's total unit tractor sales were lower in the first nine months of 2008, AGCO's unit sales of tractors over 100-horsepower and combines both showed strong growth during the first nine months of 2008.

For the full year of 2008, we expect weakness in tractors under 100-horsepower and continued growth in higher horse power tractors in the North American industry retail market. Industry tractor volumes were up approximately 9% in Europe in the first nine months of 2008 versus the same period last year and strong harvests in France, Germany, Russia and (inaudible) in eastern Europe are driving increases in European industry volumes. Our forecast for 2008 calls for market conditions in Europe to remain healthy with continuous strong growth in Central and Eastern Europe and Russia and more modest growth in Western Europe.

South America, the South American industry truck tractor volumes increased approximately 36% during the first nine months of 2008. Strong conditions in Brazil and Argentina have -- are driving most of the South American growth.

Combine 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 America and the industry demand compared to 2007 robust levels. Globally the markets are healthy and as I mentioned earlier, our order boards remain strong. I will now turn the call over to Andy Beck, who will provide you with more details.

Thank you, Martin, and good morning. Slide six details AGCO's regional net sales for the third quarter and first nine months of 2008. The bar graph shows our regional sales performance excluding the impact of currency translation.

For the third quarter and first nine months of 2008, currency translation had a positive impact of approximately 7% and 11% respectively. If the current exchange rates hold, currency translation will put pressure on our fourth quarter sales.

During the third quarter the Europe, Africa, Middle East segment had sales growth of approximately 15% excluding the impact of currency translation compared to the third quarter of 2007. The growth in our Europe, Africa, Middle East segment in the third quarter was led by Germany, France, Scandinavia and eastern Europe and Russia.

North America sales increased approximately 26% compared to the third quarter of 2007 excluding currency. Strong sales results in tractors, hay tool sprayers, combines and parts contributed to the improvement. First nine months of 2008 sales in North America increased approximately 23% excluding currency.

Third quarter sales in South America improved approximately 38% from last year, excluding currency translation. Good harvests and farmland expansion are driving double-digit sales growth across nearly all the markets in South America, even after excluding currency translation impacts.

Sales in our Asia Pacific segment increased approximately 34% in the third quarter compared to 2007 excluding the impact of currency. Improved harvests in Australia and New Zealand have sales well ahead of the drought impacted 2007 levels.

On a year-to-date basis sales were up 38% compared to 2007 excluding currency impacts. Globally, our net pricing for the quarter was a little below 5%. Part sales for the third quarter of 2008 were $301.1 million, up 19% compared to the same period in 2007 after removing the impact of currency.

Growth was strong in all four reporting segments. For the first nine months of 2008 part sales were $830.1 million compared to $657 million in 2007.

Slide seven highlights our sales and margin performance. Despite absorbing material cost increases, operating margins of 6.8% for the third quarter of 2008 matched those seen in the third quarter of 2007.

As Martin mentioned earlier, this was a significant accomplishment, given the rich mix of sales we had in the third quarter of 2007. If you recall, first -- in the first half of 2007 sales of our premium price Fendt tractors were unseasonably low due to supplier constraints and the shifting of production of our new high horsepower tractor.

Fendt production and sales were much heavier in the second half of 2007 and, as a result, our sales mix was richer and our margins higher, especially in the third quarter of 2007. Our South America business reported operating margins of 8.8% for the third quarter of 2008.

The absorption benefits from higher volumes were offset by three factors. First, raw material cost inflation, which hit us hardest in this region. Second, the negative currency translation impacts associated with sales of equipment manufactured in Brazil and exported to other countries in South America. And finally, increased product development expenses in the region.

Third quarter operating income in our North America segment was positive for the first time in over two years. Volume growth for market strength and new product introductions, distribution improvements, positive pricing environment and expense savings all contributed to the improvements.

The positive results in North America all came despite currency pressure continuing in the third quarter. Our effective tax rate was approximately 31% in the third quarter of 2008. We expect the rate to be similar in the fourth quarter.

Slide eight highlights the progress we are making with working capital reductions as we focus on improving our return on assets. At the end of the third quarter, AGCO's working capital to sales ratio stood at 6.1%, down from 9.5% one year ago. Our goal this year is to hold the line on working capital despite the strong sales growth we are experiencing.

Much of our working capital focus is now aimed at lowering dealer inventories in North America which remain -- which have now remained at 2007 levels. At the end of September 2008, our dealer month supply on a trailing 12-month basis in North America was as follows: 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 $453.6 million at the end of September 2008 compared to $433.5 million at the end of September 2007.

We have had uninterrupted access to funding through our securitization facilities to date and have liquidity backups in place for this funding source if needed. Wholesale interest bearing receivables transferred to AGCO Finance, our retail financial joint venture in North America, as of September 30, 2008 were approximately $67.1 million.

Losses on sales or receivables primarily under these securitization facilities, which is included in other expense net, was $7.2 million in the third quarter of 2008 compared to $8.7 million for the same period in 2007. For the first nine months of 2008, losses on sales or receivables were $21.6 million compared to $25.5 million in the first nine months of 2007.

Slide nine addresses AGCO's free cash flow, which represents cash flow from operations less capital expenditures. The graph on the left side of the slide shows the free cash flow during the first nine months of 2008 compared to 2007.

Our seasonal demands for working capital are greatest early in the year as we prepare for the selling season and, as you can see, we generated negative free cash flow in the first nine months of 2008 and 2007. The fourth quarter is the seasonally strongest, when dealer and company inventories are sold down at the end of the year.

The graph on the right displays our annual free cash flow for 2007 and our projection for 2008. Our focus in 2008 has been to minimize our investment in working capital while still supporting strong sales growth this year. Even after covering increased spending on strategic initiatives and capital expenditures for new products, we expect to generate strong free cash flow this year.

Slide 10 quantifies the impacts of our 2008 initiatives. 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.

Through the end of September, our sales and margin growth is paying for these investments and generating improvement in earnings in 2008 compared to 2007. Our initiative spending is focused on long-term growth and profitability improvements for our Company.

Slide 11 lists our latest view of selected 2008 financial goals. We are projecting 2008 sales to increase 22 to 24% driven by healthy market conditions, pricing and positive impact of currency.

The new sales forecasts reflect the negative currency translation impact of the recent appreciation of the dollar. Including the recent movement in exchange rates, our revised sales forecast would have been higher than our previous guidance.

We are targeting 2008 EPS to range from $3.90 to $4.00 while making significant investments in our long-term initiatives. We expect increased capital expenditures including additional investments and production capacity to be in the $230 million to $250 million range and our free cash flow to remain strong in the $175 million to $200 million range.

That concludes our comments. Operator, we're now ready to open the call for questions.

(OPERATOR INSTRUCTIONS) One moment while we compile the Q&A roster. Your first question will go to the line of Ann Duignan from JPMorgan.

Hi, good morning, guys.

Good morning, Anne.

How are you doing? Martin, can you talk a little bit about your outlook for end markets in places like Eastern Europe and South America? There's been a lot of noise about the lack of availability of financing and what that can do to not just your end markets but end markets across many industries. Can you talk a little bit about what you guys are seeing out there and how that might be tempering your outlook for Q4 or not?

Well, actually, for 2008 we, let's say, don't see any impact. For 2009 we are just working, like last year we are just putting our budget, our plan together for next year. We do not have details available yet.

Personally, I'm rather optimistic about the markets and this includes also finance solutions. I don't know whether you saw that, but in Brazil they did just launch a new program to support the smaller farmers and you might recall that two years ago we launched the -- a small, cheap, simple tractor but very doable, let's say we call it the people's tractor, because this was somewhat supported by President Lula, who at that time also promised us to support the approach by putting the right financial programs in place and this is now done.

It's called something like -- I don't remember. It's a Brazilian word for food for the poor or something like that So we have actually a support program for the smaller farmers, which is new to Brazil and that will certainly help the market.

I think it's called food for all or more food or something, yes, we are aware of that.

Something like that. You are as always well informed.

Thank you. Can we talk about the outlook for Q4 then from a financial standpoint? I say this to you every quarter, but I can't get my model down to the implied earnings estimate that you have out there.

Can you talk about the moving parts that are in your fourth quarter forecast? Because I would have expected with FX where it's at that you would deliver margins in North America probably stronger than you did in Q3. I would expect a lower tax rate because of that.

We would also expect some positive mix just on tax spending in North America. Can you just -- and pricing should be probably more positive in Q4 than it was in Q3, just given the timing of price increases. Can you talk about what you have in the different line items as much as you can and why you expect earnings to be significantly lower in Q4 than they were in Q3?

Well, Ann, I think you've listed out a number of points there that I think are -- you're pretty much right on. We do expect North America to continue to show positive results. We are seeing the market remain strong and that should drive our profitability there in the fourth quarter.

We do expect margin improvement both at the gross profit and operating margin line in the fourth quarter as well. Some of those impacts are probably starting to see some positive foreign currency impact where typically we have been -- it's been a headwind for us on the margin side as well as impacting, as you say, from finally catching up on the pricing versus our material cost increases that we have seen from the inflation on steel and some other commodities.

So our fourth quarter actually looks very good from a margin standpoint. The only negative impact that we have forecasted in here is that our sales will be impacted by the change in the dollar relative to the euro and the real that we have just seen recently. So the sales forecast that we are giving is down from what we said a quarter ago, but the underlying sales increase, if you take strict currency out from that equation, is really higher than what we had before.

So our fourth quarter really remains intact with the exception of some pressure from the currency and that that should -- would impact our fourth quarter results a little because of translating those European profits and Brazilian profits at the lower rates. We -- as I said before, we do expect to see some improvement in our margins because of the importation of the products from Brazil and Europe into North America as well as selling some of our products in South America in dollars, which gives us a benefit as well, but there is a lag there in terms of when those margins should improve and -- because you have inventory on the ground at the old prices with the old exchange rate, so there's a lag effect that we will see impacting us a little here in the fourth quarter. But, again, based on our forecast, really not too much changed from what we had before.

Okay. And the lagged impact because of inventory on the ground should be a net positive next year then as you work through that inventory?

Yes. We should see positive margins resulting if the currencies stay where they are into next year.

Okay. I'll get back in line in the interest of time. Thank you. I appreciate it.

And your next question will go to the line of Robert Wertheimer from Morgan Stanley.

Good morning, everybody.

Good morning.

I'm going to apologize for this question in advance, but when you say you don't see any change in significant orders, what date is that current through, roughly? Do you have October data?

In terms of orders?

Yes.

Yes, we -- well, we have talked to our people here in the last week or so. We have discussed with our general managers just last week where we stood and we have not seen any significant -- any real change to our order patterns. Our order boards remain strong. They are up 30 to 40% over last year at this point in time.

And this includes October.

Okay. Thank you. That was helpful. And then I guess two other questions on -- I guess some of the upside in Q3 to my model anyway was on SG&A.

I wanted to ask if you had done anything in particular on SG&A in the quarter and the second question will be the other expense line that I think is generally included, securitization costs, et cetera, was lower and I wonder if there was any light you can shed on that. Thanks.

Yes. Nothing unusual on expenses, I would say. We are still getting leverage relative to the sales, because of the strong sales growth we are achieving and holding our expenses down with the exception of you can see that our engineering and R&D expenses were up as planned.

On the other line, you are correct, that includes the securitization costs, which were a little below last year as we indicated in our prepared remarks. The big change is that we did have some foreign currency gains down there in that line that probably -- and we had some losses last year. So those usually fluctuate back and forth, are a little unpredictable, but in this quarter we had some gains that gave us a slight benefit there.

Okay. Thank you.

And your next question will go to the line of Terry Darling from Goldman Sachs.

Thanks, Martin, Andy, wondering if you could talk a little bit about sort of scenario analysis here for us. If we did assume that your industry went into a 1998, '99 kind of downturn, I'm wondering if you could talk a little bit about what your strategy would be and kind of what's different this time with regards to your company and how you might be able to weather such a downturn.

Actually, first of all, I do not believe in this kind of a downturn, but, of course, in those days you have to be prepared. We just discussed last week a very detailed contingency plan and so we would certainly react very quickly.

You might remember that when this, for example, happened in Brazil -- Brazil 2005 and market went down by about 50%, something like that, we were in a position to react very, very quickly and still make money. So that means it's a combination of reducing certain expenses like, for example, research and development, slowing down, certain capacity investments.

We have everything phased in a way that we do not commit ourselves to huge investments in (inaudible) and of course the normal program like headcount, reduction and so on, you know that this is actually a strength of our industry because we did it so often and so many times. I think important is that you react very quickly, but we did -- in Brazil we are in the midst of reducing dealer inventories, so that means that our wholesale is a little lower than maybe expected, but our retails are pretty good. Market share in South America is up from 44 to 49% in September 2008 and basically in those areas where market share is down, it's caused by a reduction of orders we see from the sugar cane industry, where Valtra is very, very strong which is caused by, one, those guys start to become a little careful because they are true professionals and secondly announced a new bench of big tractors which they are expecting which reduced the market a little bit.

And, Martin, in terms of the signals that you would need to receive to formally pull those down cycle levers, it would simply be orders turning down, is that fair?

No. It's also that we have a kind of pre-warning system, so to say, first of all informal in a way that we talk to a lot of farmers and to all our dealers frequently and then second, of course, we also use external expertise and people doing actually factored interview and with, let's say, the headline is customer satisfaction but we also ask in this form about are they building and planning to buy and what are their investment plans for the next year. So that means we have certain -- we have a lot of information.

We also talk to those guys that sell seed and fertilizers. So when you talk to Monsanto, you will -- you certainly can figure out how well they are doing and how much they have sold already, so that means overall there's no trend into a negative direction we could identify so far, with the exception of some overall political risk coming maybe out of Russia and Argentina. And we still are market leader in Iceland with about five tractors sold every year, so that didn't change.

And in terms of the kind of what's different this time about the company part of the question, if we go back to the '98, '99 financials, I think the -- the operating income margin was troughed in a 3 or 4% range. Wondering if you can help us a little bit with anything that's significantly different this time about either the nature of the cost structure, obviously the balance sheet is stronger, but maybe talk us through some of those tough --

That was before I joined the company. I think in the meantime we are in much better shape and I hand over to Mr. Beck.

Okay. Well, we are a much different company than we were then. I'm not sure there's a lot of parallels you can draw between the two. There were a number of acquisitions, including the Valtra acquisition and some other acquisitions that were done in between those periods of time and now, but I would say that we still feel like we have a relatively flexible cost structure.

We do now have an engine business, but it's only for about a third of our products that we are selling and so we are still focusing on staying as flexible as we can. We have done many studies recently on what we should -- we -- in our production facilities of what's core and noncore and we have been outsourcing a significant amount of parts and a few of our facilities, particularly in Fendt and in Hesston, Kansas as a result of some of those studies and in order to be as nimble and flexible as we can to react to market changes.

Okay. That's helpful. And shift the gears totally here. Andy, I'm wondering if you can remind us what the cash flow sort of dynamic is with the -- with regards to the joint venture with Rabobank. Is there a 4Q dividend and that's kind of it or is there cash dispersed on a quarterly basis? Can you remind us on that?

We get a dividend quarterly from them. We look at what our -- the portfolio needs and projections are and what cash can be released out to maintain our ratios that we have with that finance company, but typically the dividend is a little larger in the fourth quarter, but we are getting cash flow every quarter from those joint ventures.

Okay. And just lastly on the new EPS guidance, does it assume the impact of the lower stock price in terms of how the share count is influenced vis-a-vis the convert or has that not been changed.

It does. It does, yes.

Can you maybe give us a 4Q or a full-year share count so we can kind of back into that?

Estimate for the fourth quarter that the share count will be more like 94, 95 million shares.

Thanks very much.

And your next question will go to the line of Andy Casey from Wachovia Securities.

Thanks. Good morning.

Good morning.

A couple quick questions, a lot of them have already been answered. Can you talk about how much of the $50 million strategic initiative investment has been taken year to date?

It's pretty proportional to the year. That's spread out fairly evenly. I would say probably a little ahead of 3/4 but not too much.

Okay. Thanks, Andy. And then on -- the perennial question was Challenger above breakeven in the quarter?

Yes, Challenger was above breakeven for the quarter, had a very good quarter. Sales were up almost 25% year to date. Our sales are up in Challenger by 50% and our income is up substantially, excuse me, on a year-to-date basis. So we are profitable in Challenger and doing quite well there.

Okay. Thanks. And then if I could just dive into Martin's comment about the political risk in Russia. Have you seen any sort of impact on the order activity over there from that?

No. And I'm just saying that we are, of course, very diligent and very careful and, of course, also look into those markets. We have some of our guys going there tomorrow and they actually -- you know that we are pretty close to the market and so I'm not very scared, to be honest, because of costs.

Also, in the last crisis in Russia, there was always money to buy farm equipment and the Russians are very creative in how to organize deals and they pay then with letter of credit or cash or safe guarantees, so I'm not too worried about it. But I think it's our job to also, with regard to kind of early warning system, look into those markets that could be a little bit more volatile than others.

Okay. Thank you very much.

And your next question will go to the line of Jamie Cook from Credit Suisse.

Hi. Good morning.

Good morning.

My first question, you guys commented a little bit on your order book being up, I think you said 30 to 40%, but can you give us a sense of how much visibility you have into 2009 and how that would compare if we were sitting here last year at the same time?

We can but it's confidential. No, Andy will tell you.

Oh, okay. Telling me something new here. Our order board, if you look at tractors, is -- ranges visibility of four to six months, and combines more like six to nine months right now. And that is substantially higher than where we would have been last year; so from a visibility standpoint much better than a year ago.

It's even so that it's on record level.

Okay. And then, we have heard in the press that one of your peers was having cancellations of orders in Argentina. Have you guys seen any material cancellations across the board? And then Martin, too, if you could comment on, there are also concerns with the U.S. farmer given the credit crunch that he or she decides this year to sort of hoard cash and pull back on spending for 2009, can you sort of give us your thoughts there?

First, we did not suffer from any cancellation including Argentina. Second, when it comes to the situation in the U.S., farm income for American farmers this year was on record levels very high. Next year I expect a similar development. Of course, crop prices went slightly down but are still on a very high level historically and I'm expecting input costs going down.

So that means I'm not too concerned about farm income 2009. When it comes to the financing, first of all, as Andy mentioned already, we offer our AGCO finance solution, which is used by a lot of farmers in the U.S. Second, the CAT guys, the CAT dealers have, in addition to that, CAT finance which is also available for farm equipment and then we have a lot of very strong banks the farmers community works with that were not, due to the kind of their business, were not suffering so much from the overall problem. So that means I do not expect a major impact. And we just discussed that so that is brand-new information.

Great. Thank you very much. I'll get back in queue.

And your next question will go to the line of Mark Koznarek from Cleveland Research.

Hi. Good morning.

Good morning.

A question on raw materials. It seems like you have really managed to offset the raw material pressure of -- presumably via price or other kinds of productivity initiatives. I'm wondering if you can sort of characterize the impact of raw materials compared to your comment about price adding 5% to revenues. Was raw material a similar amount and then where do we expect that raw material inflation to move into -- move to in 4Q and then when does it begin to roll off in '09 with the commodity prices having fallen so hard?

Right, Mark. As you point out and what we have said before, in the third quarter, we did see pretty substantial increase in raw material costs and our pricing was somewhere between 4.5, 5% and that was not completely sufficient to cover those cost increases. We were probably off about almost 50 basis points on our margins as a result.

But as we get into the fourth quarter, our pricing does accelerate over 5% and the costs are also projected to go up as a percent as well, but we think we will be covered here in the fourth quarter and we will not have any margin impact there. As you point out, we are now seeing those raw material prices, particularly steel prices, come down. We don't expect that to be a significant benefit to us in the fourth quarter, but probably into -- starting into next year we can start to see some benefit from those lowered prices.

Andy, with the way your purchase contracts are constructed, would it -- would we have to wait until the second half to begin to see benefit or would it be earlier in the calendar year?

It's the first quarter.

Begin in 1Q. Then capital spending has been raised. What is that being focused on, the additional $10 million to $20 million?

A lot of it is productivity improvements, new factory layout, but also some capacity investments.

Across the board or in any particular region?

It's pretty much across the board, but with a major project in Fendt because they could have sold more if we would have had more capacity and that is not related so much to the market, because you know that Fendt has a very advanced technology which, by, let's say -- by getting farmers more and more professional is actually more demand, more requested so that means we see trends going up in markets like France, Spain and also some of the Eastern European markets.

Okay. And then just a clarification on that comment earlier about the order book up 30 to 40%. Is that a worldwide comment or specific to North America?

That's worldwide.

Okay. Thank you.

And your next question will go to the line of Barry Bannister from Stifel Nicolaus.

Just a few clarifications. In your last question somebody asked if you would exceed costs by a price, and you said, I believe, that you were bought into first quarter, so it would be after first quarter, not at first quarter. Is that correct?

No, we didn't say that. We said that we thought we would start to see benefit from the lower raw material prices starting in the fourth quarter -- starting in the first quarter of next year. We don't have any -- first of all, we don't buy a lot of raw steel. It's a very small percentage of our cost of sales. We buy more steel-related, steel -- components with steel content in them and so we are not subject to much of our cost of sales really related to locking in with contracts.

So most of this will roll in and roll out, but you have to go back and renegotiate with suppliers and then have that reflected in the rolling out from your inventory levels. So that's why we believe most of this benefit will be more next year than this year.

Okay. And you said Challenger was up 25% year to date and up 50% in third quarter?

No, the opposite. Quarter was up about 25% and year-to-date up 50%.

Okay. Sorry for that bad connection here. The -- what is the inventory effect year-to-date of foreign exchange and in the third quarter?

Okay. Inventory exchange for -- through September compared to September a year ago, inventories were actually lowered by about $30 million because of exchange, because the rates started changing right at the end of the quarter.

Any idea what we can look for in the fourth quarter?

My estimate is, in inventories, probably about $100 million.

Okay. And then lastly, could you give us a little pricing by geography in terms of where you might be getting the most traction of pricing versus costs? And then is there a potential here that with the combination of pricing and currency, that North America might snap back, at least by '09, to a mid-single-digit operating margin as it has enjoyed in past good cycles?

In terms of the pricing, it's pretty much across the board. I would say that in South America we are getting more of it. Obviously, there's the higher inflation there and so there's more costs to cover.

In relation to North America, certainly we are making a significant improvement without the benefit or really despite the currency impacts that we have experienced over the first nine months and you can see what we have done. As the currency now has changed, yes, we should get some of that margin back. So I think there is an opportunity to start getting into the low single digits, mid single digits operating margins. Whether that's in '09 or not, I don't have that ability to tell you that until we get our budgets together.

Can you give us the year-to-date effect, though, of foreign exchange on the North American operating margin and what the swing would be if that -- if the dollar/euro had stayed at 128 instead of the actually rate on a year-to-date basis?

Yes, I don't -- Barry, I'm not sure I have all that calculated in front of me. We will have to -- maybe I can share that with you, but certainly we have had some margin impact in North America this year as well as in the previous year, so there has been -- but I don't have the number in front of me to tell you how much that is. We will have to get that for you.

In previous calls you said it was in excess of 2% of margin. So it's a significant number, and I think the weakness we have seen since the end of the third quarter would be good.

Yes. Over the last few years, it's been more than that impacting our North America business.

Very good. Okay. Thank you.

And your next question will go to the line of Henry Kirn from UBS.

Is it possible to quantify the impact of the changing currency on the implied fourth quarter EPS guidance? If my math is right you're at $0.94 at the midpoint. Where could that have been if currency rates had stayed consistent with where they were in the third quarter?

I think, our estimate is that there will be a -- it's a negative impact to our quarter by $0.05 to $0.10.

Okay. And have you seen any changes in the competitive landscape with the currency fluctuations? Does it benefit you globally overall?

No. We didn't see a change.

We have not seen any change, no.

Okay. And one final one. If you look at your strategic initiatives going forward, is there any view on how they may trend as we go into '09?

I think we are pretty good in implementation. Everything is on schedule and so we will go on. We will implement one strategic initiative after the other. One would expect those initiatives that are related to new product or in new markets showing maybe a little bit more impact during 2009.

Okay. Thanks a lot.

You're welcome.

And your next question will go to the line of Joel Tiss from Buckingham Research.

Hi guys, how is it going?

Good.

Two things. Can you explain why you're reducing the inventory levels and then your free cash flow is expected to be lower in '08 than '07?

Well, I think inventory levels will be up year-over-year because of the significant increase in sales that we are forecasting. There's a requirement to have a little more inventory on the ground to achieve that, but we are managing it down as best we can and limiting that increase, so I think that's the important thing.

The reason that our cash flow forecast is a little lower than last year is that last year was a year where we made significant improvement on reducing working capital, particularly in the North America business. We focused on that as one of our key initiatives to turn inventories and our accounts receivable, dealer inventories faster in North America. We have gotten those down -- significantly down more to industry average levels and we achieved a lot of that last year.

So we -- I would say it's kind of an unusual impact as it relates to working capital last year that we enjoyed that we don't expect to see this year. It's more of a normal year and with the significant sales growth we are using working capital and as a result, we still believe we will have a very strong cash flow result, but not to the level of 2007.

Okay. And just a quick follow-up. It seems like everyone is kind of dancing around the same thing. Can you just talk a little bit about -- I'm not really looking for forecast, I'm just more looking what you're hearing from the farmers.

It seems like seed prices and fertilizer prices are still going to be up really strongly in 2009 and it seems like that has to come out of somewhere with crop prices flattening a little bit. Can you just give us a little sense of what the farmers are thinking and saying just to give us a frame for '09, not so much for AGCO but for the industry?

When you look into the past, you can see that very often the farm economy, so our market segment, was not so much related to trends in the overall economy and industries, so that means we saw it in both directions, sometimes a -- the industry or the economy was booming and the farm business did not and the other way around.

So that's one observation. The second observation is that many farmers, of course, let's say they are very informed about what's going on, but they do not think that this would have a major impact on their specific -- specific business.

Okay. Thank you very much.

Ladies and gentlemen, we have reached the end of the allotted time for question and answer. I will now turn the call back over to Mr. Peterson for any concluding remarks.

Thank you. We appreciate everyone's time this morning and your interest in AGCO. Should you have further questions, I encourage you to give me a call and with that, have a great day.

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