AGCO Corp (AGCO) 2008 Q4 法說會逐字稿

Good morning. My name is Brittany and I will be your conference operator. At this time, I would like to welcome everyone to the AGCO Corporation's fourth quarter 2008 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, February 9th, 2009. Thank you. I would now like to introduce Greg Peterson. Mr. Peterson, you may begin your conference.

Thank you, Brittany. Good morning, and thank you for joining us for AGCO's fourth quarter 2008 earnings conference call. 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. During this conference 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, market share improvements, availability of financing, general economic conditions, currency translations, farm income, working capital, cash flow, margins, effective tax rate, interest expense, market conditions, retail sales financing, pricing levels, 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 September 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.

Now, I would like to turn the call over to Martin.

Thank you, Greg, and good morning, everybody.

Since we last spoke in December, we have seen continued slowdown in the global economy and the tightened credit markets are beginning to impact our industry, most notably in the developing markets of Russia and eastern Europe and South America. We continue to believe AGCO is well positioned financially, strategically and operationally to serve our customers and execute on the positive long-term fundamentals of the agricultural sector. We've maintained a high level of financial discipline and it's reflected on our balance sheet with our low level of net debt.

Our strict focus on agricultural equipment has kept us less exposed to the ailing general economy. Given our overall financial health, we are comfortable that we have the right policies in place to manage our business through this current financial climate. In general, our dealers and our farm customers are in the healthiest financial condition in recent memory. Their balance sheets are strong and in most of the developed markets, they continue to have access to credit.

Today, AGCO Finance, our joint venture with [Rabobank], provides financing for about 50% of AGCO's retail sales in our major markets. AGCO Finance is well capitalized. It does not rely on the commercial paper or securitization -- I have to exercise a little more next time -- markets for its funding and it stands ready to increase its participation in financing our retail sales, should other credit sources tighten. Let's turn our attention now to the AGCO's 2008 results.

I'll begin my remarks on Slide three. You can see from this slide that AGCO had a strong finish in 2008, with both record sales and record earnings for the full year. Our sales increased over 23% compared to 2007. Our margins expanded nearly 100 basis points and earnings per share exceeded $4 for the first time in AGCO's history.

Slide four illustrates our production schedules for 2007 and 2008. Tractor and combine production levels were up 15% in the fourth quarter of 2008 compared to the fourth quarter of 2007. For the full year of 2008, our production of tractors and combines was up approximately 18% from 2007 levels. We did continue to see some supplier constraints in the fourth quarter, primarily for tires and wheels. As a result, our year end inventories finished higher than planned and contributed to the decline in our free cash flow. We are reducing our 2009 production schedules to drive down our inventory levels, as well as in response to the softer demand forecasted for 2009.

Slide five details industry retail farm equipment volumes by region for the full year of 2008. Industry tractor sales in North America were down 7% compared to 2007 levels. The weakest segment continued to be tractors under 40-horsepower that are more closely tied to residential construction and general economic conditions. The industry also experienced declines in the 40 to 100-horsepower category. The professional farming segment continues to benefit from positive low crop economics. Industry retail sales were up approximately 24% in the over 100-horsepower tractor segment and the combine market grew approximately 22% in the full year of 2008, compared to the same period in 2007.

While AGCO's total unit tractor sales were lower in the full year of 2008, AGCO's unit sales of tractors over 100-horsepower and combines both showed strong growth during the full year of 2008 compared to 2007. In the fourth quarter, we saw a steeper decline in North American industry tractor sales which were down approximately 13%. For 2009, we expect continued weakness in tractors under 100-horsepower and moderating demand for high horsepower tractors.

Industry tractor volumes were up approximately 7% in Europe in the full year of 2008 compared to 2007. Good harvest and healthy farm income throughout much of Europe drove the industry volume increase with the strongest growth in central and eastern Europe and Russia. For the fourth quarter of 2008, industry tractor volumes were up only 0.9% from 2007 levels. Our forecast for 2009 calls for market conditions in Europe to remain healthy, but softer from 2008 levels. The largest decreases are expected in eastern Europe and Russia, where the credit markets have felt the most impact from the global crises.

South American industry tractor volumes increased approximately 30% during the full year of 2008 compared to 2007. Strong conditions in Brazil drove most of the South American growth. Combine sales were up nearly 88% in Brazil and 50% for all of South America for the full year of 2008. In the fourth quarter, South American industry tractor sales growth slowed to 15% and industry combine sales declined by approximately 6% from 2007 levels. After record 2008, we expect 2009 South American industry volumes to be down significantly due to dry weather conditions and the impact of the tightened credit environment on planted acreage and crop production.

I will now turn the call over to Andrew, who will provide you with more detail now.

Thank you, Martin, and good morning. Slide six details AGCO's regional net sales for the fourth quarter and full year of 2008. The bar graphs show our regional sales performance excluding the impact of currency translation.

For the fourth quarter, currency translation had a negative impact of approximately 13% and for the full year, currency and translation had a positive impact of approximately 4%. If the currency exchange rates hold, currency translation will continue to put pressure on our 2009 sales. During the fourth quarter, the Europe, Africa, Middle East segment had sales growth of approximately 9%, excluding the impact of currency translation compared to the fourth quarter of 2007. The growth in our Europe, Africa, Middle East segment in the fourth quarter was led by France, Austria and central and eastern Europe.

North America sales increased approximately 17% compared to the fourth quarter of 2007 excluding currency translation impacts. Strong sales results in combines, hay tools and sprayers contributed to the improvement. Full year 2008 sales in North America increased approximately 21% excluding the impact of currency. Fourth quarter sales in South America improved approximately 18% from 2007, excluding currency. Strong market demand in Brazil drove most of the increase.

Sales in our Asia-Pacific segment decreased approximately 4% in the fourth quarter of 2008 compared to 2007, excluding currency. Despite strong market demand in Australia and New Zealand, shipments from our European factories were delayed and our wholesale revenues were impacted. Part sales for the fourth quarter of 2008 were $218.4 million, up 7% compared to the same period in 2007, after removing the impact of currency. Growth was strongest in our South America market. For the full year of 2008, part sales were $1 billion compared to $883.6 million in 2007, up 14% compared to 2007, excluding the impact of currency translation.

Slide seven highlights our sales and margin performance. In the fourth quarter of 2008,AGCO's pricing actions offset material cost increases. Operating margins were 6.5% in the fourth quarter of 2008, an increase of 60 basis points from those seen in the fourth quarter of 2007. Operating margins were the highest in AGCO's Europe, Africa, Middle East region, where they reached 10% for the second consecutive year due to record volumes and strong mix of products. Operating income in our North America segment was positive for the fourth quarter of 2008, as well as for the full year.

Volume growth from the market strength and new product introductions, distribution improvements, the positive pricing environment, and expense savings initiatives all contributed to the improvement. Operating margins in our South America business increased over 80 basis points in the fourth quarter of 2008 compared to the same period in 2007. The absorption benefits from higher volumes were partially offset by raw material cost inflation, which hit us hardest in this region. Our effective tax rate was approximately 31% for the full year of 2008. We were targeting in the low to mid 30% range again for the 2009 effective tax rate.

Slide eight reflects the progress we've made in reducing our investments in inventories and receivables. While we did make improvements during 2008, our performance in the fourth quarter was above our targets. Our 2008 year end inventory levels were higher than we had planned. We were impacted by a number of issues, including supplier constraints, limited credit in eastern Europe and Russia, and also by softening demand. Our supplier constraints were principally tire shortages, which delayed production in Europe, and resulted in heavier work-in process inventory. The production delays also caused us to miss sales in Australia and New Zealand, which were highlighted earlier on our regional sales slide.

In 2009, we are very focused on working down our inventory levels by adjusting our production schedules, particularly in the first half of the year. Longer term, we have a number of programs in place that should help us drive further working capital reductions. A global systems improvement initiative for our parts business was completed in 2008 and is expected to produce inventory savings. Our plant rearrangements and factory process improvement initiatives are also expected to generate savings as we move more of our production to presales and build to order. And finally, our distribution strategies are expected to improve inventory turnover and working capital utilization, as we progress with rationalization of dealers in North America.

At the end of 2008, our North America dealer month supply on a trailing 12-month basis was improved for combines, level for tractors, and up for hay equipment compared to 2007 year end levels. Specific levels were as follows. Approximately five months for tractors, three months for combines, and seven months for hay equipment. Other working capital details are as follows. Outstanding funding under accounts receivable securitization programs was approximately $483.2 million at December 31st, 2008 and $446.3 million at December 31, 2007. We have had an 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 finance joint venture in North America as of December 31, 2008 were $59 million compared to approximately $73.3 million as of December 31, 2007. Losses on sales of receivables, primarily under our securitization facilities, which is included in other expense net, were $5.7 million in the fourth quarter of 2008 compared to $10.6 million for the same period in 2007. For the full year of 2008, losses on sales for receivables were $27.3 million compared to $36.1 million for the full year of 2007.

Slide nine addresses AGCO's free cash flow, which represents cash flow from operations less capital expenditures. The graph on this slide shows the free cash flow during the full year of 2008 compared to 2007. Throughout 2008, we explained how the free cash flow would be down from 2007 levels due to increased capital expenditures for additional investments in our plants and new products, as well as increased working capital to support our 20% plus growth in sales. However, the year end levels of working capital caused the decline to be more significant than planned. Supplier delays, limited credit in eastern European markets and softening demand caused our inventory levels to exceed our forecast. Our new reduced production schedules are aimed at working -- lowering our working capital during 2009.

Moving to slide ten, it shifts our focus to the assumptions underlying our 2009 outlook. I want to stress that with the global recession, tightened credit markets and volatile commodity prices, there is considerable uncertainty around the market conditions we will face this year. You can see from this slide that our outlook for 2009 anticipates some level of softening in all the global markets. Some other specific assumptions also include, the strengthening dollar and its impact on the translation of our sales outside the US are expected to pressure our sales by between $800 million and $900 million in 2009. Our 2009 forecast assumes pricing increases of approximately 4% on a consolidated basis.

In 2009, AGCO will continue to invest for future growth, including increases in both capital expenditures and research and development. We also look for our productivity and purchasing initiatives to drive improved gross margins this year. And finally, the implementation of FSPAPB 14-1 in the first quarter of 2009 is expected to result in approximately $15 million of additional noncash interest expense related to our convertible notes.

Moving on to the next slide, despite the level of uncertainty in the markets, we want to continue to provide you with visibility into our business. Slide 11 lists our views of selective 2009 financial goals. We are projecting 2009 sales to range from $7.5 billion to $7.8 billion. Forecasted pricing benefits and market share improvements are expected to be offset by the negative impact of currency translation. While our 2009 results are very important to us, we are also focused on AGCO's long-term profitability and we will invest in increased engineering and capital expenditures this year.

With that long-term focus and the uncertainty that surrounds market demand in mind, our forecast for 2009 diluted earnings per share ranges from $3 to $3.25 per share. We expect increased capital expenditures to be in the range of $275 million to $325 million and free cash flow in the $150 million to $200 million range after funding the expected increase in capital expenditures. For the first quarter of 2009, we expect sales declines of 7% to 9% from the first quarter of 2008 due to the negative impact of currency translation, softer market demand,-- and softer market demand. We expect lower volumes and production, increased engineering expense, higher interest expense, and a weak product mix will keep our first quarter earnings per share in a range of $0.15 to $0.20.

That concludes our prepared remarks. Operator, we would now like you to open the call up for questions and answers.

(OPERATOR INSTRUCTIONS) Your first question comes from Ann Duignan with JPMorgan.

Hi, good morning, guys.

Good morning, Ann.

My question is based on Slide nine, where you say that your free cash flow was impacted by customer credit. Could you just explain what that is and what we should look for going forward in that category?

What happened was we had produced tractors that were destined for certain markets, particularly eastern Europe and central Europe that we did not ship because of lack of credit availability in those markets. So we were effectively holding inventories into the year that we had previously had demand for, but chose not to ship or couldn't ship because of credit issues. Some of that should probably be able to get sold in 2009. Other parts of that inventory we'll look at diverting to other markets as well.

And were these products coming out of Germany in particular, or were they coming out of North America?

It would be mainly European factories.

Mainly European factories, okay. And then in that context, just as a follow-up, you had noted in December that you had expected pricing to be up 4% to 5%. Now you're saying 4%. Can you talk about that a little bit? Is that just the mix change and you're not shipping as much large product to somewhere like eastern Europe, or is pricing coming under pressure out there in the marketplace with the moderating demand?

Pricing does not come under pressure. It's just mix.

Okay, okay. That's helpful. I'll get back in line. Thanks.

And you forgot to say that we had a wonderful year, 2008.

Well, considering you had said $3 in earnings for 2008, $4 looks pretty darn good, I'll agree.

Thank you.

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

I would like to say this is certainly no longer Bob Ratliff's little farm machinery business, is it?

Charlie, thank you very much.

I wanted to ask about, if you could tell us any detail on your capital expenditures plans for '09? You're saying $275 million to $325 million, up from $251 million. This would be almost 4% of your estimate of sales for '09. Can you give us some details of what's going on here? You finally going to build a big wheel tractor plant in North America, or what's up? I know you can only say so much.

No, but you know that we did put three light assembly factories into North America.

Yes, sir.

And those might one day develop of course in a full flash, not all of them, but one could maybe develop into a factory for North America. So that means we are heading into that direction, but we of course want to do that in a very careful way and not add just overhead costs to the organization. A big part of the capital expenditure plan for 2009 is related to the Fendt plant and we see continuous growth for this kind of technologies. Outside Germany and we therefore want to be prepared to take advantage of that situation, so that shows that technology sells. And with that, I'll hand it over to Andy because he wants to make some more remarks.

I think Martin's right. On the real key to the increase from 2008 is the project that we have going on in Fendt. We have a major capital expenditure project where we are expanding some of the operations, particularly in transmission building, as well as looking at some advancements in the assembly area as well, which will give us more capacity. But is well -- really relays out the entire flow of the operation and gives us significant productivity benefits going forward. So that is probably -- that is most of the, almost all of the increase from 2008 would be associated with that project.

And for tractors it might be interesting for all of you to know that last week we did do a major product introduction of -- for high horsepower tractors under the Massey Ferguson Challenge drive AGCO brand here in Atlanta. We had rented the Georgia Dome and we had more than 2000 people attending the meeting. Was it the Georgia Dome? Yes.

And we had about 2000 people, more than 2000 people attending the meeting and we are very proud to be in a position to tell you that the leading tractor technology in high horsepower now is with us and everybody confirmed that. So that means we are very optimistic that we also here in North America start to become much more competitive and we do that by our technology because we -- as you know, we never were very much in favor of buying market share by price.

Well, that segues into my follow-up question, which had to do with maybe you giving us a little bit more information on North American results. You finally had a profit for the year. Could you give us some idea of how Challenger, the Challenger silo is doing vis-a-vis, I'll call them the traditional silos and what kind of progress you're making there, please?

Yes, we always said that Challenger dealers are a little slow in acceleration, but once they are getting in motion, it's almost difficult to stop them and this is confirmed by the numbers. So when you look in our top ten dealers, you would find a lot of Caterpillars there, Caterpillar dealers there. Andy you could maybe share the numbers with us.

Sure. Our Challenger sales in '08 were $465 million. That's about a 35% increase from 2007. So strong growth in that line. That excludes the sprayer business, which is now -- was over $400 million in sales and that business is now being sold almost exclusively, or exclusively through Challenger, Caterpillar dealers in most cases as well. So, we're getting a lot of throughput now through the Caterpillar network and with very good results.

So it's almost 900 million then when you throw the sprayers in to the Challenger?

That's correct.

Okay, thank you very much.

Your next question comes from [Andrew Obin] with Banc of America-Merrill Lynch.

Yes, hi, how are you? Good morning.

Good morning.

Just if you could comment a little bit more about your comment on slowdown in the second half in North America and if you could just give us more details as to what you're seeing, what's the feedback from the dealers and why are you putting in this cautious language right now?

Well, I think we look at our orders that we have right now in North America; they're up from where we were a year ago, particularly strong on the high horsepower side of the market. But still are concerned about situations on the lower end horsepower end of the market that's really more tied to general economic conditions. And that's what's primarily driving down the market in our view. We're just a little cautious in terms of what happens in the second half of the year. I think it's more, a little more on terms of uncertainty at this point how conservative farmers will be in the second half. But economically, they should be in pretty good shape.

Let's say, I would like to add one general statement here. I think overall, the fundamentals for, as we say also in our report, the fundamentals for our industry didn't change at all. 2009 is just a little difficult to understand, a little more difficult to forecast. And we want to be, as always, a little bit more on the conservative, on the safe side. And therefore we also reduced the, one or the other market number. But overall, I'm very optimistic and overall I'm also -- I would also like to point out that 2009 for our industry certainly is much better than for most of the other industries. So that means investment in ag business compared to all other industries still is I think a much safer and much more interesting place.

But as you look at your order book for high horsepower equipment and compare it to where you were last year, are you seeing any specific red flags to be significant -- to be more cautious on particularly large power horsepower equipment in the second half of the year? And I would include combines there, too.

Not at this point.

It's even higher, so that means we actually see very positive numbers there. But as we say, it's a little bit more difficult to understand what will happen during the year and therefore we are basically a little bit more cautious. But as Andy says, more based on the small tractor business then on the big professional business, which also confirms that our vision is right. So we geared the Company to be leading in the professional farming business and this seems to be the right niche to be in.

Just a housekeeping question, in terms of profitability for Asia-Pacific region, its order seems to fluctuate quarter by quarter. Should it go back, as I think about '09, should -- what's a good range to think about and what specifically happened in the quarter? Was it just shipments not getting out?

We just didn't get some product there that some of the higher horsepower equipment because of some of our supplier delays. And so we just had kind of a weak mix and some currency issues affecting us in the fourth quarter. But as we look into 2009, we're looking for comparable margins to 2008 in our forecast.

Thank you very much.

Your next question comes from the line of Henry Kirn with UBS.

Good morning, guys.

Good morning, Henry.

Wondering if you could discuss a little, the age of the fleet versus historical by region and how you view replacement demand going forward?

I would say no big change compared to the previous years. I don't have the numbers with me, with the exception of Russia, where -- and the countries of the former Russian -- how do you call it, confederation or federation? Actually no big change, but in Russia, the problem gets bigger and bigger in a way that the population is shrinking and the average age is going up all the time. So -- which means, or underlines in a way that they need equipment urgently and that might also have some impact on the politicians to put some maybe finance, [heater] finance subsidies in place.

And could you talk a little bit about the trends in the AGCO Finance loan portfolio, delinquencies, how the credit standards are shaping up?

Sure. In AGCO Finance, the retail finance portfolio in general is very strong. Our risk rates and all that have been very good in 2008. The only market where we have any issues is in Brazil. And we've been talking about this for sometime, that the Brazilian portfolio has been impacted by the government mandated deferrals of payment schedules in that market over the last few years.

And so we have a situation where our portfolio -- or collateral that's securing the portfolio has a little more hours on it than we would have wanted. And so we have made appropriate provisions to offset that collateral depreciation as we go through the years. So our only concern would be in Brazil. That's the one we have our eye on. We hope, we believe that we're well positioned there, but the rest of the markets, the credit standards have not changed and are very strong.

Okay, thanks a lot.

Your next question comes from Mark Koznarek with Cleveland Research.

Hi, good morning.

Good morning.

I'm just wondering for the industry outlook if you could give us a sense whether your unit growth or declines as it were, the expectations by region have changed Latin America down 15 to 20, Western Europe down five to ten, and North America down zero to five?

I would say that the one that's changed is South America, where we did say 15 to 20 in December when we talked and now we're talking about more on the 20 to 30% reduction. There's a significant drought in Argentina that's going to affect that market this year, dry weather conditions in other parts of South America as well, as well as the impact of tightening credit and credit availability. It's not really on the tractor credit availability because we have AGCO Finance, but it's more credit within the entire sector. And so we see production -- grain production to be down in 2009 and that will impact as well as the drought and other situations we think will impact the market fairly significantly in 2009.

Okay, and then the high horsepower tractor category in North America, I think in December we were talking that that category was going to be up despite the overall market, down zero to five. Is that still your expectation?

Yes, we think so.

Okay, and then finally, what's the outlook for eastern Europe/Russia compared to how did that sector do in '08?

Well, we think that those markets are going down, not because of the overall demand, but because of the Russian bank problems. So that means securitization of credits and availability of credits become more difficult so therefore we are a little bit more conservative about those markets. I personally think that Russia needs to fix that problem, but since we do not see solutions yet, we are more on the safe side.

So what kind of decline are you expecting then, Martin, this year?

Probably in the 30% range.

Okay, and just to clarify, is that in the Western Europe outlook, or that's considered rest of world? It's in the EAME.

That's -- it would be in within the Europe, Africa, Middle East segment and I believe our outlook was just talking about Western Europe, so it would not be included in that.

Okay, got it. Thank you.

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

Good morning.

Good morning.

Quick question, Martin, on the issue you just talked about with Russia. Has there been any movement whatsoever on the part of the government to deal with the mechanism that's kind of broken right now?

No, but I talk about it, I'm aware on several sessions of the parliament talking about it. So it's -- they at least have the right sense of urgency and I'm sure that something will happen, but there's no concrete outcome yet.

Okay, thank you. And then I guess a detailed question, Andy, on tax rate for '09, what range are you looking for, giving the puts and takes in FX and the relative strength of North America?

We said -- it should be pretty similar. We said in our comments low 30% range, low to mid, but it should be fairly consistent. There's, like you say, lots of ups and downs, but we don't expect a major change.

Okay, thanks. And then the underproduction versus retail to control the inventory or get it down, how much of that is impacting the Q1 15 to 20 and if you ex out the 15 accounting change issue -- ?

That's going to affect our -- I think when you look at the lower production, that's going to impact our margins by about $10 million to $12 million in the first quarter.

Okay. $10 million to $12 million, okay. Lastly, just a question on the backlog, as you see kind of weakness in international areas, as an example, you talked about the eastern European, Russian drag on some of the European production rates. Is that starting to impact the availability in a positive way? In other words, availability of machines for markets that remain reasonably strong, such as North America?

Let's hope so, yes. That's what we tried to do.

Okay. Thank you very much.

Your next question comes from Joel Tiss with Buckingham Research.

Good morning. Congratulations on a great quarter, guys.

Thanks, Joel.

Thank you very much.

I wonder, does the exchange rate changes have any impact on sort of the intensity to move production out of Europe and Brazil into the US? Or is that sort of a long-term project that there's no impact?

That's more like a long-term project. So that means when you think about it, you would like to become independent from exchange rates in the main markets, South America, US, and Europe. And so therefore that doesn't change our strategy.

Second, [CNH] is saying they think supply/demand of corn, soybeans and wheat is going to come into balance in 2009 and you seem to be saying that probably not, we're still in a strong market for the foreseeable future. Can you just talk a little bit about some of the factors you're seeing? Is it some of the drought or the financing problems that are going to keep production down, or just give us a sense of what you're seeing now?

Just look into the wheat production, wheat inventories, and then you can see that there still will be a problem and I look at it more long-term and what I see is that fundamentals didn't change. So I think that the demand for crops will be rather high. The markets will be demand-driven also in the future. And when you look at the crop prices, the commodity prices, those are what you could call crisis prices, and compare them with other commodities and then you will see that they didn't go down as much as prices for copper for example or things.

So this seems to somewhat underline the assumption that the demand for food and also the driving factor of changing diets and renewable fuels will be very important and the fundamentals didn't change at all. So I think therefore overall we can be rather optimistic that farm income will be pretty strong also in the future.

Okay, thank you.

Your next question comes from the line of Jerry Revich with Goldman Sachs.

Good morning.

Hi, Jerry.

Good morning, Jerry.

Can you please step us through the drivers of the difference between your outlook for retail sales versus Company sales, particularly in light of the production cuts you mentioned? Sounds like you expect retail demand to be down 10% or more. But your sales guidance implies sales to dealers are only down 5% or so. Can you step us through the moving pieces there, please?

Yes. The difference obviously is that we've got pricing coming in that's positive to the sales forecast, as well as some improvement overall in mix and in -- as well as some market share improvement that we're forecasting as well.

And the market share improvement, Andy, is that based on what you have realized over the course of '08, so has your market share ramped up over the year so you just anticipate that you continue at that 4Q run rate? Is that the driver?

Well, no, I think, I think it's also the expected impact we have with some new products that we are introducing this year. Martin talked about some very important new products that we introduced here in North America on high horsepower tractors. We've got new products in Valtra coming out later this year as well as some new things coming out from Fendt. So we expect to outperform the market because of these new introductions.

And so, Andy, based on those comments, sounds like you expect the greatest market share gains to be mostly in North America, is that a reasonable way to think about it?

I would say we're looking for some improvement in North America and in Europe.

Okay, and, Andy, how much of a working capital cut does your free cash flow guidance assume for the year? And can you step us through what kind of cost savings you expect, or working capital savings you expect from the initiatives you outlined earlier in the call?

Yes, we are in a situation where we're -- our guidance reflects some working capital reduction. I think what we're targeting is that we will reduce our receivables and inventory by over -- by $200 million plus. But some of that will get offset by probably lower accounts payable and accruals because of the volumes coming down as well and production volumes coming down. So the net impact is somewhere of a $50 million to $100 million improvement in working capital in 2009.

Okay, got it. And Andy, how are you thinking about the new loans in your finance JV next year? Will you be looking to step in, into the funding gap in eastern Europe? And will you be doing less loans in South America, given the situation that you mentioned earlier in the call, I guess -- what's -- how are you thinking about the allocation of that business next year?

We have not changed our credit standards. So we will continue to have business as usual in all our credit, our credit companies around the world. So if we have -- there won't be any changes because we don't have funding availability or anything like that. Rabobank is firmly behind those credit companies. So if we have a worthy customer, we will do the business next year.

In terms of your specific questions, in Russia and eastern Europe, we do not have our own credit companies. So we are still relying on external financing sources, local banks and other programs like that. So that -- we're -- in the middle of the situation with the banks and the tightening there and that's one of the reasons why the markets will be down in 2009.

As you look in Brazil, again, we do have a credit operation there. Our credit standards will be the same and -- but I would obviously expect the number of applicants to go down just because we think the market's down, but it shouldn't be any change in our availability of credit.

And, Andy, presumably you could get some pretty attractive pricing in your finance joint venture if you were to step into the vacuum in Russia and eastern Europe. Can you step us through how you're thinking about that potential decision to enter that market?

Well, we have not -- we don't have any thoughts of participating in the financing of the equipment in those markets at this point.

Thank you.

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

Hi, good morning.

Good morning, Jamie.

Most of my questions have been answered. Just two quick follow-ups. One, I think you mentioned in the prepared remarks that South America was a region where you were sort of hit by material costs more in the quarter. I was wondering if you could just quantify that and what your expectation is for 2009?

And then my last, in terms of material costs for the entire Company relative to pricing. And then my last question, I know you've talked about production being down, it being down more in the first half versus the second half. But I don't think you quantified on a percent basis. So if I missed that, or if you could just quantify it if you haven't yet?

Well, our production will be down based on our current outlook, about 8% to 10% for 2009. And your first question was?

Just South America. I mink you mentioned in prepared remarks the material cost hit and then what's your assumption for the full Company for the year?

I'm not sure we have that in front of me. But we still didn't recover fully. Our pricing was up -- was probably up about 6%, 5% or 6% in South America and we didn't fully recover that cost, even in the fourth quarter. So as we look into 2009, we're hoping to get that straightened out where our pricing is, exceeding costs.

I don't expect the costs to continue to go up at the same rate, but we are not seeing the prices of steel and other materials go down as rapidly as we are in some of the other markets at this point just because of exchange rates and local market conditions. But we're starting to -- hopefully we'll see some change throughout the year, but certainly not as much as we're seeing in other markets.

What do you assume for material costs for the full Company for the year?

Well, we have a pretty high carry-over cost coming through and then we're expecting that the costs for the -- and there won't be much additional cost increases and they could even come down. So we're hoping to recover a little more than what we've got in the pricing. So we've got 4% pricing and the costs should be slightly below that.

Thanks. I'll get back in queue.

Your next question is a follow-up question from Charlie Rentschler with Wall Street Access.

Yes. As I look at South America the last couple of years, '07 and '08, you had 9.3 and 9.0 operating margins. Are we ever going to get back to [Palsian] the days of '05-'06 when I guess they were up in the mid teen area? Or is -- there's things that have changed this and, we're maybe in the [Gary Collar] area of 10%, 11% as optimum due to more competitors, maybe more integration, bigger staff, et cetera, et cetera, down there? Is -- as we try to model, look at things two or three years out, can you give us some --

I would like to make two general statements before Andy talks about the precise numbers. One is that we have established and agreed upon, very ambitious strategic targets for all areas with the Board of Directors. Second, when you look at South America and Brazil, it's important to know that even we don't communicate exciting good news, the market is more or less down to 2007 levels and 2007 was a very good year for South America. So we are not talking about a disaster, about a catastrophe here. Andy?

Yes, Charlie, I think what's changed is that two factors, probably the competition element that you introduced and also the impact of currency. There's a number of markets that we do business selling some of the products in dollars and the margins on those products outside of Brazil have declined over the last few years. So the question is, are we going to get back to those midteen levels. Certainly we would like to see that, but I would probably think that we're probably in the lower -- a little lower than that because of the competition and where the currencies are right now.

Your next question comes from Ann Duignan with JPMorgan.

Hi, there. I just have a quick follow-up on your outlook in South America. Could you give us some color in terms of what your expectations are for combines versus tractors, given that in the tractor sector you have the complexity of sugar cane, et cetera, et cetera, versus combines are directly for crops? Just interested in your outlook for both segments.

Combines, we think, will be more, down more than tractors. To your point, it's more related to row crop production, which grain production's going to be down next year. And as well because there are more costly machines than a little more affected by credit, the conditions as well.

Okay. Can you give us directionally what you mean by more than? What are you looking for for combines? Last time they were down 75% over two years. What kind of decline are you looking for?

No, maybe more like 45 to 50, something like that.

Okay. Okay, great. Thank you.

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

We want to thank you for your time this morning. And if you do have follow-up questions, I encourage you to get back with me later today. Have a great day and we look forward to talking with you again. Thank you.

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