AGCO Corp (AGCO) 2009 Q1 法說會逐字稿

Good morning, my name is Terry and I will be your conference operator. At this time, I would like to welcome everyone to the AGCO Corporation 2009 first quarter earnings 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, April 28, 2009.

Thank you, I would now like to introduce Mr. Greg Peterson. Mr. Peterson, you may begin your conference.

Thank you, Terry. Good morning. We appreciate you joining us for AGCO's first quarter 2009 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 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, growth, production levels, workforce adjustments, plant rearrangements, factory process improvements, market conditions, industry demand, weather conditions, availability of financing, general economic conditions, currency translation impacts, commodity prices, farm income, working capital improvement, cash flow, effective tax rate, interest expense, new product investments, pricing levels, engineering, research and development, 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, 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.

I'll begin my remarks on slide three, where you can see that in the first quarter of 2009, AGCO felt the effects of the softer market demand, the tightened credit environment and the impact of a stronger dollar compared to the first quarter of 2008. Farm economics remain healthy, but farmer sentiment has been hurt by the global recession and the ongoing financial crisis. Farmers have become more conservative with their equipment purchase decisions.

In the face of this difficult environment, we continue to focus on adjusting our production and operating expenses to reflect changing demand levels, maintaining a strong balance sheet and reducing working capital. Despite the turmoil in the commodity markets, we remain confident that long term agricultural fundamentals are excellent.

Strong harvests are still required to meet the growing demand for food and biofuel requirements. We expect global grain inventories to continue to be below historical averages, and commodity prices and farm income to remain above historical levels.

Our optimism for the long term demand for our products is driving continued investment in our long term growth initiatives. While we do plan to manage our production and working capital very closely this year, we are planning for substantial investments in engineering expenses and capital expenditures. Our first quarter sales, operating margins, and earnings were all down from the first quarter of 2008 as shown on slide three.

Now I will take a minute to touch on two of the bright spots in the quarter. In the seasonally weakest first quarter, our North America segment remained profitable. Much of improvement in North America is the result of the turnaround in our sprayer business. Last year we moved the distribution of our sprayers to the Caterpillar dealers and we have been investing more in new products. Both efforts have helped return our sprayer business to profitability. Our Fendt plant, which is our technology leader in Europe, continued its strong growth. Most of Fendt's growth was in the largest tractor models, the Vario 800 and 900 series.

Slide four illustrates our production volumes for 2008 and our current forecast for 2009. First quarter 2009 tractor and combine production levels were down 5% compared to the first quarter of 2008. You can see from this chart that we are making aggressive cuts in the remainder of the year in an effort to reduce our inventory levels. The deepest cut is expected in the second quarter, when our production is scheduled to be down approximately 30% compared to the second quarter of 2008. These cuts will have a significant impact on our second quarter sales and earnings. For the full year of 2009, our production of tractor and combines is expected to be down about 15% to 20% from 2008 levels.

Geographically, our biggest production declines are planned for our South American factories. The industry demand has been impacted most severely. In the first quarter, we made significant workforce reductions in South America, and reduced the number of temporary employees in our European factories. We have already made further workforce adjustments in the second quarter to match changes in demand.

Slide five details industry retail farm equipment volumes by region for the first quarter of 2009. Industry tractor sales in North America were down 20% compared to 2008 levels. The weakest segment was the under 100-horsepower tractors, which are more closely tied to residential construction and general economic conditions. Low crop tractors were still strong from a historical perspective but were down slightly from last year's robust levels.

The combine market grew approximately 33% in the first quarter of 2009, compared to the same period in 2008. We believe the increase is the result of timing for deliveries for competitors' pre-sale programs, which were pulled forward to earlier in the year to offset weaker demand in export markets. AGCO's total unit tractor sales -- of tractors and combines in the first quarter of 2009 were both down from the same period last year. For 2009, we expect continued weakness for tractors under 100-horsepower, and lower demand for tractors over 100-horsepower.

Industry tractor volumes were down approximately 8% in Europe in the first quarter of 2009, compared to 2008. Tightened credit, especially in the markets of Eastern Europe and Russia contributed to the reduced demand in those areas. Retail tractor sales in Western Europe were mixed, with growth in the larger markets of France and Germany being offset by weaker conditions in Northern Europe and Spain. We expect reduced farm income in 2009 to result in weaker industry demand in Western Europe and more significant market declines in Eastern Europe and Russia, resulting from credit limitations.

South American industry volumes decreased approximately 19% during the first quarter of 2009 compared to 2008. Dry weather conditions, limited credit availability, and political turmoil in Argentina all contributed to a decline of approximately 60% in Argentine tractor volumes. Total industry tractor sales in Brazil increased 3% in the first quarter of 2009. In Brazil, a new government financing program is providing financing for small agricultural tractors. The inexpensive loans, with interest rate as low as 2% allow farmers to borrow for up to 10 years. This program covers up to 24,000 tractors through 2011.

In the first quarter of 2009, we estimate the sales of tractors under 80-horsepower were up approximately 80%, while sales of tractors over 80-horsepower declined approximately 55%, compared to the first quarter of 2008. We expect 2009 South American industry volumes to be down significantly from 2008 record levels due to the dry weather conditions and the impact of the tightened credit environment on planted acreage and crop production.

Andy will now provide you with more details of our first quarter results.

Thank you, Martin.

Slide six details AGCO's regional net sales performance for the first quarter of 2009. The bar graphs show our regional sales performance excluding the impact of currency translation. For the first quarter of 2009, currency translation had a negative impact of approximately 14.5%. If the current exchange rates hold, we are estimating the currency translation will reduce our 2009 sales by approximately $900 million to $1 billion.

During the first quarter of 2009, the Europe, Africa, Middle East segment had sales growth of approximately 9% excluding the impact of currency compared to the first quarter of 2008. Sales in the first quarter benefited from a strong order backlog which declined steadily throughout the quarter. The growth in our EAMS segment in the first quarter was led by France, Germany, the United Kingdom as well as Africa. North American sales increased approximately 13% in the first quarter of 2009, compared to the same period in 2008, excluding currency translation impacts. Strong sales results in implements and hay tools contributed to the improvement. The order board for North America declined during the first quarter as well. First quarter 2009 sales in South America declined approximately 27% from 2008, excluding currency translation impacts.

Softer market demand in Argentina and the shift in mix to lower horsepower tractors in Brazil that Martin mentioned drove most of this decrease. Sales in our Asia Pacific segment decreased approximately 2% in the first quarter of 2009, compared to 2008, excluding the impact of currency. Parts sales for the first quarter of 2009 were $193.8 million, flat compared to the same period in 2008 after removing the impact of currency translation.

Slide 7 highlights our sales and margin performance. AGCO's gross margins were down approximately 40 basis points in the first quarter of 2009, compared to the first quarter of 2008. Lower production volumes and a weaker mix of sales in South America created a drag on our margins. Operating margins were 3.7% in the first quarter of 2009, compared to 5.3% in the first quarter of 2008. The decline in operating margins resulted from lower gross margins, higher engineering expenses, and higher SG&A expenses as a percentage of sales.

Operating income in our North America segment showed the largest improvement and was positive for the third consecutive quarter. Improved margins on our sprayer products and expense control initiatives contributed to the improvement. Operating margins in AGCO's Europe, Africa, Middle East region declined about 130 basis points. Lower production volumes and increased engineering expenses focused on our high horsepower tractors and new harvesting products contributed to the lower margins.

Declining market demand produced lower sales volumes and significantly lower operating margins in our South American business. The special financing program for small tractors in Brazil that Martin mentioned is causing a shift in the mix of products towards smaller, lower margin tractors. This change in product mix also contributed to the decline in the operating margins.

Turning to slide eight which addresses working capital. 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 softening demand. In the first quarter of 2009, seasonal increases raised our inventory above year-end levels, and it remained above targeted levels. We are very focused on working down our inventory levels by adjusting our production schedules, significant production cuts are planned for the second quarter of 2009, and our sales and earnings in the second quarter will be significantly impacted. We expect to see inventory declining during the second quarter and our June 30, 2009 inventories are expected to be below current levels. We also expect to end 2009 with inventory well below 2008 year-end levels.

At the end of March 2009, our North America dealer month supply on a trailing 12 month basis was as follows -- 5.5 months for tractors, 3.5 months for combines, and eight months for hay equipment. Other working capital details are as follows -- Outstanding funding under accounts receivable securitization programs was approximately $477.5 million at March 31, 2009, compared to $497.8 million at March 31, 2008. We have 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 March 31, 2009, were $66.9 million compared to approximately $76.5 million as of March 31, 2008. Losses on sales of receivables primarily under our securitization facilities which is included in other expense net were $5 million for the first quarter of 2009 compared to $6.2 million for the same period in 2008.

Slide nine addresses AGCO's free cash flow, which represents cash flow from operation less capital expenditures. Our seasonal demands for working capital are greater in the first half of the year, and thereby generate negative free cash flow in both the first quarter of 2009 and 2008. As we discussed on the previous slide, we're continuing to focus on reducing our working capital and expect our progress to generate cash flow in 2009.

As Martin explained, we plan to invest more in 2009 for future growth. We expect to increase research and development and make additional investments in our plants and new products. Even after covering this increased spending on these strategic investments we are targeting strong free cash flow this year.

One last item about our liquidity, 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 markets for its funding and is currently increasing its participation in financing our retail sales as other credit sources tighten.

Slide ten focuses on the assumptions underlying our current 2009 outlook. I want to stress that with the global recession, tightened credit markets, and volatile commodity prices, there continues to be considerable uncertainty around the market conditions we will face this year. You can see from this slide that our outlook for 2009 anticipates declines in all the global markets. Some other specific assumptions include the strengthening dollar and its impact on translation of our sales outside of the US are expected to pressure our sales by approximately 11%.

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.

And finally, on January 1, 2009, AGCO adopted FSP APB 14-1. The implementation of this new accounting rule resulted in approximately $3.7 million of additional non-cash interest expense related to our convertible notes in the first quarter of 2009. Prior year interest expense was also restated to include $3.5 million of additional interest expense.

We will post restated quarterly financial statements for 2008 on our website when we file our 10-Q for the first quarter. In the meantime, feel free to contact Greg for additional details. For the full year, this accounting rule is expected to result in approximately $15 million of additional non-cash interest expense.

Our effective tax rate was approximately 36% for the first quarter of 2009. We're targeting low to mid 30% range again for the full year 2009, for our effective tax rate.

Turning 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 view of selected 2009 financial goals.

We are projecting 2009 sales to range from $6.7 billion to $7 billion. While our 2009 results are important to us, we are also very 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 the market demand in mind, our forecast for 2009 diluted earnings per share ranges from $2 to $2.50 per share. We expect to increase capital expenditures to be in the $275 million to $300 million range and free cash flow in the $150 million to $200 million range after funding the expected increases in capital.

For the second quarter of 2009, we expect sales declines of 30% to 35% compared to the second quarter of 2008 due to reduced production, the negative impacts of currency translation and softer market demand. Lower volumes and production, increased engineering expenses and the negative impacts of currency translation will keep second quarter 2009 earnings per share below half of the level of the second quarter of 2008.

That concludes our prepared remarks, Operator. We're now ready to open the call for questions.

(Operator Instructions). Your first question comes from the line of Ann Duignan with JPMorgan.

Hi, good morning guys.

Good morning, Ann.

How are you?

Very good.

My first question is around your outlook for free cash flow. You haven't changed that from last quarter and if we look at free cash in Q1, I'm assuming that it was significantly below your expectations. Can you talk a little bit about how you expect to generate the same level of free cash flow, given all the changes in your outlook on the P & L?

Sure, Ann. Certainly we wanted to show that we can still generate the cash flow that we had in our previous forecast. That will be a significant amount of work during the year to bring our working capital levels down. As you can see, what happened in the first quarter, we had a use of cash. Most of that was the reduction in our accounts payable, and also because of seasonal requirements, as usual, our inventories and accounts receivable went up as well, so we're in a situation now where we're cutting production over the course of the rest of the year, with significant cuts in the second quarter in order to start to reduce that inventory level from where it is today.

We hope that our payable levels stay fairly consistent now and our objective will be reducing inventories and accounts receivable throughout the rest of the year and with that, we hope that our net working capital reduction will be about close to $100 million by the end of the year. That's our target and that should put us in line to generate the cash flow that we have targeted as well.

And along those very lines, can you talk a little bit about what you would anticipate decremental margins to be around the different regions as you've cut production rather rapidly particularly in South America and probably in Europe also?

Well, we are projecting that our margins in Europe and South America will be down throughout the rest of the year and for the full year. In North America, we're projecting that our margins improve, and that's because of some of the cost reduction initiatives that we started last year. That market is, although we're saying it's down, we hope to perform well there, and we are getting some benefit of currency in North America as well. But in Europe, that's mainly the reduction in our production volumes will reduce their margins, probably over 100 to 150 basis points and then in South America, we're looking for more substantial reductions in our operating margins, more like 300 to 350 basis points.

And just a real quick clarification. I know you gave us your outlook for the revenue impact from currency. What's your anticipated earnings impact from currency?

Currency impacts our first quarter by about $0.10 and we're looking for it to impact our full year results by somewhere probably between $0.35 to $0.45. We obviously are getting the impact of the translation, which is a negative impact, but there is a partial offset of higher margins that we'll see from the importing of goods back into the US and some of the dollar sales that we have in South America as well, but that's not to the same extent as our translation impact.

Okay and just the $0.10 was a negative?

Yes, all negative, yes.

Okay, I just wanted to make sure. I'll get back in line and talk to you off line.

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

Hi, good morning guys.

Good morning.

Could you give a little more detail on what you're doing for cost reductions and maybe some sense of the tailwinds that you expect on an ongoing basis as you get the reductions [done]?

Well, we have a major portfolio of cost reduction initiatives we work on. We started to do that already in 2005, and overall, it's like one-third is completed, another third is in the pipeline, and a third is actually not yet started, so that means we have a pretty healthy portfolio on productivity improvements. It is going into core process redesign in some of our factories. We changed the build to order approach in other factories, so that means we have plenty of different actions and activities we work on.

Great. That's helpful. And is it possible to talk a little bit about the credit profile of your customers globally? Maybe a sense of where delinquencies are in the AGCO Finance business and what we should be looking for there?

Yes. In the AGCO Finance business, which would be the credit environment for our end customer, we're seeing still very low delinquencies in our established markets of North America, Western Europe. Those delinquency levels are fine. I think in most cases, farmers are still very profitable in these markets and so we're not seeing any major changes or issues there.

We have an ongoing issue in Brazil that we've talked about many times, where the portfolio in Brazil, there's been numerous government sponsored delays or deferrals of the payments due, and so we have a little more cloudy picture in Brazil in terms of where our credit situation is.

Delinquencies are significantly higher in Brazil, but some of that is due to the fact that there's a number of these payment delays being considered, and farmers continue to wait to see what's going to happen with those before they make their payments. So again, we're monitoring that situation closely in Brazil, and continue to hope that there's going to be a strong resolution to that, so we can get our portfolio back in shape there.

When you look at our dealers, it depends on the market. We have a situation in Eastern Europe and in Russia where our dealers or distributors are probably -- are carrying too much inventory. The market has declined significantly, and so we're obviously working with those distributors in those markets.

And in our markets in Western Europe and North America, I would not say that there's any real significant change in the credit. Certainly, dealers in some of our markets, some markets in Europe are carrying a little more inventory than they like. We've seen our order boards come down and in some cases, we're holding back further shipments until we see that inventory clear, but in most cases, I think we're in pretty good shape with our distributor network.

Okay, thanks a lot.

Your next question comes from the line of Robert Wertheimer with Morgan Stanley.

Hello, everybody.

Good morning.

I had two questions, I guess, sort of on the [AMI]. The first would be have you already seen the slowdown in Eastern Europe and Russia in the first quarter, and is there an appetite to buy if there were more credit available or is it really a lack of confidence or economic issue?

The slowdown in Russia and some of the countries of the former Russian Federation, already started last quarter 2008, so that means we saw it already last year and the market basically over the -- in December and January was almost down to zero. There's a big demand for agricultural equipment, so that means in theory, everybody would like to buy. The problem is retail finance, so that means my impression is that as soon as local governments decide on programs, the market could turn around very quickly. There have been talks between the industry leaders and Russia last month, so I think that something could happen but actually we are more on the conservative and safe side. We don't want to deal with the assumptions that could be proven to be too optimistic.

If things did get better on the financing front, would that be a next year issue or is there -- mechanically, can things can move fast enough to help this year?

It depends pretty much on the product, so that means if it would affect combine harvesters, most probably it would be a little late. As far as tractors are concerned, that could also help this year.

Okay, and there's been some news on tariffs and such on imported tractors, into -- or, I'm sorry, combines into Russia. Can you explain mechanically what products these things apply to, and whether it applies to inventory already sitting there that's not been sold, and maybe just give us a recap of the mechanics of that?

Right now, the tariff is on combines and it would be on anything that's now imported. It wouldn't have been on anything that's already been imported or sitting on the ground in the market and so right now, it's just on the combines.

And I'll stop but is there any move to put it on other products?

In theory, if they would be successful, one could think about other products. I don't think so. Most probably I see pretty good chance that they discontinue the taxes on combines because they had it already some years ago. It failed because combines did find their way through other enabling countries into Russia. And so therefore, I think this kind of protectionism actually never works and it will not work in Russia, I'm sure. So therefore, I'm not very confident that this will go on forever like this.

All right, thank you.

Your next question comes from the line of Steve Volkmann with Jefferies & Company.

Hi, good morning. I wanted to follow-up a little bit on North America, and the margins there were a little bit better than I was expecting, and I guess you're saying they should even get a little bit better from here. How much of that, Andy, is due to the import issues with currency and so forth and how much is kind of core North American production do you think?

In terms of the improvement in North America for currency, probably about $4 million or $5 million of that improvement would have been relating to currency. The rest was operational improvement.

Okay, great. That's helpful, and then I guess I would have expected the tax rate to be a little lower given profitability in North America. Is there anything -- historically I sort of think of those profits kind of dropping pretty much straight to the bottom line. Is there anything that's changed with respect to that?

No, that's still the right concept. I think only the offset was that we did have lower income in South America, which carries a lower than our kind of average tax rate as well, so that pulled it back up from what you would have seen on the North America side.

Okay. And then maybe for Martin, can you talk a little bit about, it seems like the high horsepower equipment in the US and Europe, the commentary was actually pretty good with respect to what you're seeing in sales, and yet you seem somewhat cautious going forward. Have you actually seen cancellations in your order book or something that has developed there, or are you kind of being conservative with respect to just economic conditions?

Well actually, I think our focus on the professional farms and the product needed by professional farmers is the right strategy, so that means those products not only have higher margins but also the entry barriers are higher and the farmers act more like investors. So that means those markets in general have a much better stability than other markets.

So we launched a full range of new products for the markets here in North America and just start to sell. We had more internal problems to get the product delivered on time and only very few cancellations globally, so that means this market is pretty stable, and those cancellations are not higher than for example, last year.

So it sounds like the weakness that you're forecasting going forward, and I don't want to put words in your mouth, but it sounds like that's more in the non-US, non-European and the lower horsepower equipment?

Yeah, it's in what we call lifestyle and the lifestyle segments of the smaller low tech tractors, and it's basically then in the countries we talked about, Eastern Europe and South America.

Super, and maybe just, Andy, last one real quick, an update on Challenger, how we're looking for revenue and profitability there?

Challenger is improving but we just need to check on the numbers. Andy, do you have something?

Yeah, Challenger sales were down about 10% on a global basis in the first quarter, but the income level was just slightly down from last year, so really, pretty consistent with the overall results of the Company.

And Challenger is our main partner in Russia, so that actually does hit them more than other brands.

Great. Thanks so much.

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

I wonder if you could share with us what happened with price in the quarter?

Sure. Pricing in the quarter was up about 4.5% and as we said on the remarks we had, we expect it to be about 4% for the full year.

Okay, and that's just comps or do you see things getting weaker in certain product categories, or is that just mix or what accounts for the degradation in the full year?

It's mainly comps, yeah.

And we don't intend to buy market share by pricing, so we do what we said and so we will be pretty stable I think.

Okay, and then also on engineering expense, what should we be expecting there for the year? I think you're at about 3% of sales versus 2.3% last year. Is that a good run rate going forward and when would you expect that to tail back down?

It's at about $200 million.

Yeah, that's about the right run rate.

Does that continue into 2010 or is it just getting through the tier 4 hump here?

No, I think it's pretty much a run rate, so that means we try to use those times in order to be prepared for the future and I would assume that we stay pretty much on that level for the years to come.

Okay, great. And then actually, Martin, just share your thoughts on timing of a recovery here. Is it solely tied to the macro or do you think that we're going to see some shift in the political landscape that can accelerate things? How do you factor into the equation pretty strong purchases by farmers over the last couple of years and some potential that it takes a little bit longer to turn equipment demand relative to farmer income as we move into 2010, 2011?

Well, as you can imagine, it's very difficult to read the future. It's much more difficult than ever before, but my impression is or what I'm always saying is that the fundamentals didn't change. So -- and you can talk to people like Monsanto, other guys who are now in the industry that are pretty much saying the same. The world population is growing as fast as we saw before. Renewable fuels still matter, changing diets still matter, so there's actually nothing that really changed and therefore, I think our industry will be much better off than other industries and therefore, I also hope that we will recover faster than other industries.

Okay, thanks very much.

You're welcome.

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

Good morning. A question on EMEA in the quarter. The sales were up 8.7% ex currency while the regional market comments indicate in broad terms weaker European and Middle East with higher African demand. Is it right to think about half of the 8.7% is price and the rest is a combination of positive mix and inventory build that you talked about in the distribution channel?

I don't have the split but certainly, in terms of the pricing, you're right. And then what we had was a fairly strong order board at the end of the year, and filling those orders through shipments into our distribution and through the retail channel occurred in the first quarter. Now as we get into the second quarter, we've cut production and we'll expect to see our sales come down fairly significantly in the second quarter in that region, as we adjust inventory levels. And as you mention as well, we'll see our distributors reduce their inventory levels somewhat in the second quarter as well.

Okay, thanks, Andy and then lastly, can you comment on what happened in the input costs on a year-over-year basis during the quarter?

Yeah, we were, we saw some improvement there but our pricing offset the carryover impact of the higher cost from last year. So in terms of looking at where our pricing was and relative to our input costs, we didn't lose any ground. I'd say we were fairly neutral. And what we project going forward is that we're seeing obviously reductions in input costs, we're seeing reductions in steel prices, and that should start to show better benefit in the second half of the year.

Thank you very much.

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

Hi, good morning everybody.

Good morning, Charlie.

In view of your rising capital expenditures, could you give us a little bit of detail, Martin, maybe rattle off the top two or three biggest projects that you're undertaking currently?

In engineering?

With capital expenditures.

Well, it's pretty much the same. A lot goes into Tier 4 and then the second big portion goes into capacity and renovation and new factories in Fendt, Germany.

And Andy, can you take a stab at where you think net debt will be at the end of the year?

Sure. I think at the end of the year, you know, we're looking at cash levels of hopefully over $700 million and the debt levels should be the same as where they are right now, so in the $600 million range, so net debt at $0 or below.

So we are much better than most of your companies.

Well that's for sure. And thank God you haven't been buying your stock back, huh?

Yeah, you told us not to do that, right?

Thank you.

You're welcome.

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

Yes, good morning. Just a question, could you just provide a little bit more color as to what is happening with not necessarily your customers' access to credit but your dealers' access to credit in the current environment and how AGCO is helping dealers to alleviate whatever problems they have?

Well, actually, I think that most of our dealers also had some pretty good years and deleveraged their businesses as well. Overall, I think we do not have too many dealers talking about problems or having restrictions. Andy, I don't know how you see it.

No, I think that's pretty much right. From a -- really, the key for our distribution is financing the inventory they want to carry, and certainly we're encouraging our dealers to reduce their inventory levels, turn their inventory faster. We have more -- we're taking more retail orders and building to retail order, and that allows us to reduce our inventory levels as well as our dealers, and so we're trying to take actions like that to help work with our dealer network.

In terms of the credit, obviously we provide certain amounts of the credit to our distribution in terms of floor plan lines and terms, conditions, and we're maintaining those and certainly working with our network. As I mentioned earlier, we are holding some of those shipments until their fleets get moved back down as well in certain circumstances, but I don't believe any of our dealers are in financial problems or anything like that as Martin mentioned.

Do you think dealers are encouraged to carry lower levels of inventory because the cost of short-term financing has gone up (multiple speakers)?

We work with them in this direction anyhow because we do not think that it makes dealers very strong to have plenty of inventory, so therefore, most probably, our dealers already last year were leaner than others.

And insofar as you mentioned that you are working with dealers to reduce their inventory, when do you think production and inventory in the channel sort of balance each other?

I think we'll be working through this throughout the course of the year. Again, we're taking the biggest adjustment here in the second quarter but we would expect to be below for the third and fourth quarter as well. Now, that's more typical, particularly always in the fourth quarter, we're producing below retail as our working capital comes back down out of the -- off of the selling seasons, and so that's kind of a normal occurrence.

Thank you very much.

Your next question comes from Barry Bannister with Stifel Nicolaus.

Hi, guys. The history of the Company is that you generate most of your free cash flow in the fourth quarter, in fact 84% to 94% of full year free cash flow the past three years has occurred in the fourth quarter. And the first quarter has always been a loss but it was a bigger one than I expected in terms of operating cash flow, and bled off most of your cash. So is it safe to assume that if volumes disappoint in the back half, you're still targeting a mid single digit working capital ratio and that you'll cut production further just to keep that cash flow goal?

Yes. That's a fair assumption. Obviously the later in the year that you're not hitting your targets, the more difficult it is, and that's the challenge we have but that we are focused on trying to get our inventories and working capital to remain in line with our sales levels.

And South America, particularly Brazil, would you discuss on the Rabobank JV, what portion of the retail receivables are currently under this rate deferred payment structure, and in dollar terms, as well as percent of the portfolio?

I'm not sure I have all that detail in front of me. We have our portfolio in Brazil is about $1 billion or so, and again, I don't have the percentages. A fairly large significant portion of that has been under some sort of deferral or another during the last few years. We're certainly getting payments through those but there are some of those that have been deferred and we've taken action in terms of increasing our loan loss reserves to reflect any reduction in the collateral base that we have on those loans.

In the first hour and a half of trading on the 24th, Friday, the stock rose about 10%, and has since given back a lot of those gains, but there was a rumor of a merger or a takeover by Deere of AGCO. Two years ago it was C&H, three or four years ago it was Cat. These are very distracting for analysts. Would Martin be willing to squelch those rumors?

First off, Wall Street shouldn't generate those rumors. They were not generated by us. I heard about it not earlier than you, and we don't comment on those rumors at all, so I'm not aware on a rumor about C&H. I think the C&H rumor was the other direction. I'm aware on a rumor about Cat years ago.

Yeah, I appreciate it. And then lastly, the tax rate in 2009, did you say what it would likely be on your budget?

It's somewhere in the low to mid 30% range.

That's book and cash tax?

Cash tax would probably be a little lower than that.

Okay, thanks a lot, guys.

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

Hi, just two quick follow-ups. One, can you guys give your backlog by region or in total? And then my follow-up question on the pricing front, I was surprised you kept pricing the same, given -- or lowered it modestly, given the dramatic decline you're seeing in the markets. Are you guys seeing any more aggressive pricing on the larger commercial deals?

No, in terms of pricing, it's been pretty much as expected. We haven't seen any significant changes or big discounting going on in the markets. I'd say pricing is the toughest in South America right now, but everything seems to be holding so far and we're hopeful it remains that way.

In terms of our orders, our orders overall are about -- order book at the end of March is about half of what it was a year ago, and about a quarter down from the end of the year, so we've been seeing our order book come down. It's off of extremely high levels. You remember when we talked last year how strong our order boards were and so they're getting down to levels that we've seen before but have been declining in the first quarter.

Also, I think you understand that a lot of the sales decline is caused by exchange rates, so the pressure in core markets like Europe and North America is not really big because those markets hold up pretty well.

All right, thanks. I'll get back in queue.

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 Greg Peterson for any concluding remarks.

Once again, I just want to thank everyone for joining us today. We appreciate your interest in AGCO and I encourage you if you have additional questions to follow-up with me. Thanks and have a great day.

This does conclude the AGCO Corporation 2009 first quarter earnings call. You may now disconnect.