AGCO Corp (AGCO) 2009 Q2 法說會逐字稿

Good morning. My name is Brandy and I'll be your conference operator today. At this time, I would like to welcome everyone to the AGCO Corporation 2009 second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (Operator instructions). As a reminder, ladies and gentlemen, this conference is being recorded. Today, July 28, 2009. I would now like to introduce Mr. Greg Peterson, Director of Investor Relations. Mr. Peterson, you can begin your conference, sir.

Thank you, Brandy. Good morning and welcome to AGCO's second 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 release, 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 the call, we will make forward-looking statements including some related to future sales, earnings, production levels, market share improvements, general economic conditions, currency translation impacts, farm income, working capital and its components, cash flow, margins, effective tax rate, interest expense, retails sales financing, pricing levels, capital expenditures, plant shutdowns 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, 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, Mr. Peterson and good morning, everybody. Since the beginning of the year 2009, AGCO has taken decisive action to adjust our business to the slowing demand we are seeing across all of our end markets. We reduced our production, lowered our workforce level by over 17% and cut operating expenses. We started a discipline program to lower our inventory levels in order to deliver on our targeted levels of 2009 free cash flow.

During the second quarter, when we typically see a seasonal build in inventories, we were able to bring down inventory by more than $235 million on a constant currency basis compared to March 2009 levels. We have more work to do and plan to underproduce projected retail demand in the second half of the year.

Slide three shows AGCO's results for the second quarter and first six months of 2009. Our second quarter sales were down by about 25% due to primarily softening demand in all our major markets. The challenging global economic conditions and the volatility in commodity prices contributed to a great deal of conservative and farm equipment purchased decision. Lower production volumes and a weaker miss of quota compared to the second quarter of 2008 resulted in a drop in adjusted operating margins to 4.5%. We saw mixed results across our operating segments during the second quarter. The profitability of our North American unit continued to improve. Despite the pressure from lower production levels, operating margins surpassed 5.5% as new products, lower warranty experienced improved factory productivity and the positive impact of currency translation all contributed to margin expansion.

In our South American region, we saw a significant decline in the results in the second quarter, weak market demand, lower production, mix of product heavily rated toward lower margin, lower horsepower tractors and the negative impact of currency all contributed to significantly lower sales and operating income.

Slide four now illustrates our production volumes for 2008 and the first half of 2009 as well as our current forecast for the remainder of 2009. Second quarter 2009 tractor and combine production levels were down 35% compared to the second quarter of 2008. At the end of July, full combination of layoffs, fall-off and dismissal of temporary workers, we have reduced the workforce by over 3000 since the beginning of the year. In the first half of 2009, we have temporary plant shutdowns at nearly all of our facilities across Europe, North America and South America. We reduced assembly shifts at our plants in Brazil and Finland and reduced revocation building and paint shifts at our plants in Jackson, Minnesota and Kansas. The softening global demand is evidenced in our order boards which have declined significantly. At the end of June, the backlog was just under half the level we saw at June 30th, 2008. In response of the softening demand, our full year 2009 production of tractors and combines is expected to be down about 20 to 25% from 2008 levels.

In the third and fourth quarter, we will have additional temporary plant shutdowns on top of the normal maintenance shutdowns. These production cuts will have a significant impact on our second-half sales and earnings with the heaviest impact in the third quarter.

Slide five details industry retail farm equipment volumes by region for the first six months of 2009. Industry tractor sales in North America were down 22% compared to 2008 levels. The most significant declines occurred in the sub 100-horsepower tractor segment, which are closely tied to the weak areas of residential construction, livestock production. Tractors were also down from last year's robust levels. The combine market grew approximately 30% during the first six months of 2009 compared to the same period in 2008. We believe much of the increase is the result of timing for competitors presale programs, which were pulled forward to earlier in the year to offset weaker demand in export markets and full-year demand will end up below 2008 levels.

AGCO's total unit sales of tractors and combines in the first six months of 2009 were both down from the same period last year. For 2009, we expect the largest declines for tractors under 100-horsepower and lower demand for tractors over 100 horsepower compared to 2008 industry retail sales levels. Industry retail tractor volumes were down by about 13% in Europe in the first six months in 2009 compared to 2008. The credit constrained markets of eastern Europe and Russia have seen the sharpest declines. Investor dairy farmers and meat producers have been hit hard by low and industry sales in those sectors are down significantly. Demand (Inaudible) all over the larger markets expect for France with the weakest condition in Scandinavia and Spain.

For the remainder of the year we expect lower income across all the farming sectors will result in weaker industry demand in Europe and more significant market declines are expected in eastern and central Europe and Russia due to severe credit limitations. South American risk industry retail tractor volumes decreased approximately 25% during the first six months of 2009 compared to 2008. Drought conditions and limited credit availability in Argentina contributed to a decline of about 58%, in Argentine retail tractor volumes. Total industry leader tractor sales in Brazil decreased 6% in the first six months of 2009.

The new government financing program for small agriculture tractors stimulated an increase in sales in this sector. Industry retail sales of higher horsepower tractors were down significantly for the first six months of 2009 compared to the same period in 2008. We expect 2009 South American industry retail volumes to be down significantly from 2008 levels due to the dry weather conditions and the impact of tightened credit on planted acreage and car production. Andy will now provide you with more details of our second quarter results.

Thank you, Martin. AGCO's regional net sales performance for the second quarter of 2009 as outlined on slide six. For the second quarter of 2009, currency translation had a negative impact with approximately 10.8% on AGCO's consolidated net sales. At the current exchange rates hold, we are estimating the current translation reduce our 2009 net sales by approximately 750 to $850 million. During the second quarter of 2009, the Europe, Africa Middle East segment net sales decline of approximately 16% excluding the impact of currency translation compared to the second quarter of 2008. The EAME segment sales were weakest in the Baltics, Eastern and Central Europe and Russia. Declines in those markets were partially offset by modest growth in both Germany and France.

North America net sales were approximately flat in the second quarter of 2009 compared to 2008, excluding currency translation impacts. Higher sales and high horsepower tractors and balers were offset by declines in compact and mid-range tractors. Second quarter 2009 net sales in South America declined approximately 26% from 2008 excluding currency. Softer market demand in Argentina and Brazil and the shift in mix to lower horsepower tractors in Brazil drove most of the decline. Net sales in our Asia-Pacific segment were approximately flat in the second quarter of 2009 compared to 2008 excluding currency impacts.

Part sales for the second quarter of 2009 were $256.1 million, down approximately 4% compared to the same period in 2008 after removing the impact of currency. For the first six months of 2009, part sales were 449.9 million, down approximately 3% compared to 2008, excluding the impact of currency.

Slide seven reviews AGCO's sales and margin performance. Gross margins were down approximately 170 basis points in the second quarter of 2009 compared to the second quarter of 2008. Lower production volumes and a weaker mix of sales in South America were partially offset by improvements in North America. Adjusted operating margins were 4.1% in the first half of 2009. The decline in operating margins resulted from weaker sales, lower gross margins and higher engineering expenses as a percentage of net sales. Operating income in our North America segment showed improvement with operating margins reaching 5.5% for the second quarter of 2009. The positive impact of the stronger dollar on imported tractors, lower warranty costs and expense control initiatives all contributed to the improvement. We expect additional production cuts and dealer destocking will lead to lower net sales in margins in the second half of the year.

Operating margins in AGCO's Europe Africa Middle East region declined about 420 basis points. Weaker sales, lower production volumes and increased engineering expenses focus the on our high horsepower tractors and new harvesting products contributed to the margin compression. Declining market demand produced lower sales and significantly lower production led to the drop in operating margins in our South America business. The shift in the mix of products towards smaller, lower margin tractors also contributed to the decline in operating margins.

Slide eight highlights the improvement that we have made with our working capital over the last three years. It also highlights the need we have to further reduce our inventories in the second half of the year. Working down our inventory levels in the second half of the year is a top priority. Martin walked you through our planned production cuts which are aimed at lowering our Company and dealer inventory levels. The strongest dealer destocking that's planned for our North America region in the second half of the year. Our sales and earnings will be impacted for the remainder of the year with the heaviest impact expected to be in the third quarter. We are targeting to end 2009 with an inventory below 2008 year-end levels.

At the end of June 2009, our North America dealer months apply on a trailing 12 month basis was higher than the same time a year ago. They were 5.5 months for tractors, six months for combines and 8.5 months for hay equipment. Other working capital details are as follows. Outstanding funding under accounts receivable securitization programs was approximately 482.2 million at June 30, 2009, compared to 497 million at June 30, 2008. 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. Losses on sales or receivables primarily under the securitization facilities, which is included in other expense net was 5.2 million in the second quarter of 2009 compared to 8.3 million for the same period in 2008.

Slide nine addresses AGCO's free cash flow which represents cash flow from operations less capital expenditures. Our seasonal demands for working capital are greater in the first half of the year and thereby, generated negative free cash flow for both the first half of 2009 and 2008. While we have made a significant reduction in our inventories since the end of March, our strong production cuts have also resulted in lower accounts payables, which limited the benefit in working capital and cash flow. In the second half of the year, we expect inventory reductions to outpace our stabilizing payables position. As a result, we expect reductions in working capital will contribute to cash flow generation in the second half of the year, especially in the fourth quarter.

As Martin explained, we plan to continue to invest for future growth in the form of engineering expense and additional investments in our plants and new products. Even after covering increased spending in these strategic investments, we are targeting improved free cash flow this year.

Slide ten addresses the assumptions underlying our 2009 outlook. With the global recession, tightened credit markets and volatile commodity prices, there remains an uncertainty around the market conditions we face in the second half of the year. You can see from this slide that our outlook for 2009 anticipates declines in all global markets. Some other specific assumptions include the strengthening dollar and the impact of translation on our sales outside the US is expected to reduce our sales between 9% and 10%. Our 2009 forecast assumes pricing increases of approximately 3.5% to 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.

In terms of interest expense, just a reminder that AGCO's adopted FSP APB 14-1 on January 1st of this year. The implementation of this rule resulted in approximately $3.8 million of additional noncash interest expense related to our convertible notes in the second quarter of 2009. Interest expense was also restated to include 3.5 million of additional interest expense for the second quarter of 2008. For the full year of 2009, FSP APB 14-1 is expected to result in approximately $15 million of additional noncash interest expense.

Our effective tax rate was approximately 25% for the second quarter of 2009 compared to 32.5% for the second quarter of 2008. The decrease results primarily from the improved profitability of our North America business. We are able to utilize some of the net operating loss carry forwards to lower the effective tax rate in North America to near zero. For the remainder of the year we expect our effective tax rate to range from 30 to 35%.

Slide 11 lists our view of selected 2009 financial goals. With the uncertainty around market demand in mind, we are projecting 2009 sales to range from $6.5 to $6.8 billion, while our 2009 results are very important to us, we are also focused on AGCO's long-term profitability and we will maintain our investments in engineering and capital expenditures this year.

With that long-term focus and the uncertainty that surrounds our market demand, our forecast for 2009 diluted earnings per share ranges from $2 to $2.25. We expect capital expenditures to be in the $250 to $275 million range and free cash flow in the $150 to $200 million range after funding our strategic investments. For the third quarter of 2009, we expect softer market demand, inventory reduction the negative impacts of currency translation to result in sales declines of 25 to 30% compared to the third quarter of 2008. Lower sales and production increased engineering expenses and the negative impact of currency translation will keep third quarter 2009 earnings per share below half of the level in the third quarter of 2008. That concludes our prepared comments. Operator, we are now ready to open the call open for questions and answers.

Thank you, sir. (Operator instructions). Your first question comes from the line of Henry Kern with UBS.

Good morning, guys.

Good morning.

I'm wondering if you could chat a little bit about if you're seeing anything improving in the credit markets in eastern Europe, Russia and Argentina and what the impact of that could be.

My only comment on this is as far as Russia is concerned, there is a desperate need for equipment. They have a very aged fleet. The average age of the fleet is 15 years plus and within the last ten years the population of farm equipment for combines and tractors only was cut in half. So that means there is a need for farm equipment. What you can see is acreage which has not be used for farming because they didn't have equipment for soil preparation and planting and seeding and what we also will see that we -- that they don't have enough equipment to harvest later on.

So I think Russian authorities know about the problem and my question is only when they will take action. In fact, they changed the laws two years ago and farmland in the meantime can be privately owned, which means that farmers are in a position to securitize their investments. So therefore, I'm slightly optimistic that it will change. I'm sure it will change. The question is when. It's most probably too late for this year when it comes to harvesting equipment.

The situation in Argentina is more difficult to understand and I think the government in Argentina is doing an extremely poor job in their agriculture strategies and politics because the Argentinian farmer has to take the burden of an export duty of about 30%. They call it export value customs or something like that. So there are still competitive, which is amazing but on the other hand there really are hard times plus the weather conditions are not very good and I think financial subsidies are not available and therefore, farmers have to help out themselves. I think a reduction of the export duties would have them already to be in a position to invest more.

That's helpful. And in terms of pricing, is it possible to give a little bit of a geographic break down. Where it is stronger and where it is weaker.

Yes. Pricing was in line with what we thought would happen pretty much in North America around 3.5 to 4%, same with Europe and South America the pricing was a little lower than our average and so that did hurt us as you can see our margins in South America were down in second quarter.

Thanks a lot.

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

Hi. Good morning. Just to follow up on the South American margin. You said pricing was down but can you also break out how much mix and the fact that you underproduced I think in South America dramatically. And then just my follow-up question on South America, Martin, if you can just talk about how you see that market shaping up with some of the funding in June that we hoped would get passed through, got passed through on the higher end, so how are you thinking about that and when or -- when do you expect to see a pickup in that market?

I think that South America, mainly Brazil bottomed out and so therefore, there might be hope for recovery. This is a very volatile market as you know and in a little bit more difficult times, it's also not easy to understand what's going on. Over all, I'm slightly optimistic that Brazil might come back.

When?

That's a very good question. Jamie, actually to be perfectly honest, I don't know. I hope towards the end of this year. They are -- let's say they are in wintertime right now, let's say in spring soon, so I think we know more during the next call.

And then just, Andy, if you could break out the margin impact and then the last question is how do we think about the tax rate for the back half of the year, especially with some of the nice profit improvement we saw in North America?

Sure. On the South American margins, that decline break up into a few categories. Approximately half of the decline was relating to the lower production and the higher costs associated with that, with the lower absorption of our fixed costs. About a quarter of the decline was relating to mix and higher warranty costs and then another quarter was due to losing leverage over our SG&A and our engineering system that we had in the second quarter in South America.

In terms of our tax rate, as we said in our prepared comments, we are expect it to range somewhere between 30 to 35% in the back half of the year. We don't expect our profitability to be as -- be strong in North America in the second half and so we will be back to kind of the same rates that we saw in 2008.

Thanks. I'll get back in queue.

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

Good morning.

Good morning.

Martin, can you please talk about what you're seeing in terms of tariff barriers in Russia and eastern Europe. I guess based on your comments it sounds like you think the government is under pressure to potentially loosen those?

Well, actually they tried that already some years ago and I think overall this is the opposite of free trade and most probably will not work, but you never know. And there are a lot of ways how people get product into Russia even with those tariffs by going through Ukraine, Belarus, Pakistan whatever, so not illegal, but they find their ways into the country. So I'm not sure whether that helps.

Okay. So it doesn't sound like you need to set up some wide assembly there to get product into the market. It sounds like you can get around the barriers that they have put up?

We plan to do that. You might recall that we started an engine joint venture together with the biggest manufacturer of farm equipment, a company called CTP for diesel engines and the reason why we joint ventured this is because that they have a big internal demand so that means this year already engines would be available for local assembly, which represents, of course, already nice portion of localization and we are working on a light assembly operation or facility for tractors and also combines.

And, Martin, can you talk about which regions you're more optimistic on than others for a potential 2010 recovery? It sounds like your prior comments Brazil might be the top of the list. Can you just step us through how you're thinking about your market in the next year.

I would say overall the logics of our business didn't change. Since we started from the beginning of this call, the population was going by 4680 people because it's growing by 156 people net every minute globally. This means 9354 per hour or 224,000 per day or 6.83 million per month or 82 million per year. So the growth of the work population is going on and doesn't stop. The change in diet didn't change. So the Chinese go for more protein. The Indians do as well. So no change at all. We are the only pure play in this industry, so we only do farm equipment. We do not have to carry the burden of weaker demand from construction equipment and things like that. We have a very good global footprint and I believe we have a very good strategy and we continue to invest in our strategic initiatives including also our R&D activities.

So therefore, I think, we are well positioned and certainly also this year we suffer less than many other companies and we still have an okay year, more or less, on the level maybe of 2007. So that means we are not really going down the drain. We are taking additional action in order to make us stronger in the future and now the question is what will happen and I'm not in a position to tell you or to give you more details on 2010 because our work for the 2010 budget starts in September, October and it would be too early to now guess and give you a guesstimate on 2010. But overall I'm -- I think we are in the right business.

Thank you.

This was the marketing section.

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

Hi. Good morning.

Good morning, Steve.

I was hoping we could drill down a little bit more into North American margins, obviously better than what we had looked for. How much of that should we think about as being currency related and how much related to some of the other things I think that you mentioned, Andy, and maybe while we are doing that, we could just roll in sort of a quick challenge or update in the process.

Sure, Steve. When you look at North America, we did have a number of items helping on the margins in the order in the first half of the year, a little less than -- a little more than a quarter of what did relate to currency in terms of margin improvement and then other areas of improvement were better warranty experience and also better margins in our sprayer business. That was a fairly substantial piece of the improvement we talked about in the first quarter and that carried into the second quarter and then, we are getting better margins on some of our tractor lines.

We have got some new products in place. We have replaced some of -- we talked about last year replacing some of our tractors that we supplied Brazil with some Indian source tractors and those are coming on stream and helping us with our mix and our margins on those categories of tractors and then our expense reduction activities also contributed. So there was a number of items all helping and we are making progress in North America as a result.

As we look into the second half of the year, we are going to cut our production more significantly in North America to get our dealer and Company inventories in place and so that will hurt our margins in the second half. So we won't see the same improvement in North America in the second half of the year. When you look at Challenger, our Challenger sales were relatively flat between 2009 and 2008 in the quarter. Year to date they are down about 5% and because of the production changes and other factors, we are slightly profitable but down from the level of profitability that we had in 2008.

Great. That's helpful. And Martin, if I could ask you, you were quoted in a Reuters interview recently talking about being interested in potentially making some acquisitions. I think it was specifically in North America but I don't want to put words in your mouth. Can you just expand a little bit on how you see the industry and if further consolidation needs to happen, then whatever your view of AGCO's position in that might be.

I think that there will be further consolidation because some of the smaller companies, midsized companies, family-owned companies do not have success, might give up, might suffer more from the recession than others and you can see that globally. We, let's say, look at it in a way that Andy Beck and I and also my board would be prepared to do something but it sure needs -- move the needle substantially so we don't just look for an acquisition as such.

If we do something in North America, it should help us to improve our profitability dramatically, and that, of course, if you have this kind of benchmark, it makes -- it rules out a lot of things. So we looked into two or three midsized and small companies and decided not to go ahead and not to do a deal and stay with our strategy of internal growth but in case something really interesting and important would become available, we certainly would be interested.

And it sounds like you're saying that that would have to be something large.

Something profitable.

Okay.

If it would be large on top of that, that would be perfect.

And maybe cheap.

Cheap, profitable and big.

Perfect. We will keep an eye out for you. Thanks.

Thank you very much.

Your next question comes from the line of Ann Duignan with JPMorgan.

Hi. Good morning, guys.

Good morning, Ann.

Back to the operations, I guess, Martin. Can one of you address a little bit of what you can expect kind of more normalized margins to be both in South America and North America? I know North America is a dependent a little bit on currency but, you know, North America was better than we expected this quarter. South America was worse and just trying to get a sense of on a more normalized basis what those margins might look like.

It's hard to answer what's normal, I guess. One of your -- one of the issues here, but certainly North America, I think we feel comfortable we can operate in a profitable basis. The margins still are going to be below average and I think the margins we showed in the second quarter are probably not sustainable for right now. But I think comfortably profitable would be the indication for North America.

When you look at South America, I think what we have done in the first quarter -- first two quarters were below what we would anticipate we can run at and I think in the second half we hope to show that we can get our margins up to a little more respectable level. Although, they will still remain below 2008 levels because of the sales decline, but I'm expecting that our margins do come back up in the second half of the year and stabilize in South America.

And on South America, you know, I'm thinking about the new smaller tractors and the change in the mix. How much of a headwind is that going to be on an ongoing basis, or at least as long as that program exists?

I wouldn't call it a headwind as long as the other business would be stable. So the problem we face right now is that we basically have too much of the small tractor business and the big -- the professional segment is down. So I think if it's balanced better. We like that business because we also launched a new product years ago. We saw that somewhat coming because [Lieu La] was the president was talking about it quite a while and we launched of a what we call people sector. So very, let's say, reliable do-ables, simple tractor for the segment.

We talking about people that so far were not recognized. So they were farming manually or with donkeys and oxen and things like that or horses. So that's a good development because this means that the Brazil will mechanize more in the future. The problem is not this additional segment. The problem is that we lost -- or let's say the professional segment is down so much.

And we have also re-engineered some of our lower horsepower tractors and now under -- in production, particularly in our Valtra business with a lower cost version of these low horsepower tractors that we think will help enhance our margins in the second half. So we are working to improve our profitability of that sector as well.

And just to give you an idea, a tractor between 60 and 80-horsepower in this segment are typically something like $10,000, but really low end.

Yes. That is very low end. Can you talk just a little bit, then, as a follow-up, a little bit about working capital mentioned in particular what you're going to have to do in inventories by region. Where are you facing the large challenges? Is it just your importing of products into North America and so you have longer lead times. Where do you think, Martin, you have to put the brakes on hardest in the back half of the year?

To be perfectly honest, most probably all over the place. So we do it in Germany. We just decided to close the factory down for another week. They have Summer vacation anyhow. Scheduled Summer vacation in the European factories in Germany, Finland and France and we will shut down a little longer, like maybe a week or ten days or something like that.

We do the same basically globally. So there actually is no exception. And we took action pretty early, so that means we -- the idea was to take radical steps at the beginning in order to make sure that we get that we get cash flow into the right direction and inventories down.

Okay. Thanks. That's helpful. I'll get back in line and follow up off-line. Thanks.

Okay.

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

Good morning, everybody.

Good morning.

Good morning.

First question is on structural versus temporary cost cuts. You cut your workforce I think by 17%, which is hard to do, obviously. Can you split that between permanent cuts and temporary cuts?

I think about a third of those are permanent. You know, and in a lot of cases you can bring some of the workforce back and some of those were furloughed and were relating to temporary employees that weren't on our permanent workforce anyway, but you can bring those back, but when you look at it, it's about a third.

Ideally, we want to have 20 to 30% temp so that gives us the right flexibility and helps us to react quickly and now maybe let's say after we took action now, we will do that again so that means we don't replace people and got temps in instead of permanent people.

Yes. So it sounds like not too much of it was factory shutdown. The follow-up question was how long you can continue with some of the temporary actions if markets remain weak in the next year. Can you keep shutting down factories for weeks or longer?

We can.

Yes. I think we can. We are working with the -- I think it's a little more difficult in the European factories but we are working our way through that, but in most cases we have worked our way through what we want. We think we need to do this year without any additional significant cost and as long as our sales forecast holds for the balance of the year, we think we will be fine.

Also next year we don't have the problem we have this year so that means if -- in case, for example, 2010 would be flat or slightly down, we wouldn't have to be as aggressive.

Okay. And just a final one. In South America was there any issue with not being able to -- not having as much as a temporary workforce or not being able to idol factories as much. I think your margin there was really lower than than any time since 2000.

We were able to do what we needed to do. Particularly, for instance, our combine factory was virtually shut down for the whole quarter and so that really led to some of the margin hit we had. As you say, we cut costs but there's still an element of fixed costs associated with those facilities that you just can't get behind, get around, and so that's what hurt our margins in the second quarter.

Thanks, everyone.

Your next question comes from the line of Daniel Dowd with Sanford Bernstein.

Good morning.

Good morning, Daniel.

Let me actually just -- I realize we are talking about North American margins quite a bit and maybe I didn't quite understand. Can you quantify what percentage of the margin increased from Q1 to Q2 in North America? Was it purely a function of currency? Have you shared that?

We did.

Well, the way I would rather state that is the year-over-year improvement in the second quarter, about 150 basis points of that improvement was relating to currency.

It was just 150 basis points. Okay. And then in terms of broader issue, combines is obviously an area whereas an industry you're seeing continued strong growth. Can you talk about given the age of the global combine fleet, given the amount of land likely to come into production in various parts of the world, likely replacement rates, how do you see the combine market developing over the next two to three years? Do you anticipate dramatic declines or how do you see the total volume in the industry playing out?

We saw -- this year we saw a decline in most markets with the exception of the US and we explained why and overall I think the combine market investment in Europe, North America and South America will be rather stable and it will be growing substantially in eastern and central Europe. And there's also some upside potential in China because China and also India don't, let's say, have combine so much yet and with the increase in mechanicization, they also will consume more combines in the future.

We have basically launched a project for a new generation of combines for basically most markets but the most important one is Europe, where we develop a so-called hybrid combine which is a mixture between a conventional walker and an axial flow machine and this project is on schedule. The prototypes are harvesting right now and the results with regard to yield and productivity are very impressive. So that means we will launch that combine in Fall, there's a big European -- the biggest farm equipment show in the world in Germany and that's where we will launch that new generation of combines.

So if I just sum that up, you do not see a -- given the big growth that we have had in combine sales across the industry, you're not anticipating anything worse than a flattening out of combine sales?

Yes. For 2010 or what are you talking about?

Yes. I think 2010, 2011. I think the bare case, Martin, part of it is, look, the replacement cycle in combines in particular has been really robust and therefore you're going to see a significant decline in industry level combine sales.

I don't see that. So but you can see is -- you also have to look at it horsepower wise and capacity wise. So that means number of units might typically go down slightly but the units do get bigger and bigger and that means also there are more interesting marginwise.

Thank you very much.

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

Yes, good morning. Can you hear me?

Yes.

Yes.

How are you? So the question in terms of under destocking in North America, could you quantify by any chance thinking about second half of the year how much under absorption we are going to have in western European operations as we get rid of North American inventory? Is that something you can quantify?

No, I don't know how to quantify that. I do -- would say that, you know, our sales will be impacted in the second half in North America by probably an additional 10 to 15% as a result of what we are trying to do with our dealer inventories, but to get that detailed in terms of the carryover impact into North America is difficult. There will be some impact on the margins but you probably see some of that in the results so far this year as well.

Okay. But is it fair to take this 10 to 15%, assume a certain share of European production and then apply some sort of nominal incremental margin to that? Is that a fair way of thinking about it, to figure out the impact on European possibility?

Well, the way you'd have to do that would be certainly the amount of production that we are taking out and then some absorption factor will hurt our margins, not only in North America but in western Europe, you're correct.

And Andrew, that 10 to 15% is of North America sales not of European production.

You slightly lowered your pricing expectations. Which region is driving? Because I think we went from 4% to 3.5% to 4%. Which region in particular is impacting your pricing expectations?

South America and western Europe.

Thank you very much.

Your next question comes from the line of Barry Bannister with Stifel Nicolaus.

Guys, hi. When I look at your balance sheet items, you're inventory turns really aren't that far out of line. The five-year average second quarter is 4.0 and you're at 4.25.

I would really like to for the next board meeting.

The only thing that really moved the needle is your cash balance falling 350 million year to date exactly matches the decline in accounts payable, which fell 35% from a record 1.03 billion to 670 million. What bill did you pay that caused that large of cash outflow and that large a decline in accounts payable?

Well, those payable declines go with production pretty closely, so as we reduced our production down 35%, our payables go down the like because we are really pulling down our production inventory as well and so our inflow of new material into the plants and into our parts facilities was down substantially in the second quarter and really the first -- whole first half of the year. And so as a result, we are seeing our payables go down in relation. So our payable -- days of payables hasn't changed.

It's just the level of activities down and so we are -- as we said in our comment, we expect the payable balance to now stabilize a little more and so now that we can work our inventory -- rest of our inventory levels down, that should flow better into free cash flow in the second half.

Yes. That makes sense because your accounts and notes receivables are lumped together and there it went up 100 million. So perhaps the accounts receivable portion changed more against the notes receivable portion. Could you explain to me what's going on in the robo bank credit JV. It might account for as much as 20% of this years profits and it is fairly opaque. I know you securitize wholesale receivables but at the joint venture level what is going on there in terms of past dues, net charge-offs, loan loss reserves and recent trends?

Certainly, Barry, you're correct that that is a very important part of our business is the active finance joint venture and we do own 49% of that business. So that's shown in our equity and affiliate line on our income statement. The business in North America and in Europe for the AGCO finance business has been pretty stable. Our delinquencies are up slightly but not any concern and really still at historically very good levels. So we are seeing good collection performance and the market -- and the performance of the joint venture is very strong.

When we get to Brazil, we have the ongoing issue with our delinquency rates are higher than where we would like them to be and it's a result of the payment deferrals dictated by the government over the past two or three years have resulted in farmers delaying their payments back into the finance company for the second half of the year. There should not be any payment deferrals that we will have to contend with and so we will have a better chance to get our delinquencies and our collections back in line.

We have been adding to our loan loss reserves in Brazil as a result of this situation and as a result of our collateral values declining as we extend these payments and it's something that we have to continue to keep a very close eye on. In the second quarter, we did reserve some additional amounts and we have increased our monthly reserves on loan losses for Brazil, but after all, we will still performing well in that market as well.

And no problems in central and eastern Europe, Argentina related to the JV that you --

Our JV does not have operations in eastern Europe or Russia and so we rely on external financing in those markets and that's one of the issues, obviously. Then, in Argentina, we have just a very small operation that we manage very, very tightly. So there are some delinquencies there but they are not material to the company.

Thank you.

Your next question comes from the line of Andrew Casey with Wells Fargo.

Good morning, everybody.

Good morning, Andy.

Good morning.

Just a follow-up on North America. I mean a lot of questions have been asked including about that region. But could you -- and if I did, I apologize. Could you characterize the orders and backlog that you're seeing for the higher horsepower equipment that just fly into that market?

Our orders are down in all categories of equipment in North America as well as the rest of the world as we talked about. I don't have a breakdown between high and low. Our tractor orders are down.

I would say that we do have a pretty good order board on the new large range tractor that we just started introducing here right at the half year and looking forward to getting those deliveries in from our european factories and supplying those in the second half of the year. And so we do have a good order situation there.

Okay. Thank you very much.

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

We appreciate your interest in AGCO this morning and your participation on the call and if you have additional questions, I encourage you to get in touch with me later today. Thanks and have a great day.

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