AGCO Corp (AGCO) 2009 Q3 法說會逐字稿

Good morning. My name is Christie and I will be your conference operator. At this time, I would like to welcome everyone to the AGCO Corporation 2009 third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) As a reminder, ladies and gentlemen, this call is being recorded today, October 27, 2009. Thank you.

I would now like to introduce Mr. Greg Peterson, Director of Investor Relations.

Thank you, Christie, and good morning. We appreciate you joining us for AGCO's third 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 conference call, we will refer to a slide presentation which is posed posted on our website at www.AGCOCorp..com. The non-GAAP measures used in the slide presentation are reconciled to GAAP measures in the last section of the presentation. During the course of this conference call, we will make forward-looking statements including some related to future sales, earnings, production levels, general economic conditions, currency translation impacts, farm income, working capital and its components, cash flow, margins, effective tax rate, interest expense, retail sales financing, pricing levels, capital expenditures, plant shutdowns and strategic initiatives the. 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 will now turn the call over to Martin.

Thank you, Greg, and good morning everybody. In the third quarter we continue to execute our plan to cut production, reduce inventory and aggressively control cost. The third quarter production was cut by 31% compared to the third quarter of 2008. Our aggressive force realignment removed another 8% of our employees, bringing the year-to-date reduction to 25%. Our disciplined program to lower inventory levels has taken down company and dealer inventories by more than $165 million since June 30. We have more work to do here and plan to underproduce projected retail demand for the remainder of the year.

Slide three shows AGCO's results for the third quarter and first nine months of 2009. Our third quarter sales were down approximately 33% from the third quarter of 2008 due primarily to weaker demand in all our major markets. The volatility in commodity prices and the expectation of lower farm income has contributed to a great deal of conservatism in farmers equipment purchase decisions. End market demand continues to soften in Europe and North America and we saw sales decline steep in those markets during the third quarter. In Brazil the mix of our sales is still weighted towards smaller tractors but a new government financing program which includes high horsepower tractor sales has helped to stabilize the market. In the third quarter of 2009, sales declines, slower production volumes and a weaker mix of products compared to the third quarter of 2008 resulted in a drop in adjusted operating margins to 2.5%.

Slide four illustrates our production volumes for 2008 and the first nine months of 2009 as well as our current forecast for the fourth quarter of 2009. Third quarter 2009 tractor and combine production levels were down 31% compared to the third quarter of 2008. At month end, October, through a combination of layoffs, (inaudible) and dismissal of temporary workers, we reduced the workforce by nearly 4,000 employees since the beginning of the year. In the first nine months of 2009 we had temporary plant shutdowns at all our facilities across Europe, North America and South America. We reduced assembly shifts at our plants in Brazil and Finland and reduced fabrication, welding at all our plants in Jackson, Minnesota and in (inaudible), Kansas.

The softening global demand is evidenced in our order boards which have declined significantly. At the end of September 2009 the backlog was just under half the level we saw at September 30, 2008. In response to the softening demand, our full year 2009 production of tractors and combines is expected to be down close to 25% from 2008 levels. We lowered our production plan for Europe and North America and increased it for improvements in the Brazilian market. In the fourth quarter of 2009, we will have additional temporary plant shutdowns on top of the normal maintenance shutdowns on top of the normal maintenance shutdowns. These production cuts will have a significant impact on fourth quarter sales and earnings.

Slide five details industry retail farm equipment volumes by region for the first nine months of 2009. Industry tractor sales in North America were down 22% compared to 2008 levels. The most significant declines occurred in the sub100-horsepower tractor segments which are closely tied to the weak areas of residential construction and large stock production. (inaudible) tractors were also down from last year's robust levels. The combine market grew approximately 19% during the first nine months of 2009 compared to the same period in 2008. The sales of high horsepower tractors and combines into the professional producer sector have weakened in the fourth quarter as forward commodity prices declined through most of the quarter and farm income estimates were lowered.

AGCO's total unit sales of tractors and combines in the first nine months of 2009 were both down from the same period last year. Industry sales in Western Europe have weakened further in the third quarter, down 16% in the third quarter of 2009 compared to a 4% reduction in the second quarter of 2009. In AGCO's key markets, third quarter industry sales compared to the third quarter of 2008 were down 18% in France, 11% in Germany and decreased 28% in the UK. Industry sales for these three countries were approximately flat to the first half of 2009 compared to the same period last year. In addition, the markets of Finland and Scandinavia were both down nearly 40% in the third quarter compared to the third quarter of 2008 due to soft demand from the dairy and forestry sector.

European demand continues to be weakest in the challenged markets of Eastern and Central Europe and Russia. Order intake across Europe has continued to be weak. Dealers are more conservative with reorders and they are less comfortable with levels of new and used inventories. South American industry tractor volumes decreased approximately 22% during the first nine months of 2009 compared to 2008. Conditions and limited credit availability in Argentina contributed to a decline of approximately 62% in Argentine retail tractor volumes.

Industry retail tractor sales in Brazil decreased 2% in the first nine months of 2009 with the Brazilian government financing plan for small farms and a new financing program for all equipment helping to stabilize the Brazilian market. We expect 2009 South American industry retail volumes to be down significantly from 2008 levels due to dry weather conditions and the impact of tightening credit on planted acreage and core production. Andy Beck will now provide you with more details of our third quarter results.

Thank you, Martin, and good morning. AGCO's regional net sales performance for the third quarter of 2009 is outlined on slide six. For the third quarter of 2009, currency translation had a negative impact of approximately 5% on AGCO's consolidated net sales. If currency rates hold, we are estimating the currency translation will reduce our 2009 net sales by approximately $500 million to $600 million for the full year. During the third quarter of 2009, the Europe, Africa, Middle East segment had a net sales decline of approximately 30%, excluding the impact of currency translation compared to the third quarter of 2008. France, Scandinavia, Germany and the UK contributed the majority of the Western European decline. Sales in Eastern and Central Europe and Russia continued to be weak.

North American net sales were down approximately 32% during the third quarter of 2009 compared to the same period in 2008. Declines in compact and mid-range tractors, hay tools and sprayers accounted for most of the decline. Sales in the dairy and cattle producer segments showed the most weakness. Third quarter 2009 net sales in South America declined approximately 21% from 2008 levels, excluding currency translation impacts. Softer market demand in Argentina and Brazil and the shift in mix to lower horsepower tractors in Brazil drove most of the decline. In the third quarter of 2009, the Brazilian government introduced a new financing program for all equipment. This new program offers interest rates as low as 4.5% and helps stabilize the Brazilian market. The program is set to expire at the end of 2009 but with other favorable financing programs in place through the first half of 2010.

Net sales in our Asia-Pacific segment declined approximately 9% in the third quarter of 2009 compared to 2008, excluding the impact of currency. Sales in Asia and the Eastern Pacific continue to be weak and were partially offset by growth in Australia. Part sales for the third quarter of 2009 were $261.1 million, down approximately 8% compared to the same period in 2008 after removing the impact of currency. For the first nine months of 2009, part sales were $711 million, down approximately 4% compared to 2008 excluding currency.

Slide seven reviews AGCO's sales and margin performance. Gross margins were down approximately 100 basis points in the third quarter of 2009 compared to the third quarter of 2008. Lower production volumes and a weaker mix of sales in South America and Europe were partially offset by improvements in North America. Adjusted operating margins were 3.6% for the first nine months 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 margins in AGCO's Europe, Africa, Middle East region declined significantly for the first nine months of 2009 compared to the same period in 2008. Weaker sales, lower production volumes and increased engineering expenses focused on our high horsepower tractors and new harvesting products contributed to the margin compression.

In South America, operating margins declined approximately 560 basis points for the first nine months of 2009. Softer market demand produced lower sales and the shift in the mix of products towards smaller, lower horse -- lower margin -- lower horsepower tractors also contributed to the decline in operating margins. Operating margins did increase sequentially in South America during the third quarter of 2009 compared to the second quarter of 2009. Stronger market demand and an increase in third quarter production compared to the production in the second quarter of 2009 produced the increase. In the third quarter of 2009, operating income in our North America segment declined compared to the third quarter of 2008 due to the significant drop in sales, production cuts, and dealer destocking. We expect to continue the destocking in the fourth quarter which will penalize the net sales and margins in North America.

Slide eight looks at the North America profitability in more detail. While our North American operations continued to lag the performance of our other operations, you can see this slide that our operating income for the first nine months 2009 has improved significantly from the same period last year. As we have discussed previously, we have put a number of initiatives in place to improve North America profitability. Our North American business continues to focus on streamlining our brands and we are continuing to consolidate our dealer network. Today we stand about 1,000 dealers down from 1600 dealers a you few years ago.

We are reducing our logistics cost, the use of of our regional assembly centers and we have added added more rigor to our pricing function to ensure we are more responsibly pricing our products. We resourced some of our utility tractors from Brazil to India to produce our small-- to improve our small tractor margins. We returned our sprayer business to profitability by investing in product upgrades and moving the distribution to the CAT dealer network. We are continuing to invest in new products designed specifically for the North America market. The results of our initiatives have been favorable. While the North America business was not profitable in the third quarter due to our production cuts and inventory destocking efforts, we expect full year 2009 operating income to improve on 2008 results. In addition, we have other initiatives in the pipeline that we believe will have a positive impact on North America results.

Slide nine details our working capital position at the end of the third quarter. It also highlights the need we have to further reduce our inventory in the fourth quarter. Working down our inventory levels remains a top priority. The largest dealer destocking is planned for our North America region where our sales and earnings will be impacted for the remainder of the year. We are targeting to end 2009 with working capital below 2008 year-end levels. At the end of September 2009, our North America dealer month supply on a trailing 12-month basis was higher than the same month -- same time a year ago but lower in all categories from where we were at June 30, 2009. Tractors were at five-month supply, combines were at five months, and hay equipment was at seven and-a-half months.

Other working capital details are as follows. Outstanding funding under accounts receivable securitization programs was approximately $491 million at September 30, 2009, compared to $453.6 million at September 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 of receivables primarily under our Losses on sales of receivables primarily under our securitization facilities which is included in other expense net were $1.5 million in the third quarter of 2009 compared to $7.2 million for the same period in 2008.

Slide ten addresses AGCO's free cash flow which represents cash flow from operations less capital expenditures. While we made a reduction in our inventories since the end of June, our significant production cuts resulted in lower accounts payables which limited the benefit in working capital and cash flow. In the fourth quarter we expect inventory reduction toss outpace our stabilized payable position. We expect reductions in working capital will contribute to cash flow generation in the fourth quarter. We plan to continue investing for you future growth in the form of engineering expense and additional investments in our plants and new products. Even after covering increased spending on these strategic investments, we are targeting improved free cash flow this year.

Slide 11 addresses the assumptions underlying our 2009 outlook. With the global recession, volatile commodity prices and lowered expectations of farm income, our order boards are weak and farmers are being very conservative. Consequently, no improvement is anticipated in market demand for the remainder 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 changing value of the dollar and its impact on translation of our sales outside the US is expected to reduce sales between 6% and 7%. Our 2009 forecast assumes pricing increases of approximately 3% to 3.5% on a consolidated basis. In 2009, AGCO will continue to invest for future growth including strong investments in both capital expenditures and research and development.

In terms of interest expense, just a reminder that AGCO's adopted FSPAPB14-1 on January 1 of this year. The implementation resulted in approximately $3.8 million of additional non-cash interest expense related to our convertible notes in the third quarter of 2009. Interest expense was also restated to include $3.6 million of additional interest expense for the third quarter of 2008. For the full year of 2009, FSPAPB14-1 is expected to result in approximately $15 million of additional non-cash interest expense. Our effective tax rate was approximately 38% for the first nine months, compared to 33% for the same period in 2008. In the fourth quarter, we expect our effective tax rate to range from 35% to 40%.

Slide 12 lists our you view of selected 2009 financial goals. With the weak market demand, we are expecting for the remainder of the year, we are projecting 2009 sales to range from $6.4 billion to $6.6 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. Our forecast for 2009 diluted earnings per share ranges from $1.30 to $1.50. We expect capital expenditures to be in the $200 million to $225 million range and free cash flow in the $50 million to $100 million range after funding of our strategic investments. That concludes our prepared remarks, Operator. We'd now like to open the call up for questions.

Thank you. (Operator Instructions) We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Henry Kirn of UBS.

Hey, good morning, guys.

Good morning.

Wondering if you could chat a little bit about how much of the capacity cuts you would view as permanent and how much you would need to ratchet back up when demand ultimately returns.

Well, Henry, we're producing about 5% below retail, that's our anticipated full-year estimate right now. So if we can get our inventories back in line in the future, then we would be able to produce more at a steady retail level. In terms of capacities, what we're doing is lowering our direct headcount and certainly working on our indirect overhead cost as well, but we're confident through bringing back employees, bringing back temporary or contract employees that we could ramp back up if demand improved in the future. So I think everything we're doing is what we need to do at this point because we have to get our costs down but we're confident we can get back up if demand would return to higher levels.

That's helpful. Could you talk a little bit about what you saw for pricing by region in the quarter and where things may be more pressured or more opportunity for price increases?

Well, pricing as we said was about 2.5% for the quarter. It was a little lower than we had anticipated. All were about in that range. I'd say South America was a little lower than we anticipated, primarily still related to the government programs which have some set pricing in there that aren't helping allow us to get our prices up there and a little more discounting in some of the other markets as well.

That's helpful. Thanks a lot.

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

Hi, good morning.

Good morning, Steve.

I was wondering if you could talk a little bit about your inventory situation in Europe, yours and your dealers. You talked about North America, needing to bring that down more. Are you kind of comfortable with where we are in Europe or is that also a target to be reduced?

Well, I think, Steve, we're still -- we did -- we made some progress here in the third quarter with dealers. Dealers are still not ordering at a very rapid pace in Europe and so the order board is relatively low right now which indicates that they still would like to see their inventories continue to come down. So we expect dealer inventories to decline more in the fourth quarter and we would hope that we would be better in line by the end of the year. Some of that will be dictated by what next year looks like and whether there needs to be further adjustments. But we made some progress, but still believe we need to make more here in the fourth quarter I would say in Europe and North America. South America I think we're in pretty good shape, particularly because things seem to be picking back up a little more there.

Okay. Great. And then, Andy, it sounded like you were talking about a number of things you're working on margin-wise in North America. We're still sort of on the (inaudible). Should we be expecting North American margins to be a little bit better next year?

Well, certainly we believe that there are initiatives through our new products and some of the things we're working on in terms of factory productivity, full-year impact of a lot of these initiatives I spoke about could help us. On the negative side, we probably get a little -- depending on where currencies are, could be in worse shape there as the dollar starts to strength -- weaken again against the Euro and the Real. So as we get our budgeting done and see how that all falls out, we can give you a little more guidance. But behind the currency, if you exclude that, we certainly think there's more to come in terms of margin improvement from the actions we're taking.

Okay. Great. And then just finally, just to make sure I understand that, year-to-date free cash flow down $312 million but you still expect to generate $50 million to $100 million for the full year so we're looking at like $400 million positive in the fourth quarter. Am I reading that right?

That is correct. That's our target right now. It's certainly a major challenge for us and we've got our production pretty much set now. There's not much left to do there. So it will come down to us hitting our sales targets for the balance of the year, particularly on the retail side, and then the timing of collections which will dictate whether we achieve that target. It's a big challenge for us but something that we're focused on from a total management team.

Thank you very much.

Your next question comes from the line of Seth Weber of RBC.

Hi, good morning everybody. Wondering if you can help us frame some of these -- the cost cuts that are -- that seem to be accelerating with the employee reductions and how they might flow through for next year and as well as whether you expect to get some tailwind on lower input costs next year?

We are cutting -- doing a lot a cuts here throughout the year this year, so there should be some carry-over impact into next year, particularly on some of the cuts we made on our operating expenses, operating costs, as well as overheads in our factory. So we'll be looking for that to help us a little next year, but we've got to work our way through our budgeting and process to really be able to quantify that for you, but there is going to be an element of that. What was the second part of the question?

Input cost for the --

Input cost. We've done a pretty good job getting -- particular line steel, getting that back in line from the big increases we saw in 2008 as steel prices come back down. We spent this year getting our costs back down in line. Based on where we are, we see steel prices still come down a little, coming down a little right now, so there could be some opportunity into next year but based on our projections, I wouldn't expect a significant amount of benefit carry-over into next year.

We work in materials and purchasing on a strategic initiative called [Best Cost Country] sourcing and this is a major project, how to move components to suppliers with more favorable conditions. This has just been started this year and I am expecting some long-term improvements coming from this major activity.

Okay. And if I could just ask a quick follow-up. I don't know if you saw but just on the tape France has announced a $2.5 billion aid package to the ag economy over there. Have you heard anything about that or -- ?

Yes.

Do you have any thoughts on that.

Good news in the way that it looks like some of the European markets, the big markets, the biggest farm equipment or let's say the biggest farm market in Europe is France and so that France takes a lead in order to support farmers certainly will also be supportive for us.

Okay. Thanks very much, guys.

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

Hi, good morning, guys.

Good morning, Ann.

Hi. Good morning, guys. Could you address the fact that your backlog is down 50% versus year ago and your inventories are still too high? So why wouldn't we anticipate that next year your revenues will be at least 50% below 2008 levels or 35% plus below this year?

Dear Ann, this is maybe your scenario but not mine. We are just working on our budget for 2010 and it looks like that revenues top line is pretty much flat to 2009 with a slightly different mix, so that means it looks like that South America is doing better while Europe is still slow. And the only question where I'm with you is the phasing. So to me it looks like that let's say we saw numbers for the year now but we certainly will start with a more difficult first quarter than what we had in 2009. You remember that 2009 our first quarter was pretty strong. This most probably will not be the case in 2010.

So Europe would be slower in 2010 than 2009, which -- I mean, obviously with everything that's going on over there, be it the protein sector, the wheat sector, the barley sector, we agree with that --?

Not slower. Flat, I think.

Flat.

But you-- what you have to do is you have to somewhat think about the year in total and 2009 certainly had a better start than what we expect for 2010. I would also say that certainly 2010 is a very difficult year to budget, to plan not only for our industry, for a lot of industries because we see a lot of question marks and I think that also some of the behavior of our farmers and our customers is more related to emotions than to real facts. So that means with only bad news in the media every day, they actually became much more careful. I'm not -- let's say I'm not that negative about the fundamentals of our industry in general.

But you did say that your order board in Europe is much lower than your overall order board right now?

It is not, yes, yes.

Okay. And how much confidence do you have that you will have right-sized your inventories by year end and that it could spill over?

That all depends on whether we make the sales we want to this year or not so that means we actually are in good shape as long as we can sell what we have, what we plan to sell for the -- in the last quarter. So if there would be a further down trend in the market, then of course we would have a (inaudible).

There are some sectors that we feel like we'll probably have to make some adjustments in the next year, particularly on bailers or hay equipment in North America, probably inventory levels in certain regions of Europe, but for the most part if we get to the targets that we've laid, we should be in pretty good shape.

Okay. I'll get back in line, then, and take my other questions offline. Thanks.

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

I'd like to start by saying I think you guys did a terrific job on the gross margin line to essentially hold that almost stable in year-over-year or quarter versus quarter given the dropoff in sales. As you peel the onion you find that the real strength is in the North America segment and I know on the release and in the slides and in your verbal commentary you've mentioned 8 or 10 or 12 things, but I wonder if you could maybe cite what you think are the one or two most important causes for the improvement in the operation income in North America and comment on how sustainable these are and also give us some color on how much is Challenger versus Massey Ferguson, please.

Charlie, thank you, but let's say when you start, it all starts with the people so that means during the last couple of years we basically changed our management team for North America and took on both a, let's say, really went for excellence and we really managed to get a very, very good management team in place in the meantime. That's very important, I think. Second, we work on several projects which are a little bit more long-term like getting to a stronger distribution network without facing a lot of legal problems. So this is a major undertaking which takes time. We are pretty much on schedule with the reduction of our many brands in North America and we will bring it down to two only and they are Massey Ferguson and Challenger. All the rest will be integrated in those two brands so that's also progressing pretty much as scheduled.

And then there are a lot of smaller initiatives in the area of cost reduction, for example, because we of course worked also a lot to get our factories in North America in better shape. We really find the core processes of those factories. We have installed an echo improvement system in order to make sure that we collect input from our people in order to improve our manufacturing processes. So we have a lot of things going on and, therefore, I'm pretty optimistic that at least this is the target, that this is not just a short-term improvement, but a long-term adjustment of our North American activities.

And the good thing is that we went through all kinds of details and reviewed alternatives. I don't want to discuss this here because they're very strategic, but the good thing is that we basically can do that more or less along side with our normal business. So we basically have the right products, we have the right technologies, we understand the business and, therefore, I think to be in North America, to be in this important and big market is very important also for AGCO and we will show improvement I think year-over-year.

Thank you. And just a quick follow-up. Can you comment specifically about Challenger, whether this has been profitable year-to-date?

It is.

Challenger sales are about -- down about -- for the quarter were down a little more than 10% year-to-date, down about 10, and our income because of that's down from a year ago but we're still slightly profitable with the Challenger line. And then the other part of the business that now goes through our CAT distribution network is our sprayer business in North America and that has, Charlie, in answer to your other questions, one of the key elements of North America is the return of strong profitability of our sprayer business and the reason for that was moving the sprayer business through our CAT distribution network. So that's a very profitable, important part of the CAT network business as well.

That's great work. It certainly sets a stage for when volume comes back.

Thank you.

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

Hey, good morning everybody. I have two questions. My first was on Russia and Eastern Europe. If you could give a sense, you gave it in Scandinavia, of how far down that is, if we've already hit trough in some of those markets that really imploded.

The Russian market, Eastern Europe mean market are down about 70%.

Actually, they were down to zero almost at the beginning of the year so that means the main reason is lack of -- it's let's say the situation of the banks in Russia and Ukraine and countries like that and you see also -- you saw that also Kazakhstan now is facing a problem. In a lot of those countries, it's not related to our industry. It's more related to the overall problems they are facing and the fact that customers can't find retail finance solutions. As soon as you have a solution, then you also can do business. So Russia is coming back slowly. We saw that already during the Russian bank crisis some years ago and the demand -- I think the theoretical demand certainly is very high and we have to see. So that means I think it's right to say that they bottomed out, but the question is when will they really recover.

That's fair. They started out the year at zero and haven't climbed that much. That's helpful. The second question would be to the extent you're willing to talk about it, can you talk about where you're at in terms of getting over the hump for tier 4 and stage 3B? Have you already done most of the redesigns you're going to do and can you talk about what percentage of your product portfolio does need a redesign?

Well, actually, as everybody in our industry, most of our equipment needs to be redesigned. We work in this direction already since many years. Everything is on schedule. I don't see a problem. The year 2010 will be a little interesting in a way that you need to make sure that you do the -- take the right decisions with regards to the things you can -- where you are flexible. So buying engines ahead, producing equipment ahead and things like that.

Okay. I'll stop. Thanks.

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

Hi, good morning. Martin, just a follow-up question on your comments to Ann about 2010. I just want to be clear. Was that AGCO sales or were you talking about just the industry? And in that environment do you think given the production cuts that you've taken that you can actually be up in 2010 on the earnings front and with some of the cost initiatives that you've done? And then my second question on the inventory front again in the quarter, did we build inventories in Brazil in the third quarter for AGCO specifically?

I think with the last point we certainly did not.

No, we did not.

Okay.

And your question for 2010, I actually didn't get exactly.

I guess my question is are you saying AGCO sales are going to be flat or industry sales are going to be flat because if AGCO sales are flat and you've -- I'm just trying to figure out if we really underproduced enough what's the likelihood that we get up earnings in 2010.

AGCO sales on our first view of the 2010 budget are flat for the year.

Okay. And is that -- will you be in line with demand, with the industry?

I think so, yes.

Okay. Thank you.

Your next question comes from the line of Andrew Obin of Banc of America.

Yes, hi. It's Bank of America/Merrill Lynch. Just a little bit more technical. Given where the tax rate is running, can you explain why the tax rate is so high and does it mean that we are now running at a structurally higher tax rate going forward or should we use sort of historical tax rates?

Andrew, the reason why we had a high tax rate in the third quarter was generally because we're at such a low -- fairly low income level here this quarter and we have -- we had losses in North America where we don't take any benefit and also readjusted some of our European tax rates due to changes in the mix of incomes and the jurisdictions there. So those were the two factors that drove the rate up. I would advise you to look more at the year-to-date rate and project that forward and, as we said, our fourth quarter should be in the 35% to 40%, which would keep us in the same range for the full year as well.

But here's the question. I thought the whole key was that in North America, as North America gets more profitable, you will be able to utilize NOLs going forward. That's the part I'm a little bit confused about.

Well, that's correct, but certainly in the third quarter of this year we weren't profitable.

No, but I'm looking forward, that's what I mean.

Oh, yes, looking forward, as we improve our North America results and we become profitable, that should drive down our effective tax rate, that's correct.

Okay. So, but I'm sorry, so then going back, so going forward, what's the right range for tax rate? I apologize.

For the fourth quarter?

No, for like 2010 and beyond.

We'll wait until we see what the relative earnings are of each region and we're not ready to give that level of detail yet on next year.

And just to follow up on Ann's and Jamie's questions, so we're forecasting revenues flat as a preliminary forecast for 2010, right?

Yes, that's correct.

Thank you very much.

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

Good morning. Most of my questions have been answered. I just have a detailed question on the order board in North America. One of your competitors earlier this week, last week, basically indicated a 50% down experience in combines and high horsepower tractors. Are you seeing something similar to that?

Andy, I don't have in front of me where we are on each segment, but in general, we're about 50% in North America as well. So I would assume that's correct.

Okay. So against the flat revenue outlook on a preliminary basis for 2010, would you expect North America to be closer to flat or down somewhere in that 50% range?

You need to make sure that you compare apples to apples. When we talked about flat forecast, we talk about the top line, the revenues. You're now talking about the order book being down. So I think the order book will stay pretty much on that level, hopefully will go up again. So that's two different categories we are talking about here.

Okay. So if I extrapolate what you just said, Martin, you would expect order patterns to improve from where you are right now into 2010?

In certain areas, yes.

Okay. Thank you.

Your next question comes from the line of Joel Tiss of Buckingham Research.

How's it going, guys?

Hi, Joel.

I just wonder maybe more color around Europe and maybe even Latin America. What would get farmers a lot more excited in 2010? Is it more from government programs or is it waiting to see industrial production get better? It sounds like they still need to buy more tractors.

Well, Joel, I think it's confidence in their overall income levels. This year they saw in the mid part of the year fairly substantial drop in commodity prices, a little concerned about their input costs and since they had bought significantly -- made major investments in 2008 in particular, they certainly are being more conservative with the buying patterns in 2009. What will get them back buying again I think is confidence in their income levels, seeing the commodity prices higher and looking for more productivity in their farms. So nothing special, but just seeing that overall economic conditions improving and good outlook on their own earnings front.

And then can you give us a sense in 2009 the under production relative to retail demand, if the demand is flat, how much do we add back to 2010 earnings just to produce in line with retail?

We were 5% below this year. Some of that is below retail, but certainly as you notice, we're trying to get our finished goods down so some of that we're selling out finished goods that were on hand so you have to take that into account and we will look into next year and see what adjustments we need to make, whether we're going to build at retail or make any further adjustments. As I mentioned before, we already have identified a few pockets like hay equipment where we think we'll be producing under but we have to finish our detail plans before we can give any more guidance there.

Can you also just help us understand -- last question -- where the finished good inventories are both by products and geographically as well? Sounds like it's more in hay.

Well, I'd say more the dealer inventory's where we're high in hay. When you look at finished goods inventory, it's really across the board. I'd say our South America inventories are much better in line now. We made a lot of adjustments in the first half but where we need to continue to bring them down is particularly in Europe and then somewhat in North America as well. Okay. Thank you.

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

Good morning.

Good morning.

Can you talk about the divergence of the detrimental margins you've reported this quarter across the regions? Is this a function of being in different stages of addressing the problems or is there something more fundamental there?

Can you rephrase the question? I didn't follow it.

Sure. So across the regions that you reported, your detrimental margins were quite a bit different from each other. Can you talk about what was driving those differences?

Yes, I think the -- one of the key differences is just the extent of the declines can create different margins. You're seeing the operating margins and so the operating leverage over your engineering and operating expenses can make a significant difference in what you see falling to the bottom line. So as revenues come down to these large percentages that will happen in the third quarter, you can start to get really very little leverage on your operating costs and that's the real difference. So it's production, absorption and leverage over operating costs which causes those fluctuations. We're also with a small amount of sales, your mix of parts which are high margin to machinery margins which are lower margin has the offsetting impact as well.

Okay. So as you shift to higher levels of production when demand starts to return, do you expect similar kinds of incremental margins to what we've observed on the down side or do you expect more traditional incremental margins?

Well, again, it is a function of your sales going up. It's not just all about the factory but certainly as we go back up, we would expect that we would be able to hold our overheads and try to get as much falling to the bottom line from that additional production. So I think what comes down we should be able to capture when we go back up.

Okay. One last quick point. I notice that sequentially it appears that your repair parts inventories actually were up a little bit. Is that just a seasonality effect or is that -- are you actually -- it's just seasonality?

That should be mainly seasonality, yes.

Okay. Thanks.

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

Thanks, Christie, and we thank you for your participation today on the call and I would encourage you to contact me either via phone or e-mail if you have follow-up questions. Have a great afternoon.

Thank you again for participating in today's conference call. You may now disconnect.