AGCO Corp (AGCO) 2009 Q4 法說會逐字稿

Good morning. I will be your conference operator today. At this time, I would like to welcome everyone to the AGCO 2009 fourth 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. If you would like to ask a question during this time, (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, February 9th, 2010. Thank you. I would now like to introduce Mr. Greg Peterson. Sir, you may begin your conference.

Thank you, Jay. Good morning and thank you for joining us for AGCO's fourth quarter 2009 earnings conference call. On the call with me this morning we have 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 which is posted on our web site at www.agcocorp.com. The non-GAAP measures used in the slide presentation are reconciled to GAAP measures in the last sections of the slides. We will make forward-looking statements including some related to projections of earnings per share, sales, population growth, market demand, and conditions, product offerings, margin, and productivity improvement, plant idling, inventory management, working capital, free cash flow, exchange rates, production volumes, general economic conditions, pricing increases, farm incomes, grain consumptions capital expenditures, pension and benefit plant costs and engineering and restructuring expense. We wish to caution you these statements are predictions and actual results or results may differ materially.

We refer you to the periodic reports we file from time to time with the Securities and Exchange Commission including the Company's form 10K 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 web site. I would now like to the turn the call over to Martin.

Good morning, everybody. Thank you, Greg. Despite the severe global recession of 2009, the long-term drivers of our business remain intact. Closing population, changing diets and improved economies in developing nations are all leading to greater demand for food. Current estimates show that global grain consumption increased in 2009 demonstrating the power of these trends.

We believe favorable farm economics will continue providing farmers to an incentive to invest in farm equipment, that makes them more productive and more efficient. I am pleased to tell you that AGCO responded to the difficult economic conditions and finished the year solidly profitable, and with a stronger balance sheet. Our disciplined inventory reduction program cut company and dealer inventories by more than $550 million on a constant currency basis, compared to December 2008 levels.

Slide 3 shows AGCO's results for the fourth quarter, and full-year of 2009. Our fourth quarter sales are down approximately 14% from the fourth quarter of 2008. And therefore, without the impact of currency, primarily due to weaker demand in Europe, and North America, partially offset by improving conditions in South America.

The volatility in commodity prices and the expectation of lower farm income contributed to a higher level of conservatism in farmers equipment (indiscernible) decisions. End market demand continues to soften in Western Europe and North America. Sales decline steepened in those markets during the fourth quarter. In Brazil, our strong government support in the form of subsidized interest rates helped stabilized the market. In the first quarter 2009, sales declined lower production volumes and weaker mix of products compared to the fourth quarter of 2008 resulting in a drop in adjusted operating margins to 3.1%. Our production volumes in 2008 and 2009 are illustrated on slide four.

Fourth quarter 2009 tractor and combine products leveled to a down 23% compared to the fourth quarter of 2008. Softening global demand is evidence in our order board which has declined significantly from year-end 2008 levels. (indiscernible) the backlog in Europe and North America is approximately half of the level of the end of 2008. In South America, the order board is up considerably from year-end 2008 levels. We made good progress in lowering inventory levels in the fourth quarter of 2009. However, we will make further production cuts in early 2010, in response to the weak demand in some of our market.

Our first quarter 2010 of production of tractors and combines is expected to be down approximately 20% from 2009 levels. We will make deeper cuts in Europe and North America, and increase production at the same time in South America. We are idling some of our plants during the first quarter to further reduce inventory levels. These actions will significantly impact our first quarter 2010 sales and earnings. For the full year of 2010, we are expecting tractor and combine production to be down 3% to 5%.

Slide five detailed industry unit volumes by region for the full year of 2009. Industry tractor sales in North America were down 21% compared to 2008 levels. The most significant declines occurred in the south 100 (indiscernible) tractor segment which are closely tied to the weak residential construction dairy and livestock production areas. (indiscernible) tractor and tractors were also down from last year's robust levels.

The combine market grew approximately 15% during the full year of 2009 compared to 2008. The sales of high horsepower tractor and combines into the professional producer sector weakened in fourth quarter as the late harvest added to farmer's conservatism. AGCO's total unit sales of tractors and combines in the full year of 2009 were both down from 2008 levels.

Industry unit retail sales investor (indiscernible) weakened further in the fourth quarter. Industry sales were down 20% in the fourth quarter of 2009 compared to the fourth quarter of 2008.

The 20% decline in the fourth quarter of 2009 compares to a decline of 12% in the first nine months of 2009, compared to the same period in 2008. European demand were softest in the credit challenged markets of eastern and central Europe and Russia. Our intake across Europe remained weak. We are projecting softness in the western European markets through the first half of 2010. South America industry retail tractor volumes decreased approximately by 17% during the full year of 2009 compared to 2008. Route conditions and limited credit availability in Argentina contributed to a decline of approximately 61% in Argentine retail tractor volumes. The decline in Argentina were partially offset by growth in Brazil of approximately 5% for the full year of 2009 compared to 2008.

A Brazilian government financing plan for farms and low interest rate program launched in July covering all equipment help to stabilize the Brazilian market. In South America, we are expecting improved market conditions in the first half of 2010, compared to the first half of 2009. And we will now provide you with some more details of our fourth quarter results. Andy Beck.

Thank you, Martin. So turning to slide 6, AGCO's regional net sales performance for 2009 is outlined. Currency translation had a positive impact of approximately 10% on AGCO's consolidated net sales, in the fourth quarter of 2009.

During the fourth quarter of 2009, the Europe Africa Middle East segment reported a net sales decline of approximately 27%, excluding the impact of currency, compared to the fourth quarter of 2008. Sales declines in France and Germany contributed to the western European decline. AGCO sales in eastern and central Europe and Russia continued to be very weak. North American sales were down approximately 42% during the fourth quarter of 2009 compared to the same period of 2008.

Destocking initiatives and softer end market demand in the dairy and cattle producer segments contributed to the decline. Hay tool, high horse powered tractors and sprayers showed the most weakness.

AGCO's fourth quarter 2009 net sales in South America, increased approximately 4% from 2008 levels excluding currency. The low interest financing, offered by the Brazilian government in July produced strong growth in AGCO's fourth quarter sales in Brazil compared to 2008. Improved demand in Brazil was partial usually offset by continued weakness in the Argentina market.

Net sales in our Asia Pacific segment grew 62% in the fourth quarter of 2009, compared to 2008, excluding the impact of currency. Improved sales in Asia drove most of the growth.

Part sales were $225 million for the fourth quarter of 2009, and $939.9 million for the full year of 2009 which was a decline of approximately 5% for both the quarter and full year compared to the same periods in 2008 excluding currency.

Slide seven reviews AGCO's sales and margin performance. Gross margins were down approximately 300 basis points in the fourth quarter of 2009 compared to the fourth quarter of 2008. Lower production volumes in North America and Europe were partially offset by margin improvements in South America. Adjusted operating margins were 3.5% for the full year of 2009. The decline in operating margins resulted from weaker sale, lower gross margins, and higher engineering expenses as a percentage of net sales.

Operating margins and AGCO's Europe, Africa Middle East region declined significantly for the full year 2009 compared in the same year 2008. Weaker sales, lower production volumes and increased engineering expenses focused on the high horsepower tractors and new harvesting products contributed to the margin compression. In the fourth quarter of 2009 operating income declined due to over sells, production cuts, and inventory reduction initiatives.

In the South America region, operating margins declined approximately 343 basis points for the full year of 2009 compared to 2008. Softer market demand produced lower sales, and the shift in mix of products toward smaller lower margin tractors also contributed to the decline. Operating margins did increase sequentially in South America compared to the fourth quarter 2009 compared to the third quarter. Stronger market demand, a richer product mix and improved factory absorption produced the increase.

For the fourth quarter 2009, operating income in the North America segment more than doubled and operating margins improved to 1.5% despite a 20% decline in sales. AGCO's results in North America benefited from improved margins from new products, productivity initiatives and lower SG&A initiatives, partially off set by higher engineering costs and the impact of lower production. In fourth quarter of 2009, operating income declined in North America due to the significant drop in sales, production cuts, and the order destocking.

Slide eight details our progress with inventory reduction initiatives. Despite the softening demand throughout the year, we were able to reduce inventory and accounts receivable at year-end by over $550 million on a constant currency basis, from 2008 year-end levels. As Martin mentioned, we will idle plants in the first quarter of 2010 to address these opportunities. We are also planning a lower use of seasonal working capital during 2010, by reducing the build of dealer and inventory required by the spring season.

At the end of December 2009, our North America dealer months supply on a trailing 12 month basis, was lower in all categories in the same time a year ago. We still have work to do especially in the area of hay equipment. Our dealer month's supply in North America was as follows. Tractors were at 4.5 months, combine at the 2.5 months, hay equipment at 6.5 months.

Other working capital details are as follows. On December 22nd, 2009, we terminated and replaced our US and Canadian accounts receivable securitization facilities which totaled $350 million with new sales agreements which will allow in the transfer of the majority of our wholesale in the North America, to AGCO Finance which is our 49% owned retail finance joint venture. This is on an on-going basis.

This change generated approximately $41 million of cash flow which is included in our free cash flow analysis on slide nine. At December 31, 2009 we had accounts receivable securitization facility still in Europe with an outstanding funding of approximately $149.9 million.

Losses on sales receivables, primarily under our securitization facilities which is included in other expense net was approximately $3.8 million for the fourth quarter of 2009 compared to $5.7 million for the fourth quarter of 2008.

Slide nine addresses AGCO's free cash flow, which represents cash provided by operating activities less capital expenditures. The benefit of our working capital initiatives can with seen on the slide. AGCO's fourth quarter cash flow of $448 million was generated largely from working capital reduction.

Significant production cuts made during 2009, resulted in lower accounts payable which limited the benefit for the full year and working capital and cash flow. With a net debt position near zero at year-end 2009, we plan to continue to invest for future growth. in the form of engineering and investment in our plants and new products. Even after covering increased spending on these strategic investments, we are targeting free cash flow in the $75 million to $100 million range, during 2010.

Slide 10 looks at our depreciation and capital expenditure trends. We slowed the investment in some of our planned productivity project and new products during the year in respond to softening market conditions. Looking ahead to 2010, we expect to increase our capital expenditures as we work to meet the tier four emissions requirements refresh and expand our product line, and improve our factory productivity, and establish assembly capabilities in both China and Russia.

Slide 11 shifts our focus to assumptions underlying our 2010 outlook. We are optimistic about the long-term growth opportunities for industry in our business. Our strategies are aimed at helping AGCO grow profitability in this environment. However, the weak demand in Europe and North America, creates uncertainty around the market conditions we will face in 2010. Our outlook for 2010 is not changed since we spoke in December. It anticipated decline in western Europe and North American markets and modest growth in South America.

Our 2010 forecast assumes pricing increases of 2.5% to 3% on a consolidated basis. In 2010, expenditures on new product development and tier four emissions will cause an increase in engineering expense by approximately 20% or $40 million. We also look for our productivity and purchasing initiatives to drive improved margins. The impact of our pension and post retirement benefit plans is expected to increase expenses by approximately $9 million.

Slide 12 lists our view of selected 2010 financial goals. We projecting 2010 sales to range from $6.6 to $6.8 billion or roughly flat with 2009. We expect forecasted pricing benefits and market share improvements will offset the softer market demand. Our forecast for 2010 diluted earnings per share ranges from $1.55 to $1.65.

We expect gross margin improvements to be offset by higher engineering and pension costs. In the seasonally low first quarter of 2010, tightened dealer inventory management in North America and Europe is expected to drive lower production and sales levels in result in an adjusted net loss of $0.10 to $0.15 per share. These earnings per share projections exclude restructuring expenses expected today be incurred in the Company's European operations estimated at approximately $0.10 per share for the full year of 2010. Operator, that concludes our prepared remarks. We'd like to open it up for question and answers.

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

Good morning, guys. It is Ann.

Hi Ann. Good morning.

I just wanted to talk about the western European, you maintained 10% versus 2009, but I think you did say very clearly that western Europe had deteriorated in Q4. Can you help us reconcile that to your number. And what you expect to happen in the fundamentals that would be important improvement in the back half?

It is still early part of the year. We have limited visibility for obviously for the entire year. We certainly see in the first half is additional weakness and demand. And the fourth quarter was down approximately close to 20% in western Europe. I think project it will be down about that much at least in the first quarter of the year, maybe even the first half. And then you will see a flattening out as the comp, comparable demand in the second half was obviously much weaker. So we are looking for flatter comparisons in the second half. And so, that's how we get to the 10% projection.

Okay, And then can you talk about currency, the impact of that in the fourth quarter? What you have included in our outlook for currency?

Currency, if you can see that we had a benefit on the sales side, and probably offset to some extent by the impacts of imports into certain markets. But I would say it was a slight benefit from currency in the fourth quarter probably a few cents a share. As we look into 2010, the currency will not, at current rates will not be a significant impact to sales and earns. I don't think it is a significant factor to consider next year or this year in 2010.

If we stay at current levels or forecast?

At current levels.

Okay. And one real quick follow up on North America. Your SER engines particular in the challenger product line, you underperformed the market, and tractors in North America, and some of them probably mixed. But can you talk about how your SER engines are being accepted out there in the market place particularly by the Caterpillar dealer?

So far very well. And I don't know whether you saw that some of our competitors, competitors changed directions and announced to launch SER technology as well. So that means we're somewhat are proven head in the right direction.

Thanks and can you be a little more specific on accepted very well?

Well, actually, you want to know numbers or something?

Yes.

Ann I think these engineers you are speaking of are relatively low volumes at this point. We're just rolling out those large tractors in 2009. We'll have a large supply here in 2010. So I think, I don't have any specific numbers to give you on that other than we have project that they will, our sales will improve there, in that sector in 2010. So I think it is more that we start performing 2010 that's a real factor.

Okay. Yes That's helpful. That makes sense. Okay. I will get back if line, and follow up off line. Thanks.

Your next question comes from Steve Volkmann with Jefferies.

Hi. Good morning.

Morning, Steve.

Andy I hope this isn't too net picky but the unallocated expenses in the quarter were a lot lower than what I was looking for. Was there anything going on there that we should know

A year before we had some legal accrual that we didn't have here in fourth quarter of 2009. So, that could have been throwing you off to some extent. But other than that we are trying to cut expenses. We have cut expenses throughout our organization, including those corporate expenses. We also had lower costs associated with incentive plans, which also would pull those expenses down as well.

Ok great. And then to follow on to that, what should we expect to come back to us in 2010?

When you look at 2010, you're going to be flat to slightly down.

Okay. Great. Then maybe I was a little surprised, Brazil seems to continue to do very well given the January numbers, I think were somewhat surprising on the upside. And yet, you still have a pretty modest outlook down there. Is it just that Argentina continues to be so difficult, or do you think that maybe things are a little brighter down there, that your forecast might.

I think if you take the balanced approach, it might be a little conservative on South America. But on the other hand, we have (indiscernible) on the other markets. So I think over all, when we think about our guidance on the top line, we might be okay.

Okay. Thank you.

The other thing is we did gain market share, in South America. So, we have been successful in (indiscernible) regain the market position we want to be in.

Your next question is from Meredith Taylor with Barclays Capital.

Hi Good morning.

Morning.

You obviously have view on year-over-year change in production levels that you've seen. But can you talk about the sequential changes you saw in the fourth quarter? And maybe you can offer some color there on a geography by geography (inaudible) in Europe?

In the fourth quarter, Meredith?

Sequential changes, versus the third quarter.

Well, sequentially, let's see, the production was fairly level with the third quarter. And that's unusual because we usually have shut down periods in the third quarter. So, our production is typically the lowest in the third. But here in 2010, because of all of the additional cuts it was very, it was pretty level with Q3. So that is not something that we normally see. I don't have specifics by market. But certain think majority of the, really all of the cuts were in Europe, and North America that South America production would have been up. So, what we see overall is the production was down about 20% or so in the fourth quarter.

Okay. Got it. And you talk about production levels for tractors and combines, but I realize that a lot of inventory efforts that are underway at this time, in North America, which are Ktools, bailers and some other categories. Can you walk through more broadly, the production cuts you saw in some of those other categories?

I don't have anything specific on that but when you look at North America, the production we have is most of the production cuts is in hay equipment. We give you the supply of hay dealer receivable, deal inventory on hay, and it was still higher than where we would like to see that. So, there is still too much inventory out there in the industry and with our dealers with hay equipment. And we will continue to cut production in that, in that category throughout the first part of 2010 as well, relative to, probably what we normally do.

Okay. Yes, I was looking at the down 23% year-over-year for tractors and combines. Trying to get an order of sense of magnitude for how much it would have been for hay equipment.

Yes, Hey equipment was down about 25% in North America. The market was.

One last question, I mean if you (indiscernible) production levels for the first quarter, again if you can just talk sequentially around the trends you are looking for from a production level. And again any color by geography would be helpful.

Well, in the first quarter we expect production to be down about 20% from the year before. And that production is all in really it is more significant cuts than that, in Europe and North America with higher production expected in South America. So, as have said in our comments, we are seeing an increase in demand here, and projected in South America in the first quarter, but significantly lower sales and production in North America and Europe. As the demand profile as well as we are continuing to try to cut production in order to reduce inventories and/or reduce the level of seasonal build of inventories that we typically have and the spring selling season.

Okay. Just again trying to get a better sense of how you looking for production to move sequentially relative to the fourth quarter?

Well, relative to the fourth quarter, it is really hard Meredith, to compare that because we really have a seasonal changes there. But as you look at production, it should be down, from the fourth quarter at least another 10% or 15% from what we had.

Okay. Thanks so much.

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

Good morning. Hi. I have a follow up to Meredith's question on the inventory. With production cuts in Q1, do you expect your inventory to be where you want them to be? Or is there a potential given your market outlook for production cuts relative to retail in Q2?

The answer is yes. So, they will be where we want them to be under the assumption that there are no further changes in our sales budget.

Okay. And then, do you expect the year to year change in both North America and Europe in the first half to be similar to what you saw in the fourth quarter? In the industry retail?

For sure for the first quarter. The changes in industry retail should be similar in the first quarter. Second quarter might be, projecting to be a little better. But it is based on more comparables than I think a change in market conditions.

Okay. Thank you very much.

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

Good morning. Two questions, one, Andy, can you sort of comment on how you are thinking about profitability for North America for 2010? And then, whether we expect to see an improvement versus 2009 for the full year. And then in any other question, I think at your analyst day you said you were anticipated material costs to be flat for the year. Is that still the way you think about the year. And did we get any material cost benefit in the fourth quarter specifically?

Okay Jamie. On North America, we expect our earnings to be improved in 2010 in North America, not significantly, but slightly improved. We are seeing some March improvement and so that should help us, we expect. But we will have higher engineering expense in North America as well. In terms of our material cost. Lost my train of thought here. Material costs, our assumption, you are right, is that it would be relatively flat. We have seen some changes in what's happening here with material cost here in the last 30, 45 days. So we think there's some risk of higher material cost particularly in steel, as we go throughout the year. But it is still a little uncertain. We feel like we are in pretty good shape for at least the first half of the year and we will have to see how those prices develop. We did get some benefit. So as we come into 2010, we are in a way carrying over some benefits from lower material costs as we enter into 2010.

Okay. So we should look at that as a possible head wind to EPS in the back half of the year, though.

Well, I think --

We are not changing pricing assumption.

I think it's too early to say. And what we have the industry, and our Company has been able to respond to that with pricing changes, if need be, if it is a material difference. So, I think it is too early to say that's a major issue at this point.

Jamie, I'm a little more optimistic because we just found a major project in the area of purchase and materials. And I expect this will help us. Also, it is not in the budget. So normally I think we should be okay, even with some danger with a little head wind at the end of year, I think normally, we should be fine.

And then, last, did we see any change since December in eastern Europe or is that still pretty depressed?

In practice, not. We have sold maybe some more products here and there but nothing fundamental.

Okay. Thanks: I will get back.

But the market is a little better than maybe a year ago but not exciting at all.

Okay. And you are not assuming anything in the.

Not in the budget. So in case something would happen, this would be, would come on top.

Okay. Thanks. I will get back in queue.

Your next question comes from line of Steph Weber with RBC Capital Markets.

Hey thanks. Good morning everybody. Can you give us color on what you are seeing with your dealers, maybe some color by region and by type of equipment? And as a follow up, can you tell us what pricing was in the fourth quarter? Thanks.

In terms of used inventories, our used dealer inventories is up somewhere between 10% to 20%. I would say that is from very low levels at the end of 2008. So, the level of used dealer inventory we are seeing, that's in North America we are seeing, I would say is not way out of line. It is probably a little higher than everyone would like, but not significantly out of line. In Europe, I think the -- I don't have a number for you but I think your inventories are up from the same percentage as North America. They have probably a little more of an issue in that they rely on the eastern European market, as a source of moving used equipment. And that market as we just discussed is not available for that any of much of the extent it used to be. And so, we do have issues with used inventories and that's making dealers be more conservative in their buying patterns. And so that is impacting the markets at this point. Our pricing to go on to your next question was about 1.5, in the fourth quarter.

Okay. So just going back to North American inventory, can you give us the used inventory. Is that across the board, or is it skewed towards small equipment versus large equipment?

I don't have that data. I would say it's across the board, though/

Okay and then back on pricing. Can you just reconcile? So, pricing was up 1.5% in the fourth quarter. I think the third quarter 2 to 2.5 and for 2010 you are looking for something more like 2.5 to 3. Is there is that just a function of new products or carrying higher price points or can you just give us some color on that?

Sure, I think it's a factor of new products, your normal pricing of new model year. And also, I think we saw in 2009 some discounting as the companies were reducing their inventory levels. And hopefully, most of the industry levels are now in line in the industry, or getting back in line. And so that won't be as much of a factor in 2010.

Some of this smaller European players who don't make money with their activities, they're very aggressive in the marketplace, and dumped product into the market. And I think they on closing the year found out this wasn't very helpful, with regard to their bottom line performance. I am talking about German and Italian manufacturers.

Got it. Thanks very much, guys.

Your next question comes from the line of Mark Koznarek with Cleveland Research Company.

Hi. Good morning.

Good morning, Mark.

A couple of questions here, just to clarify, the foreign exchange expectations in December you were talking like 4 or 5 points for the revenue contribution for 2010. Is that unchanged or is that now changed to something more modest?

It is changed more modest. Mark.

So we are talking like 1 to 2 points.

Yes, at the most at this point.

Okay. All right. Then, secondly, we took some, you took some larger restructuring here in the fourth quarter, $13 million for the year. And it looks like you know your $0.10 works out to be the same number for 2010. What are we actually getting for that? What are you doing? What kind of on going benefits are is the Company expected to o get for that expenditure?

Sure, Mark the majority of those costs relate to one, the closure of our Randar Denmark facilities which was a small combine assembly operation that is correct we had. That production is moving to our joint venture that we have in Italy, called Laborda, And so that cost, some of those costs were incurred in the fourth quarter, will continue to incur here in the first half of 2010 as we close that facility down. And then the other significant cost that we are incurring is a permanent head count reduction, and some of the work force in our French facilities, both in our transmission joint venture as well as in the assembly operations in Bobay. And so those will be on going, as well as we work through those negotiations and that process. So that's a 2010 item as well. The benefits compared to 2009 are not significant, in that these most of these workers particularly in France were laid off under government programs, where you can lay off employees, and the government picked up their costs during that period of time. But, looking at our demand profile and our prospects for improving productivity in that plant, we did not feel like we needed those permanent workers anymore. And the result have made a decision to permanently reduce our worker count in France at this point. You might read something about it pause as you can imagine, it is not so easy to lay off people. But overall, as Andy says, it is a result of becoming more efficient, since we also work on the major (indiscernible) re-engineering and redesign project for the Bovar factory, which includes also our transmission joint venture, we have basically in the same building.

And then I had just one final question on South America, Brazil in particular, on the government sponsored financing programs. Can you update us on where those stand? When are they expected to lapse? Are they July to July, or you know, what is the outlook for the government support in that market for the year?

Sure, Mark. The financing typically have as you say a July to a July period of commitment. There is a specific low interest program, that is in place, that stimulating the market here in the second half of 2009, and the first half of 2010 which was a 4.5% low rate program, which will expire at the end of June 2010. That program was supposed to expire December 2009 and they renewed for another six months. So at the end of June, we will have to see what programs will remain in place or whatever changes might happen. We don't have any visibility of that at this point. Other than it is an election year. And so we are hopeful that strong programs will remain in place for the full year.

So just to clarify, your South America outlook, 0% to 5%, what would that assume in those financing programs, in the second half? Would it assume a continuation that it gets rolled over, or does it assume it goes away?

Well I don't think that we will be assuming that it goes away. I think that we do assume that the first half will be stronger than the second half, primarily because we just don't have visibility, and there is a risk there. But, we can't afford with that projection the market could be down a little in the second half relative to the first. Relative to what we saw in the second half of 2009.

So you're assuming there will be some degree of government sponsored financing in the second half?

Absolutely.

And --

There always is. There will be some, 100% but how much, it also coil be more, as Andy said, it is an election year. And therefore, Lula might be elected and might be a little more generous. So that's not yet clear. So but there will be something.

Okay. Great. Thank you.

Your next question comes from Daniel Dowd with Bernstein.

Good morning. I noticed, the decremental margins in Europe, Africa, Middle East were really quite high. And I know you have talked about the charges for 2010. But I wonder if we could take a step back and ask a longer term question about what are the three or four most important sources of that rigidity in the western European facilities and what's the glide path of how that gets addressed. Or alternatively, should we expect that there really isn't much to be done about it and we should expect that decremental margins in future downturns?

I think what you're saying in terms of the margins going down was a significant cut in production here in the fourth quarter as we working our inventory levels down and you see the results of what we achieved there. So, moving forward as we look at our European facilities as Martin talked about we have a number of projects that we are kicking off in 2010 that we hope will make significant improvements. And the productivity of those facilities we are making investments in those facilities.

We are working very hard on how to integrate those facilities particularly on a material by standpoint to be more productive in the way that we design products and the way that we buy our materials. And so, we think that there is a lot of opportunity there. When you look at the overall fixed cost structure of those plants, I wouldn't expect those change that much from where we are today. It is more on the material cost side and the productivity that we can achieve in those plants that will hopefully drive margin improvement in the future.

What I take away from that are structural margin opportunities, the volatily of the margins in the western European facilities is unlikely to be declining the way it has in some of the other companies. Is that a fair assessment?

Yes I think so.

All right. One last thing about North America, what scale do you think you need to be at there, in terms of either revenue or volume growth, to get to mid single digit margins. What number should we expect to see before you have a long term realistic expectation?

We have talked a lot about what we are doing in North America. And you can see we are making some improvements in the margins through a lot of our productivity projects that we have in place. We are continuing to work on those and we think there's more opportunity there.

But I do believe there's an element of growth that we need in order to get to that mid single digit operating margin that we have discussed. We are at about roughly 10% market share right now. And I think you know every point of market share would give us another 10% of volume. As we move up the chain, and try to that market share up, I think there's going to be a significant leverage we can create.

I don't have a specific target for you that says we are going to need to get to certain sales or anything like that because it is too dynamic of all the factors that are involved in your margins. But certainly growth is a significant factor that we want to improve on as with well.

Margins are very important targets for all of our managers. Once a year, we have a strategy meeting with all of the leaders in the Company. And this year we will leave you all of our facility, factories, all our brands. And with we prepare that by a benchmarking. And we certainly will focus on market improvements. You can be sure.

Okay. Thank you.

Andy will not want to share with you what the results are of course. But maybe we do towards the end of the year.

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

Hey everybody. My line was cut for a minute, so I apologize if this is asked and answered. In Brazil, I wanted to ask about the mix and whether you can differentiate the trends you're seeing between buyers of smaller equipment and buyers of larger equipment?

Yes, you can. The market is still weighted toward the small end of the market where the growth has come from in Brazil as a result of some of these programs, (inaudible), that support small farms, and provide very attractive financing for the small farmer.

There's probably been a shift of about 15% to 20% in the mix of sales between low and high horse power tractors in 2009 compared to 2008 but in the fourth quarter, it did improve back. It was more like 5% to 10% difference in that fourth quarter. So we are seeing an improvement in the mix back to what I would call more normal conditions.

Do you have a sense of the sentiment among the end user, the larger equipment?

In Brazil, one of the key customers of the larger is the sugar cane area. And they've had for a couple of years now had tough conditions with lower sugar prices. But as you know the sugar prices are now extremely high. And we are expecting to see demand pick up in that sector. That's a high horse power market particularly for our vulture products that have a good share of that business. So that should help us and it certainly did help us in the fourth quarter. And we expect that to continue in 2010.

If I can, just one other question. And this is longer term on tier four, can you talk about which hurdle is higher, tier four interim or final? When the R&D curve might come for tier four final, and when you might know how large the R&D curve for tier four final would be?

I don't know if I can fully answer that question. Certainly, what's going happen in 2010, are engineering cost is going to be up 20%. And a lot of that is related to to being ready for the tier four interim. But we don't expect engineering costs to come back down, in 2011. And that relates to some of the projects we have in place but also to getting ready for 2014, and the tier 4 final.

I don't have much visibility beyond that to tell l you whether the costs are going to come down. So we will have to continue to focus on that and give you more visibility once we have it ourselves.

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

Hey guys how are you doing?

Hi Joel.

Just can you give us the number of days of plant idling in the first quarter of 2010 versus 2009?

I don't have that, Joel for you. As we said, production will be down about 20%. It is going to be, we certainly were idle like in our German facility or for the month of January.

We can make it very simple because 2009, first quarter, no factory was fully down at all. And in the case of Germany, we had a record quarter first quarter 2009. So, that means that is that's probably not right benchmarking.

That's a good point. But we're down in Germany and Kansas, and for a large part of January. And then we're pulling forward some vacation days in other plants into the first quarter as well. So, it is a mixed bag of how to achieving that but production down 20%.

Can you give us a sense about the geographically about the price increases. If there is more or less, and just the sense of where it's going to come from.

It is roughly the same in all markets.

Okay. Can you also tell us January, in Brazil? A lot better than December? Or the same, or just any sort of sense?

I think that -- it is very strong.

We had a very strong January and it was better than December.

I don't have the numbers but it was a good start of the year in Brazil.

So, it was better in December. Okay. All right. Thank you.

Thank you. We have a follow up from the line of Andrew Casey with Wells Fargo Security.

Follow up question on the backlog Martin, roughly 50% down year-over-year. Has there been any sequential improvement if you ex out Europe?

I will categorize our order situation as stabilizing now. And so as we said, in North America and Europe it is about half of where it was. But those were very high order levels, a year ago. And South America orders are higher than they were a year ago. But in all cases, I would say that they're now stable.

Okay. Thanks, and then back to I believe it was Dan's question on the longer term North America growth, do you expect in the short term with brand consolidation you are going after in that market to see a little bit of a a share slippage near in the term before it re-eccelerates for your plan?

No.

No. We don't expect that.

Okay. Thank you.

You're welcome.

The excitement is mainly with those customers who never bought those brands. So therefore.

And sir, there are no further questions. I will turn the conference back to Mr. Peterson for any closing remarks.

We would like to thank you for joining us this morning, and would encourage you to follow up with me later today if you have any additional questions. Thanks and have a great day.

This concludes the conference call. You may now disconnect.