AGCO Corp (AGCO) 2010 Q1 法說會逐字稿

Good morning. My name is Shira, and I will be your conference operator. At this time I would like to welcome everyone to the AGCO Corporation 2010 first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-and period. (Operator Instructions).

As a reminder, ladies and gentlemen, this conference is being recorded today, Tuesday, April 27, 2010. Thank you.

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

Thank you, Shira. Good morning, and thank you for joining AGCO's first quarter 2010 conference. On the call 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'll refer to a slide presentation, which is posted on our website at www.AGCOCorp.com. The non-GAAP measures are reconciled to GAAP measures in the last segment of the presentation. We will make forward-looking statements, including projections of earnings per share, sales, market demand and conditions, margin and productivity improvements, inventory management, working capital, exchange rates, production volumes, general economic condition, pricing increases, capital expenditures, pension and benefit plan costs and engineering. We wish to caution you that these statements and predictions and actual events and results may differ materially.

We refer to you the periodic reports that we file from time to time with the Securities and Exchange Commission commission, including the Company's Form 10-K for the year ended December 31, 2009. These documents discuss important factors that could cause the actual results to differ materially from those contained in other forward-looking statements. A replay of this call will be available on our corporate website. Now I'd like to turn the call over to Martin.

Thank you, and good morning, everybody. We started 2010 with contrasting regional trends. The growth in Brazil was stronger than expected, while North American market was stable, and the market in Europe continued to weaken relative to last year. During the quarter we closely managed the seasonal build of our inventories by slowing production schedules and putting some factories on temporary shutdown. Our significant production cuts in Europe and North America negatively impacted our first quarter sales and margins. This control production in the first quarter positions us to improve our performance in the second half of 2010.

Slide three shows AGCO's financial results for the first quarter of 2010. Our first quarter sales were down by approximately 13% from the first quarter of 2009. Excluding the impact of currency sales, we are 22% below last year. In the first quarter of 2010, sales declines, slower production volumes, a weaker mix of pro duct and high engineering expenses all contributed to the drop in our earnings.

Our production volumes for 2009 and projected volumes for 2010 are illustrated on slide four. First quarter 2010 tractor and combine production levels were down 20% compared to the first quarter of 2009, with significantly higher production South America, offset by heavy production cuts in both our North American and European factories. This reduction helped us to manage the seasonal build in our inventory, and our dealer's inventory in the first quarter of 2010. This strength will continue in the 2nd quarter with the exception that our overall production levels are expected to be above the levels of the second quarter of 2009. As a result of lower production rates in the first quarter of 2010, our orders have improved across all markets from year-end 2009 levels.

At the end of March, the backlogs in Europe and North America are up over 30% from December 2009 levels, but remain below the first quarter of 2009. In South America, the auto bond is up from both quarter 2009 levels and year-end 2009 levels. For the full year of 2010, we are expecting tractors and combine production to be about flat to slightly up compared to 2009 levels.

Slide five details industry unit volumes per region for the first quarter of 2010. Industry tractor sales in North America were up only slightly compared to first quarter 2009 levels. Compact tractor category, which is tied more closely to the general economy, was up 4% in the first quarter of 2010 compared to the same period last year. The high horsepower segment benefited from favorable low-cost economies and increased 14% compared to the first quarter of 2009. Declines in utility tractor sales offset growth e in the other segments. The combine market grew by about 1% during the first quarter of 2010 compared to the strong levels seen in 2009. AGCO's total unit sales of tractors and combines in the first quarter of 2010 were both down from 2009 levels.

Industry unit retail sales in Western Europe weakened further in the first quarter. Industry sales were down 23% in the first quarter of 2010, compared to the first quarter of 2009. Slower recovery of the general economy, weaker farmer sentiment and lower farm income in 2009 all contributed to the decline. Demand persisted in France, Germany, Scandinavia and Finland. South American industry retail tractor volumes increased approximately 53% during the first quarter of 2010, compared to a relatively weak first quarter of 2009. Strong car production have an attractive programs provided by the government contributed to strong market demand. Better harvest in Argentina and improved credit availability resulted in market growth of 37% compared to the drought impacted volumes in the first quarter of 2009.

I will now turn the call over to Andy Beck, who will provide you more information on our first quarter results.

Thank you, Ma tin, and good morning to everyone.

I'll start with a look at our regional businesses. AGCO's regional net sales performance for 2010 is outlined on slide six. Currency translation and a positive impact of approximately 9% on AGCO's consolidated net sales in the first quarter of 2010. During the first quarter of 2010, the Europe, Africa, Middle East segment reported a net sales decline of approximately 37% excluding the impact of currency compared to the first quarter 2009. The most significant declines occurred in France and Germany. Sales and production were significantly lower in 2010 compared to the first quarter of 2009 due to soft retail market conditions.

In contrast, our 2009 sales benefited from large opening order boards in the first quarter of 2009, which were carried over from the strong markets in 2008. North American net sales were down approximately 31% in the first quarter of 2010, compared to the same period in 2009. Destocking initiatives and softer-end market demand in the dairy and cattle-producing segments contributed to the decline. Tools, mid range tractors and implements showed the most weakness.

AGCO's first quarter 2010 net sales in South America increased to approximately 68% from 2009 levels excluding currency. In Brazil strong harvest, stable commodity prices and low interest rate government sponsored financing programs resulted in strong industry sales. Better growing conditions and improved credit availability contributed to the I improved results in Argentina. Net sales in our rest of the world segment declined approximately 14% in the first quarter of 2010 compared to 2009, excluding currency. Lower sales in Australia and New Zealand contributed to the decline. Part sales were $207.3 million for the first quarter of 2010, which is a decline of approximately 1% for the quarter compared to the same period in 2009, excluding currency.

Slide seven reviews AGCO's sales and margin performance. Gross margins were down approximately 80 basis points in the first quarter of 2010, compared to the first quarter of 2009. Lower production volumes in North America and Europe were partially offset by margin improvements in South America. The decline in operating margins resulted from weaker sales, lower gross margins, and higher engineering and SG&A expenses as a percentage of net sales. Operating margins in AGCO's Europe Africa Middle East region declined significantly for the first quarter 2010 compared to the same period in 2009. Weaker sales, lower production volumes, sales mix, and increased engineering and SG&A expenses as a percentage of net sales resulted in lower operating margins.

In South America region, operating margins rebounded to 11.3%, an increase of over 800 basis points for the first quarter of 2010 compared to 2009. Robust market demand in Brazil and improved conditions in Argentina in a produced higher sales in both countries. Increased production and the shift in mix of products towards larger high horsepower, higher margin tractors also contributed to the improvement. Sales of tractors, combines and implements were all up sharply.

In the first quarter of 2010, operating income declined in North America due to the significant drop in sales, production cuts, and dealer destocking. Weak demand from dairy and livestock producers resulted in significantly lower sales of our hay equipment and mid range tractors. March gins for the full year are expected to improve in 2010 compared to 2009. Higher sales, higher levels of sales and production in the second half of 2010 in both North America and Europe, stronger full year margins in South America, and our global cost reduction efforts are expected to drive the expected margin improvement.

Tractors were at 4.5 months, 2 months for combines, and 7 months for hey equipment.

Other working capital details are as follows. On January 1, 2010 the company adopted the provisions of ASU 2009-16, and result as a result of this adoption of the new accounting rule, the Company's European securitization facilities were required to be recognized within the company's consolidated balance sheets. At March 31, 2010 the company's accounts receivable, securitization facilities in Europe and outstanding funding of approximately $138 million. The Company recognized approximately $138 million of accounts receivable sold through its European securitization facilities with the corresponding liability equivalent to the funded balance of the facilities. Losses on sales of receivables primarily under our securitization if facilities, which is included in other expense net with approximately $2.7 million during the first quarter of 2010 compared to $5 million during the first quarter of 2009.

Slide nine addresses AGCO's free cash flow, which represents cash provided by operating activities less capital expenditures. AGCO's use of cash in the first quarter of 2010 was $226 million compared to over $0.5 billion in the first quarter of 2009. As a result, our balance sheet and liquidity position at the end of the first quarter is significantly better than at this point a year ago. We plan to continue investing for future growth in the form of engineering expense and additional investments in our plants and new products. Even after covering increased spending on strategic investments, we're targeting free cash flow in the 75 to $100 million range during 2010.

Slide ten looks at our depreciation and capital expenditure trends. We slowed the investment in some of our plant productivity projects and new products last year in response to softening market conditions. In 2010, we expect to increase our capital expenditures as we work to meet the tier 4 emissions requirements, refresh and expand our product line, improve our factory productivity, and establish assembly capabilities in China and in Russia.

Slide eleven shifts our focus to the assumptions underlying our 2010 outlook. We are optimistic about the long-term growth opportunities for our industry and our business. Our strategies are aimed at helping AGCO grow profitably in this environment. Our latest outlook for 2010 anticipates declines in the Western European and North American markets, and growth in South America. Our 2010 forecast assumes price, pricing increases of approximately 2% on a consolidated basis. In 2010, expenditures on new product development and tier 4 emissions requirements will cause an increase in engineering expenses 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 $8 million.

Slide twelve lists our view of selected 2010 financial goals. We are projecting 2010 sales to range from $6.7 billion to $6.8 billion, a small increase from 2009. We we expect forecasted pricing benefits and market share improvements to provide some lift despite relatively flat market demand. Our forecast for 2010 diluted earnings per share ranges from $1.65 to $1.75. We expect gross margin improvements to be offset by higher engineering and pension costs.

In the second quarter of 2010, we expect sales to be flat compared to the second quarter of 2009. A higher effective tax rate and increased engineering and other project expenses will keep second quarter 2010 earnings per share below the level of the second quarter last year with a range of $0.40 to $0.45. These earnings per share projections exclude restructuring expenses expected to be incurred in the Company's European operations, estimated at approximately $0.10 per share for the full year of 2010.

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

(Operator instructions). One moment while we compile the Q and A roster. Your first question comes from the line of Ann Duignan with JPMorgan.

Hi, good morning, it's Greg Williams sitting in for Ann Duignan with JPMorgan.

Good morning, Greg.

How sustainable is the current rate of demand in Brazil?

Well, as you know, the harvest season now getting to its end and Brazil is getting into the winter period so to say, and, therefore, of course, we need to see how basically the next season will develop, but the numbers we have in our plan and the numbers Andy Beck shared with you reflect basically our position.

Okay. And moving on to North America, you guys reported a loss, and we expected a profit. Can you describe your outlook for profitability in the North American region?

Sure, Greg. We didn't expect profit in the first quarter, so we were pretty much in line with what our results expected for North America. So no surprises there . As we look through the rest of the year, we'll still be below last year at the end of the second quarter, second quarter of last year was extremely strong with very high margins. And then if you recall, we had started to pull down our sales and actually had losses in the second half of the year. We expect that to be the opposite this year wherein the second half of the year will be profitable and our sales will be up significant significantly from a year ago. So by the end of the year our sales will be flat to slightly up, and, well, our profitability will be flat to slightly up from a

Okay. Thanks very much, guys.

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

Yes. Hi. Good morning, everybody. I wanted to ask two or three questions on South America, first on share trends. Your shares -- and I know it's very volatile, but your shares bounce back a bit, but a little bit lower at some points over the last few months and last year, but the volumes are pretty low. So I wanted to ask about the competitive environment, whether you're doing better or whether it's just that your customers were the ones that sort of disappeared more at the low points and the competitive intensity right now.

I think some of the issues are which customer base is buying or not buying during the period of time. And what we've seen here in the first part of 2010 is a recovery in some of the high horsepower markets, particularly in the sugar cane area where we have a strong share. So I think that has helped us exhibit a little bit of performance in that area of the business. The market still has heavy weighting towards very small tractors, because of some of the government support programs for new farmers or for very small farms. And our market position is good there, but not as good as in some of the high-horsepower segments. So I think it's mainly mix. And we're also doing well, we believe, in all of the segments that we compete. We've got new products coming through during this year that we also hope will be exciting for our customers and keep our position strong here for the rest of the year.

Also in South America the margin was pretty good given the revenues. Is that, is that Argentina coming back or is that mix?

This is mix and volume. I would say mainly volume.

I agree.

And Argentina is a part of that, of course.

And last question, beyond the expenses for tier 4, are you seeing yet an uptick for spending on tier 4 final? And, if not, when do you expect those dollars to start flowing? .

Well, we're really focused on this interim stage and getting our products ready for that, which starts -- the products need to be ready for next year, and certainly some of the work we're doing now carries into the final stage as well, but in terms of putting engines in new tractors for tier 4 final, that's the 2011, 2012, 2013 period of time, but it will impact our engineering expenses during that period of time. And we expect them to remain relatively high as a result.

But this increase is also getting ready for January 1, basically?

Yes.

Yes.

All right. Thanks.

Your next question is from the line of Steve Volkmann with Jefferies and Company.

Hi. Good morning.

Good morning, Steve.

I'm wondering, back when things were really good down in South America we had mid teens margins down there. What has to happen to get back to those levels? .

I think the mix has to change a little bit towards bigger tractors and combines, as Andy mentioned. And I think also we need some of our competitors be a little bit more reasonable with regard to pricing. So we need to make sure that we do get potential price -- more material prices also into our sales prices.

Okay. Great. And then I'm just curious about your outlook down there. I mean, you think things are going to be up, but, boy, the first quarter was up huge, and the comparisons in the second quarter looked pretty easy as well. Do you expect some sort of meaningful slowdown in the second half of the year down in South America or are you just sort of waiting to see how it unfolds? .

I think more the second one.

We know that the second half the government has renewed some of the favorable financing programs at I would say slightly higher rates. So there is a change in the programs, but still very favorable. So that was a positive for us, but still there's -- we expect to see some slowing in the second half just naturally over what was a very strong second half the last year.

Okay. And then just one more, Andy, you talked a little bit about inventory reductions needing more in hay tools, but can we read from that that you're kind of where you want to be on tractors and combines, and that inventory reduction has kind of run its course now? .

Yes, I think that's fair to say. Most of the focus is now in that hay market, which is pretty much the weakest market in North America at this point.

And is there just a round dollar number in terms of how much reduction you'd want to do in there?

I'm not sure I have that. I guess what I would say is we'll -- we expect to see some of this impact the second quarter revenues in North America, not to the extent of what happened in the first quarter. And then we hope to be clear of this in the 2nd hal .

Okay. Great. Thank you.

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

Hi, good morning. It's actually Chase Becker in for Jamie. With respect to your comments on the backlog, I believe you said that that is trending up 30% is sequentially in North America and Europe but was wondering what is that trending year over year? .

Year over year it's down between 10 and 20%.

Okay. And then can you flesh out kind of your expectations on Eastern Europe? Have you seen any improvement in the financing environment? .

Not really. So far we did get some nice tender business in, but it's still a difficult market.

So no, no improvement expected this year, right?

Exactly.

Okay. Great. Thank you.

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

Good morning, Mark.

Something about the production versus retail sales in Europe. The question I've got is how much under production will occur during the remainder of the year? .

Probably not a whole lot. I think our inventory levels are pretty good level now, and so we should expect to sell at retail for the balance of the year.

Okay. Then you mentioned that margin expected to be up on a companywide basis year over year. Would that statement also be true across every geography? .

Yes. Well, actually, margin improvements are the most important strategic target we are focusing on. And we try to improve, of course, globally. We have two major initiatives we work on. One is in the area of purchasing and materials where under the leadership of our Senior Vice President materials and purchasing David Kaplan, we work on a major program to improve our core processes, to reorganize our, say, our purchasing people to strive for more excellence or to hire some more experienced people to go for global single sourcing and also to increase our best cost country sourcing.

The second major initiative is on Massey Ferguson, mainly Massey Ferguson in our French factory in Bovair near Paris where we we organize, effectively layout, review and streamline our product offering. We want to improve our quality, and we want to increase productivity. So that's two major initiatives which somewhat underline and support the important target of margin improvements.

So that -- so you're saying that Europe would expect to see margin improvement this year based on that?

Yes. What we're looking for on in Europe is gross margin improvement, but a large majority of the engineering increases that we -- engineering expense increases that we discuss, Mark, fall into Europe. So that offsets that because of the flattish or slightly down sales we're looking for in you Europe. So from an operating margin standpoint, we expect it to be a little more flat by the end of the year. But overall gross margin improvement in every region.

And as soon as volumes are back, we should be in a very strong position, and we should show pretty good margin improvements.

Okay. Thank you.

Your next question is from the line of Seth Weber with Royal Bank of Canada.

Hey, good morning.

Oh, I don't know that there's a king in Canada.

Well, just to clarify that last comment, the European -- the EMEA margins you're saying flat year over year by the end of third and fourth quarter; is that what I heard?

Right.

Okay. And is it possible to quantify what you expect to Ben -- what the benefit will be from this Massey Ferguson reorg or restructuring?

We usually go and do a presentation somewhere in fall at Wall Street. And when we do that this year, we will maybe come up with some targets.

Okay.

You know we don't like to share them so much, but we also understand that you want to know what we are striving for , and so we will do that. The strategic target is 10%, as you might remember,

Right. Okay. I notice that you took your pricing, your pricing target in a little bit for this year. I think it had been 2.5 to 3. Now it's closer to 2.5. Is there anything, you know, structurally that's driving that or it's just, you know, kind of as business is evolving you're just fine tuning estimates? .

Competition.

In any market in particular?

Well, basically in Europe. There's some unreasonable guys who try to buy market share when the markets are down, and, of course, you can't completely avoid to follow that a little bit.

Any particular color of machine?

No. It's basically John Deere, CNH, and Clark. Everybody, with the exception of HENT.

Okay. With we tie that to -- are used inventories still higher in Europe? .

Used inventories are still higher than normal, yes. So that's partially the reason why we're seeing some pricing pressure in that market.

Okay. How would you characterize used inventories in North America? .

Our used inventories are higher than a year ago, but I would -- I guess wed categorize them as at acceptable levels.

Okay. And are you seeing anything on used pricing? .

I think they've stabilized from what we --.

Okay. Okay. Thanks very much, guys.

You're welcome.

Your next question is from the line of Barry Bannister with Stifel Nicolaus and Company.

Hi, guys. When you roll out the tier 4 engines and presumably your steel costs are rising, you're doing 2.5% of pricing now, but one of your competitors is talking about having to raise prices just to offset the engines and giving no real room for price increases for steel and materials. What are you hearing as far as what level of pricing would be necessary to both recoup some of the R&D investments as well as offset pricing pressures as your production lifts in the back half?

Well, my question would be when you look at those competitors how much did their prices go down and how exact have they been so far. So there's a lot of, there are a lot of stories around, and I don't know what people are really doing. So you know from our history that when we talk about a price increase, we also try to implement it and deliver. And we might be a little bit less aggressive, but that's what we want to do.

Okay. Thanks a lot. I'll call you later. Bye.

Your next question is from the line of Meredith Taylor from Barclays Capital.

Yes, hi, this is [Anita Zion] for Meredith Taylor. I was wondering could you talk about what you were assuming about how Brazil's government support programs could evolve over the balance of the year? Are you assuming they're extended and how do you see rates involving? .

Andy talked already about it. Andy? I don't know.

Yes. The rates for the second half in Brazil have been -- the programs have been extended for the second half of the year at slightly higher rates than what we're seeing today. So the low-rate program right now is 4.5%, and in the second half it's going to be 5.5%. There's also the small tractor program that's out there that will continue throughout the balance of the year. So there, there shouldn't be any major changes in government support for 2010.

Okay. I understand. Thank you. And, also, one of your competitors has said that they're having challenges ramping production and the supply chain in LM given the speed and extent of market growth. And you guys clearly haven't had that issue as much or had that issue, but as other suppliers do bring production closer to end market demand, how are you looking for the competitive set to to change in South America going forward this year? .

Well, I think we, as you point out, we have not seen any -- had any difficulties with supply chain issues so far as our productions increased in Brazil and don't have any specific concerns at this point about anything relating to supply chain for the balance of the year in South America.

Right, but in terms of the competitors that involve going forward do you have a view?

You have to ask Sandia .

Okay.

I think there's going to be -- there's pricing pressures in many markets, but I don't see -- we don't have anything that we're specifically identifying in South America as a major issue at this point.

Okay. Thank you.

(Operator Instructions). Your next is from the line of Mark Koznarek.

Again, just a couple, I guess, clarifications. There was just that question about tier 4. Have you guys -- can you talk about what, what kind of price increase range we should expect for tier 4 equipment? .

No, but we know it. We have detailed information about it, and we will roll that out during the next couple of years. So I think we are on top of the situation.

Okay.

Engines only, you could say that maybe, but then you have to question -- you could -- we could give you a number, but it wouldn't help you because you need to know how much an engine is in a given product, and that varies by size and also by type of product. It's different in a combine from a tractor and so on.

Well, it would help to know that point, however. What would that be for engine --.

Mark, for competitive reasons we're not giving out that information right now.

Okay. I'll talk to you offline about that. Then the other followup was having to do with Brazil margin. And another question addressed this, but it was surprisingly strong, especially given your core revenue when you exclude currency was actually down for the quarter versus the fourth quarter, but the income was up. And you said that mix had a lot to do with it as well as volume, but sequentially, volume appeared to be down. And the question I've got is whether there is anything unusual in the first quarter or are these kind of levels that you generate in the 1st quarter sustainable for the remainder of the year? .

They are depending on the volume.

Yes, Mark, the -- I think the big difference between maybe what you're looking at in the fourth quarter and first quarter's overall production volumes and looking at what's happening in the other markets as well, because those factories support other, other markets. And also the mix has improved a little because of more combine sales in the first quarter and more high horsepower tractor sales than probably what we had in the fourth quarter. So I think those are the main, main keys. As we look throughout the rest of the year, we're not forecasting that the margins will stay at that level. So they -- we think they'll come -- pull down here in the rest of the year.

Okay. And then, finally, the raw material outlook based on the -- those strategic initiatives you talked about, I'm assuming that would be down for the year, but I just wanted to ask to get a specific answer.

The raw materials we had a pretty good performance here in the 1st quarter and down what we have for the rest of the year is that they will come up a little because of some of the pressures that we're seeing, but relatively flat for the full year. The initiatives that Martin discussed certainly will start to help us this year, but more of the impact will be in future years.

Okay. Thank you.

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

Hi. Thanks. My followup was just answered, but if I could just ask a quick update on Russia.

Well, actually, nothing exciting happened so far. What do you want to know about Russia specifically? .

Well, I guess I've heard recently in a couple of different industries, not yours, that things are starting to improve. And I wondered if there's any, optimism among farmers, any looseness in farmers that's helping the market.

Not really. So we don't hear that yet.

Thanks.

You're welcome .

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

Thank you very much for your participation today. And I'd encourage you to follow back up with us later if you have in decisional questions. Thanks and have a great day.

This concludes today's teleconference. You may now disconnect.