AGCO Corp (AGCO) 2010 Q3 法說會逐字稿

Good Morning, my name is Angela and I will be your conference operator today. At this time I would like to welcome everyone to the AGCO Corporation 2010, third quarter earnings conference call. All lines have been placed on mute to prevent background noise. After the speakers remarks, there will be a question and answer period. (Operator Instructions) As a reminder ladies and gentlemen, this conference is being recorded today, October 26, 2010. Thank you, I would now like to introduce Greg Peterson. Mr. Peterson, you may begin your conference.

Thanks Angela, and good morning. Welcome to those of you joining us on the call and over the internet for AGCO's third quarter 2010 conference call. We will refer to a slide presentation this morning 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 section of the presentation. We will make forward-looking statements including some related to projections of earnings per share, sales, market demand, gross margins, market share improvements, investments in facilities and new products, productivity and purchasing initiatives, effective tax rates, inventory levels, free cash flow, production volumes, industry demand, global food demand in dive trends, commodity prices, farm economics and productivity pension costs and engineering and restructuring expenses.

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, 2009. 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 web site. On the call with me this morning are Martin Richenhagen our Chairman, President and CEO. Andy Beck, our Senior Vice President and CFO. With that Martin, please go ahead.

Thank you Greg, and good morning. AGCO executed a gains to our operating plan and delivered solid results in the third quarter. The market remained very strong in South America and AGCO took advantage of that strength by posting third quarter records for net sales and operating income in that region. Europe and North America both reported net sales close in the third quarter of 2010, compared to efforts -- compared to the third quarter of 2009. The first half production cuts and inventory destocking efforts in 2010, brought our dealer and company inventories of new equipment to targeted levels in both of these regions.

Economic for grow crop farmers in North America are very strong and the market demand for large equipment remains robust. In Europe the market remains quite weak but it stabilized during the third quarter. Commodity prices moved up in the third quarter, which is a positive sign for farm income and farmer sentiment. Slide three summarizes our results for the third quarter and first nine months of 2010. AGCO's sales improved approximately 19% in the third quarter of 2010, compared to the third quarter of 2009.

All four of our geographic segments reported double digit sales growth on a constant currency basis. Stronger sales and higher levels of production generated over 200 basis points of improvement in the third quarter operating margins compared to third quarter of 2009. Adjusted earnings per share for the third quarter of $0.66, exceeded our guidance due to a higher than anticipated operating margins and a lower than expected effective tax rate.

AGCO's structure and common production volumes for 2009 and projected volumes for 2010 are illustrated on slide 4. Our factories operated a relatively normal production level in the third quarter of 2010. AGCO's structure and common production increased 35% compared to the third quarter of 2009. Production continued to be significantly higher in South America in the third quarter of 2010 compared to the prior year. North American and European factories also experienced production increases in the third quarter of 2010 compared to third quarter of 2009.

While demand continues to be weak in Europe, order flow from our dealer stabilized and the order board in Europe was up significantly at the end of September 2010 compared to the very weak level at the end of September 2009. Compared to the end of June 2010 orders in Europe are flat.

Equipment order boards in North America also increased from September 2009 levels. South American order boards remain strong, but were slightly down by 25% from very high levels at the end of September 2009, and down about a third from the end of June 2010. In fourth quarter we expect lower production volumes in South America relative to the strong levels in fourth quarter of 2009. North American and European productions expected to be higher than the weak levels in the fourth quarter of 2009.

Slide five details industry unit volumes by region for the first nine months of 2010. Industry practices in North America were up only slightly compared to 2009 levels. The compact tractor category which is tied more closely to the general economy was up 3% in the first nine months of 2010, compared to low levels experienced during the same period last year. The high horsepower segment benefited from favorable low cost economics and increased 12% compared to the first nine months of 2009.

Declines in utility tractor sales, partially offset growth in the other segments. The combine market grew approximately 4% during the fist nine months of 2010 compared to the strong levels in 2009. AGCO's total unit sales of tractors and combines in the first nine months of 2010 were both down from 2009 levels. Industry unit retail sales in Western Europe stabilized in the third quarter. Industry sales were down 15% in the first nine months of 2010 compared to the same period of 2009. Slower recovery of the general economy, weaker farmer sentiments and softness in the dairy and livestock sector all contributed to the decline. Demand for softness in France, the United Kingdom and Italy.

South American industry leader tractor volumes increased approximately 46% during the first nine months of 2010 compared to the relatively weak period in 2009. Strong crop production with an attractive financing program supported by the government contributed to strong market demand. Better harvest in Argentina resulted in market growth of 57% in the first nine months of 2010 compared to the drought impacted to our volumes in the first nine months of 2009. I will now turn the call over to Andy Beck, who will provide you more information on our third quarter results.

Thank you Martin, and good morning to everyone. AGCO's regional net sells performance for 2010 is outlined on slide six. Currency translation had a negative impact of nearly 3% on AGCO's consolidated net sales in the third quarter of 2010. The Europe, Africa, Middle East segment reported a net sales increase of approximately 12%, excluding the impact of currency translation during the third quarter of 2010 compared to the third quarter of 2009.

Most significant improvements occurred in Austria, Poland , Scandinavia, United Kingdom and Germany. These gains were partially offset by declines in France and Spain. North America net sales increased approximately 26% excluding currency translation impacts during the third quarter of 2010 compared to the same period in 2009. With our dealer inventory de-stocking efforts complete, sales of tractors, combines and sprayers all showed improvement in the third quarter of 2010, compared to third quarter of 2009.

AGCO's third quarter 2010 net sales in South America increased approximately 39%, from comparable 2009 levels, excluding currency translation impacts. In Brazil strong farm fundamentals and supportive government sponsored financing programs resulted in strong industry sales. Improved crop production and increased credit availability contributed to improved results in Argentina.

Net sales in our rest of the world segment increased approximately 19% in the third quarter of 2010, compared to the same period of 2009, excluding the impact of currency. Growth in China and East Asia was partially offset by lower sales in Australia and New Zealand. Parts sales were $268.1 million, and $745.1 million for the third quarter and first nine months of 2010. An increase of approximately 7% for the quarter and 5% for the first nine months of 2010, compared to the same periods in 2009 excluding the impact of currency.

Slide 7 details AGCO sales and margin performance. Operating margins were up approximately 200 basis points in the third quarter of 2010, compared to the third quarter of 2009. The benefit of increased production volumes and material cost control was partially offset by increase in expenditures for engineering and other initiatives. Third quarter 2010 operating margins and AGCO's Europe Africa Middle East region stepped down sequentially due to primarily to seasonal plant maintenance shutdowns.

Margins were improved in the third quarter of 2010 compared to the same period in 2009, due to higher sales and production volumes partially mitigated by increased engineering expenditures. In the South America region operating margins rebounded to 11.1%. An increase of over 400 basis points for the third quarter of 2010, compared to 2009. Strong market demand in Brazil and improved conditions in Argentina produced higher sales in both countries. Increased production and the shift in the mix of products towards larger, higher margin tractors also contributed to the improvement.

In the third quarter of 2010 operating margins improved in North America, due to higher sales and production. Margins for the fourth quarter expected to improve both sequentially and year-over-year in Europe and North America. Higher level sales and production in the fourth quarter in both regions are expected to drive the improvement. South America industry and AGCO sales are expected to remain strong in the fourth quarter, but be down from near record levels experienced in the fourth quarter of 2009. Consequently, fourth quarter margins in South America are expected to decline on both a sequential and year-over-year basis.

Slide 8 addresses AGCO's free cash flow, which represents cash used in operating activities, less capital expenditures. As a result of the stronger cash flow results for the fist nine months of 2010 our balance sheet and liquidity position at the end of September 2010 was significantly better than at this point a year ago. We are expecting strong free cash flow in the fourth quarter from our seasonal reduction of inventories. This year we have been investing for future growth in the form of higher engineering expenses and additional investments in our plants and new products. Even after covering increased spending on these strategic investments, we're targeting free cash flow in excess of $100 million for the full year of 2010.

Our working capital management continues to make progress. At the end of September 2010 our North America dealer month supply, on a trailing 12 month basis, was lower for tractors and hay equipment compared to the same time a year ago. A dealer month supply in North America was as follows, tractors were 4.9 months, combines 5.5 months and 7 months for hay equipment. Other working capital details are as follows, losses on sales of receivables, primarily under our securitization facilities, which is included in both interest expense net and other expense net were approximately $3.9 million, and $11.5 million during the third quarter and first nine months of 2010, compared to $1.5 million, and $11.7 million in the same periods of 2009.

Slide 9 looks at our depreciation and capital expenditures trends. We slowed the investment in some of our plant productivity projects and new products in the last year in response to softer market conditions in Europe. In the fourth quarter of 2010 we expect to increase our capital expenditures as we work to meet Tier 4 emissions requirements, refresh and expand our product line, and improve our factory productivity.

Slide ten looks at the assumptions underlying our 2010 outlook. Our latest outlook for 2010 anticipates a slightly more optimistic view for the South America market with no change to our view of western Europe and North America. We are now forecasting 20% to 25% growth in South America, a decline of 10% to 15% in Western Europe and mild growth in the North America market. Our 2010 forecast assumes price increases of 1.5% to 2%, on a consolidated basis. In 2010 expenditures on new product development and Tier 4 emissions requirements will cause increase in engineering expense by approximately 15% or $30 million. We also look for our productivity and purchasing initiatives to drive improved margins.

Slide 11 lists our view of selected 2010 financial goals. We are projecting 2010 sales to range from $6.7 billion to $6.8 billion. We expect pricing benefits and market share improvements to provide some lift despite mixed market demand. Our forecast for 2010 diluted earnings per share ranges from $2.10 to $2.20. We expect gross margin improvements to be partially offset by higher engineering and pension costs.

These earnings per share projections exclude restructuring expenses expected to be in incurred in the company's European operations, estimated at approximately $0.04 per share, for the full year of 2010. We've increased our EPS guidance by $0.20 to $0.25 compared to last quarter's guidance to reflect a slightly lower effect tax rate, as well as slight improvement in our operating margins. Operate that concludes our prepared remarks. We would lake to open the call for

(Operator Instructions) One moment while we compile the Q and A roster. Your first question comes from the line of Jamie Cook with Credit Suisse.

Hi, good morning. It's actually Peter Chang in for Jamie. Nice quarter, guys. I had a quick question on South America. Also a quick clarification, actually. Are you -- Did you say that orders were down 25% year-over-year?

That's right, Peter, yes.

Well with the government financing extended through March or into March of 2011, could you give us some thoughts or initial thoughts on how you think that might impact 2011, with contacts that your order book is down about 25%?

Well, Peter, we're not ready to talk too much about 2011. We're working on our budget and looking at the market conditions and things like that. And we'll be ready to talk about that more in December and when we release our fourth quarter earnings. But obviously with the -- our order board down, we are seeing that the market is starting to, I would say, come off of these record levels a little. The market remains very strong and they have extended that the PSI program which is the low interest rate program through March, but there's still a little uncertainty in the market about the availability of that program going forward and I think that's impacting some of the order board softness that we're seeing compared to the -- really the extremely high levels that we saw a year ago.

Fair enough. Then my next question is on just on R&D expense for the remainder of 2010. It looks like it's up 8%, of year-to-date and there's going to be a significant ramp in the fourth quarter. Is there something that might have gone wrong to cause this ramp or was this baked into guidance for the entire year.

For the most part this is what we expected. We've got some significant expenditures here planned in the fourth quarter relating to some prototype expense and things like that. I would say that we are running a little lower than we thought but for the most part, this is what -- kind of the shape of the expense that we expected.

The reason for this is more efficient engineering and not any kind of delay in project.

Great. Got you. I'll get back in queue, thanks guys.

Your next question comes from Ann Duignan with JP Morgan.

Good morning, this is actually Ingrid, standing in for Ann. I was wondering if you could talk a little bit about what's going on in the other regions, other than South America, it seems that you under-performed in each region other than South America.

I don't know where you see that.

That was --

I disagree.

Excuse me?

I disagree.

Okay. So I guess maybe we're misunderstanding --

That you think that this is the case, but you need to explain why you think so.

On your presentation number -- page five.

Ingrid, what that says is that in North America we did -- we are slightly down compared to the market being slightly up, but in western Europe our sales are right in line with the industry. So, there's no deterioration at all in western Europe and actually performed quite well in the third quarter and looking for a very strong fourth quarter as well. So, that's the facts of the situation.

Okay. So we're just misunderstanding the slides.

Right.

Okay. And, then if you could just maybe talk about -- you recently announced plans to increase investment in China, I was wondering if you could talk about your investment in the region, and your outlook for the agricultural equipment market in the region.

Well, the plans we have for -- in general is to put all our small tractors and business that is known under the project (inaudible)on all of our small tractors below 100-kilowatt, which is about 125-horsepower on one common platform globally and the components for those sectors will be localized in China which makes us very competitive in this business outside China, like in South America and North America and also Europe, and creates a platform which can also be used for local assembly and helps us to get into the local Chinese market.

Okay. Great, thank you.

Your next question comes from the line of Maredith Taylor with Barclays Capital.

Good morning, guys. It's Mark Bushallow stepping in for Maredith Taylor. Can you discuss [lad am] really quick. I know you talked about it a lot during opening comments, as well as in the first question, and how you're seeing for 4Q margins to decline sequentially on a year-over-year basis in lad am. Can you just talk about how sustainable margins and mix are in the region recognizing that the seasonably weak quarter and I guess you're not going to give a base case yet for lad am for 2011, but just kind of, how sustainable is your growth in margins in lad am.

First of all, as we said already, as Andy said already, and this is the case every year, we are not in a position to talk about 2011 yet with the exception that I think the fundamentals are very, very strong and farm income should be pretty good globally. In South America, then second margin improvements are priority of management and we work on margin improvements all over the world but also in South America. In South America next year, I think we can -- we will see a further improvement due to the fact I could imagine that the mix will change in our favor. Last year and also this year we had quite some of those small tractors under the Mais Alimentos Program being sold in South America, this might slow down a little bit while the professional sector might grow a little bit more. So normally, I would assume that the margins we see for South America look pretty stable also for the future. So the idea is not to improve margins for just one quarter and then give them away next quarter. So we are trying to improve margins globally on a sustainable basis.

Okay, that's helpful. And then also, just going to FX really quick, and looking at your top line guidance range. How much of a change is based on a lower FX headwind compared to guidance that you provided in the second quarter?

It's -- the difference is about $100 million or so.

A $100 million?

Yes.

Okay, got you. That's it, thanks very much.

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

Hi, it's Mark Koznarek, good morning.

Hi, Mark.

A question about the production increase up 35%, so close to double what the revenue increase is. And your margins typically respond pretty significantly to the production rate increases or decreases, and I was kind of struck that the leverage on the revenue increase was actually kind of modest. It was only up about 16% or so -- your incremental margin versus a year ago when you were cutting around this level and the 25% to 35% rate. The incremental margin was about double that rate, so it kind of seems like either the production mix is kind of weak or maybe there are some start-up, re-start costs that maybe had not been anticipated. Can you talk about the leverage and whether this is going to be an on going issue into the fourth quarter?

Sure, Mark. The -- I think part of the increase was, as you point out, more of a mix issue that the lot of units increase, units that we talk about and a lot of the units were in South America. So that doesn't carry as much leverage, maybe as what we see in our European factories for instance. When we get in to the fourth quarter, we'll see that that leverage picks up a little bit and we'll get a little more margin improvement here in the fourth quarter. We were shut down for our normal factory shut-downs in the third quarter, which always doesn't help the margins. And also to your point, we are including some project expenses in our results for, really this quarter and next quarter, relating to the major changes to our assembly processes and some of our European plants and some other projects that we have on going, that are taking up some cost that you would normally probably see a little more leverage. But we did get some here in the third quarter and expect to get more in the fourth quarter.

How significant are those costs, Andy, in terms of magnitude.

If you look at our margins in the third quarter, there's probably about 70 basis points associated with items like that. That's not all projects but kind of things like projects, some increases in overhead through wage increases, things like that, that impacted the results.

Okay. And then finally here, when we look at fourth quarter, your production forecast for 4Q is roughly flat year-over-year, but you just mentioned that Europe ought to be up. Can you sort of --

When you look at the hours rather than the units, the units are up because we had South America coming down and Europe coming up. As I said the mix will be a much better, so while it's only about a 1% increase or 1% to 5% increase, something like that in units, it's going to be double digit increase in hours and so that should help drive the margin improvement in the fourth quarter.

That's Company wide or that was Europe?

That's Company wide.

Company wide, okay. And then, Europe would be stronger than that.

Europe should be a little stronger than that, right.

Great, okay. Thank you.

Your next question comes from Seth Weber with RBC Capital Markets.

Hello, good morning everybody. The comments about the western Europe order board being up significantly, is it possible to frame that relative to a more normal year? Kind of, where we are today versus-- not up verses last year which is weak, but on a normalized basis.

Yes, I think the way to look at that is, as we said it's up significantly from a year ago, which was kind of the weakest point, so -- but it's relatively flat from where we were at the end of June. So, what we've seen is -- we put in our release, it's the market stabilized but really at a weak position. The market -- Western European market is down 25%, 30% from its peak levels of 2008. And so far that's kind of stabilized at this point. So, we're not seeing declines anymore in many of the markets, and we have started to see some markets come up a little bit, but still overall it's fairly steady now.

Okay. And, does the -- I think you had said the de-stocking was essentially over. Does that mean that the used equipment inventory has basically flushed through at this point.

I think for the most part, dealer inventories are in reasonable shape. Used inventories in Europe still, I would say, are on the high side. But manageable at this point.

Okay. But, have they come down a little bit?

Yes.

They have been coming down.

Okay. And then just flipping back to South America, the margin -- the sequential margin decline that you are talking about for the fourth quarter, how much of that is absorption, and -- or are you starting to see some pricing pressure as the market volumes come off a little bit.

Most of it's absorption. We're also seeing some -- a little bit of pressure on material costs in that region as well and we're working hard to off-set that.

Okay, but pricing is pretty rational at this point.

Yes, and I don't expect anything different.

Okay. And then, lastly -- sorry?

That's it.

Okay. Lastly, I think Andy, you said the tax rate was going lower, can you just -- Is there a number that we should be thinking about?

In the third quarter we had a -- everyone can see that the tax rate was low. We had a somewhat one time benefit in our South America tax rate, of about $6 million, which is roughly $0.06 a share. That again was a one time item and so as we get into the fourth quarter we'll get back to more normal tax rates. So our full-year tax rate's looking to be about 36% for the full year.

Great, okay. Thanks very much, guys.

Welcome.

Your next question comes from Barry Banister with Stifel Nicolaus.

Hi, I noticed that the North America, which is 22% of sales, the 3.2% third quarter margin was the highest margin in that geography in 12 years. Could you give us some color on Challenger, which had been down 20% in sales through the second quarter, how it did in the third quarter. And talk more about the differentiation between the self-propelled sprayer market, the Challenger avenue and other products in North America that may have helped you there.

Sure, Barry. I don't have a quarter but year-to-date our sales for Challenger are now down about 13%. So we did pick up some here in the third quarter along with the growth that you're seeing in all the other North America brands in the region. And our margins are up on Challenger as well. So, from a sprayer stand point, we are seeing growth in the sprayer business here in North America. It's a key part of our profitability improvement in North America over the last couple of years is the improvement we seen in the sprayer business and the majority of that goes through the Caterpillar dealers, and so that's been very successful for us thus far.

Would you attribute any of the improvement to the ICO production system and, if so, how much?

We do, but it's difficult to say how much.

I don't have a number for you, Barry, but we are seeing some improvement in our results in our margins are, as you can see, getting better in North America and that's a key element of that. There's a lot of opportunity to come, as well, in our factories in North America as well.

Then lastly, if I look at slide six versus the same slide last quarter, it clearly does show a hand off in the momentum from South America to the other more balanced regions of the world which is something we wanted. Last quarter you did clearly state Andy, that in response to Seth's question, that South America in the back half would be flattish to maybe even a little down. The first half margin was 10.2%, so you would be down fourth quarter, year-over-year. If you are down 100 bips for the second half, you'd be down in the fourth quarter. So, have you really changed your view at all? Or is it still the same view that you carried last quarter on South America.

Pretty much the same I would say. I'm leaving for South America today. So I might know a little bit more next week. But overall, I think, we were pretty good in forecasting South America so far.

And then on South America, yes your order book is down, but you said last quarter that you expected an improvement in the mix towards a higher margin and higher horsepower on down units and you did speculate a little bit into next year. Is that preliminarily what you are seeing still?

Yes.

Okay, thanks.

Your next question comes from Andrew Obin with Merrill Lynch.

Yes, hi guys. Congratulations on a good quarter. Can you hear me?

Yes, we can.

Just a little bit more about Americas and North America, and I apologize if I missed it. Could you give us a sense with how much of North American production is made in North America right now? And help to separate from an operating perspective, the FX impact on profitability, and what should we thinking about North America profitability going forward if the dollar continues to weaken.

Well, Andrew about 70% of our business in North America is domestically produced. So, there is an element there where we are being challenged -- could be challenged more by currency, the mix of currencies that we are dealing with between the Euro, the Brazilian Real, and, as well, the Japanese Yen. So you have to kind of look at this over a longer period of time. The short spike in currency doesn't impact us. So I don't think it will be major impact for the fourth quarter. As we look into next year, there could be some impact that the currencies hold where they are. Obviously, for AGCO overall there's an equal opposite benefit that we'll see in our translating our earnings in Europe and Brazil into dollars at stronger rates.

Right. But I remember we historically talked about a drag from Euro -- from sort of relatively strong Euro on North American margin versus, I don't even know what historical average is, but how much of a drag was the FX on profitability in this quarter if you could quantify it? Because I think, historically, talks about one or two percentage point of a drag from strong Euro.

If you look at this quarter or look at year-to-date, there really hasn't been much impact on currency versus last year. There was actually -- North America slight benefit for the year-to-date results.

Okay, so the basic of the margin improvement is right now is all operational and things getting better in North America, right?

Exactly. Also, it reflects a little bit a more intelligent way to manage our sales mix, so the priority right now is not increasing market share in those areas where we are not competitive and where the margins are not very good. So we tried the gain market share in those products where we have a good margin position.

And, maybe you will talk about more of it at the analyst meeting but, where we are in terms of Laverda and European combine strategy?

No comment today.

Thank you very much.

We can talk about it in December.

Thank you very much.

You're welcome.

And your last question comes from Henry Kirn with UBS.

Hi, good morning guys, last and least.

Okay, Henry.

And, I wish I were going to South America as well. First question, you touched on pricing in South America. Could you talk about the pricing in the other regions as well?

I would say overall everybody in our industry knows that we need to be very careful here because we have substantial price -- cost increases coming from the emission legislation so everybody has to be careful and therefore I think long-term and midterm I would assume that prices go up slightly more than we saw in the past. Because we have a little bit more to compensate than just only inflation. And for 2010, I hand over to Mr. Beck.

Overall pricing as we said in the call was 1.5% to 2%. What we're seeing is stronger pricing it goes with the market, stronger pricing in South America and the weakest pricing in Europe so far this year.

And, one quick follow up. What are you guys seeing in Eastern Europe in general?

Well, the situation over all, you need to differentiate between Central Europe, which are the new members of the European community, and basically the countries which are closer to Europe and then Eastern Europe, which is basically Russia. So, in Central Europe some of the markets does pretty good like Poland was a very good market for us this year, also because of a very strong dealer we have there, we see the same in some other markets. In Russia, I think they cannot stand much longer not to invest in farm equipment anymore because they have already problems this year. The old situation didn't get better by the drought and the fires and everything. So, therefore, I think that Russia should show some signs of recovery, everybody talks about it right now. It's difficult to really forecast but we have a good team and we are close to the market, so hopefully we see some improvements next year.

That's helpful, thanks a lot.

Thank you.

And, I will now turn the call back over to Mr. Peterson.

Thank you Angela. I would just like to thank everyone for their interest today and I encourage you to bring your follow-up questions to me later. Thanks and have a great day.

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