AGCO Corp (AGCO) 2010 Q4 法說會逐字稿

Good morning. My name is Tamara, and I' will be your conference operator today. At this time I would like to welcome everyone to the AGCO Corporation 2010 Fourth Quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period.

(Operator Instructions)

As a reminder, ladies and gentlemen , this conference call is being held February 8, 2011. Thank you. I would now like to introduce Greg Peterson. Mr. Peterson, you may begin your

Thanks Tamara, and good morning. Welcome to those of you joining us on the call and over the Internet for AGCO's Fourth Quarter 2010 Earnings 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 this slide presentation are used are reconciled GAAP measures in the last section of the presentation.

We will make forward-looking statements, including some related to the projections of earnings per share, sales, market demand, pricing benefits, margin and market share improvements, currency impacts, investments in new products, market growth, productivity and purchasing initiatives, capital expenditures, effective tax rates, inventory levels, free cash flow, acquisitions and strategic investments, seasonality, industry demand, general economic conditions and engineering 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 actual results to differ materially from those contained in our forward-looking statements.

A replay of the call will be available on our corporate Web site. On the call with me this morning are Martin Richenhagen, our Chairman, President and Chief Executive Officer, and Andy Beck, our Senior Vice president and Chief Financial Officer. With that, Martin, please go ahead.

Thank you Greg, and good morning, everybody. AGCO finished 2010 with a very strong fourth quarter. After focusing on working capital reductions earlier in the year, our European and North American businesses both led the way on sales growth and margin improvement in the fourth quarter.

We took advantage of improving market conditions in Europe and posted fourth quarter sales growth of nearly 30% on a constant currency basis compared to the fourth quarter of 2009. Fourth quarter operating margins in our Europe, Africa, Middle East regions rebounded to 9.5%, up nearly 500 basis points from the third quarter of 2010, and nearly 600 basis point from the fourth quarter of 2009.

In North America, the economy makes for row-crop farmers continues to be outstanding, and the market demand for large equipment remains robust. We capitalize on industry conditions and gross sales in North America 47%, compared to the fourth quarter 2009, excluding the impact of currency translations.North American operating margins exceeded 7% in the fourth quarter, the highest level in 10 years. Commodity prices remain at very high levels, a positive sign for farm income and farmer sentiment in 2011.

Slide three summarizes our results for the fourth quarter and full year of 2010. AGCO sales improved approximately 19% in the fourth quarter of 2010, compared to the fourth quarter of 2009. Stronger sales and higher levels of production generated 350 basis points of improvement in the fourth quarter operating margins, compared to the fourth quarter of 2009.

Adjusted earnings per share for the fourth quarter of $0.88 exceeded our guidance due to higher than anticipated operating margins. In addition, we managed working capital very closely as we ended the year, and our strong operating performance translated into over $270 million of free cash flow for the full year of 2010.

AGCO's tractor and combine production volumes for 2009 and 2010 are illustrated on slide four. AGCO's fourth quarter 2010 tractor and combine production was flat compared to the fourth quarter of 2009. Improving order flow along with increased production levels in our North American and European factories were offset by lower production volumes in South America. European production was up approximately 25%, and North American production was up approximately 6% in the fourth quarter of 2010 compared to prior years.

South American production decreased approximately 19% in the fourth quarter of 2010 compared to the fourth quarter of 2009, as a result of softening market demand. Strengthening demand in Europe doubled AGCO's order bought for the E markets at the end of December 2010 compared to the very weak level at the end of December 2009.

Equipment [auto boards] in North America were also up significantly from the December 2009 levels. South American auto boards remains strong, but we're down significantly from very high levels at the end of December 2009. In 2011, we expect production volumes to be relatively flat compared to 2010. Higher production volumes in Europe and North America are expected to be offset by lower levels of production in our South American factories.

Slide five details industry unit volumes by region for the full year of 2010. Industry tractor sales in North America were up modestly compared to 2009 levels. In North America, the high horsepower segment benefited from favorable row-crop economies, mix and increased 18% compared to the full year of 2009.

Industry sales were up modestly in compact tractors and declined in the utility tractor sector, compared to the full year of 2009. The combine market grew approximately 9% during the full year of 2010, compared to strong levels in 2009. AGCO's total unit sales of combines in the full year of 2010 increased, while tractors declined from 2009 levels.

Industry unit retail sales in western Europe improved in the fourth quarter compared to the weak level from the fourth quarter of 2010. Industry sales were down approximately 10% in the full year of 2010, compared to the same period of 2009. Slower recovery of the general economy, weak farmer sentiment and softness in the dairy and livestock sectors all contributed to the decline. Demand were softest in France, Spain, Italy and the United Kingdom.

South American industry tractor volumes increased approximately 31% during the full year of 2010, compared to the relatively weak 2009. Strong crop production in Brazil, and attractive financing program supported by the government contributed to strong market demand.

Better harvest in Argentina resulted in market growth of 74% in the full year of 2010, compared to the drought-impacted volumes in the full year of 2009. I will now turn the call over to Andy Beck, who will provide you more information on our fourth quarter results.

Thanks you Martin, and good morning to everyone. AGCO's regional net sales performance for 2010 is outlined on slide six. Currency translation had a negative impact of nearly 5% on AGCO's consolidated net sales in the fourth quarter of 2010. The Europe, Africa, Middle East segment reported a net sales increase of approximately 29%, excluding the impact of currency translation during the fourth quarter of 2010, compared to the fourth quarter of 2009.

Sales increased in nearly every market across Europe in the fourth quarter compared to the fourth quarter of 2009. The most significant improvements occurred in Germany, France, and Finland . North American net sales increased approximately 47%, excluding currency translation impacts during the fourth quarter of 2010, compared to the same period in 2009. With our dealer inventory, destocking efforts complete, sales of sprayers, high horsepower tractors and combines, all showed improvement in the fourth quarter of 2010 compared to the fourth quarter of 2009.

AGCO's fourth quarter 2010 net sales in South America increased approximately 1% compared to 2009 levels, excluding currency. AGCO's fourth quarter sales in Argentina more than doubled compared to the fourth quarter of 2009. Improved crop production and increased credit availability, contributed to the market strength in Argentina. Softening market conditions in Brazil in the fourth quarter of 2010 offset most of the strong growth in Argentina.

Net sales in our rest of the world segment decreased approximately 16% in the fourth quarter of 2010, compared to 2009, excluding the impact of currency translation. Lower sales in Australia and New Zealand were partially offset by improved sales in Eastern Europe and Russia. Part sales were $258.7 million and $1 billion for the fourth quarter and full year of 2010. An increase of approximately 17% for the fourth quarter, and 8% for the full year of 2010 compared to the same periods in 2009, excluding the impact of currency.

Slide seven details AGCO's sales and margin performance. Operating margins were up approximately 350 basis points in the fourth quarter of 2010, compared to the fourth quarter of 2009. The benefit of increased production volumes and a richer mix of products was partially offset by increased expenditures for engineering and other initiatives.

As Martin mentioned earlier, fourth quarter 2010 operating margins in AGCO's Europe, Africa, Middle East region were up 9.5%, up significantly both on a sequential and year-over-year basis. Margins were improved in the fourth quarter of 2010, compared to the same period in 2009, due to higher sales and production volumes, and a richer mix of products, partially mitigated by increased engineering expenditures.

In the South American region, operating margins declined in the fourth quarter of 2010 compared to 2009. A weaker geographic mix, and lower levels of production and higher expenses contributed to the decline. In the fourth quarter of 2010 -- fourth quarter and the full year 2010, operating margins improved in North America both due to higher sales and production.

As you know North American profitability has been one of our main focus areas for the last few years. You can see from the graph on slide eight that we have made progress. In 2010, margins improved 180 basis points compared to 2009 on relatively flat sales. We have introduced profitable new products, reorganized our sales organization, lowered our logistics costs and improved the efficiency of our factories. We realize we have more work to do and target additional margin improvement in 2011.

Slide nine addresses AGCO's free cash flow, which represents cash provided by operating activities, less capital expenditures. As a result of strong cash flow for the full year 2010, our balance sheet and liquidity position at the end of December 2010 remains strong. In 2010, we made investments for future growth in the form of engineering expenses and initiatives for productivity in our plants and new products.

During December 2010, we expanded our high margin replacement parts business with the purchase of Sparex Holdings Limited in Europe. In early 2011, we will close on two previously announced acquisitions, which will bolster our European combine business and provide advanced air seeding products to our distribution network. AGCO's strong financial position, and ability to generate cash will allow us to increase our strategic investments in 2011.

Our working capital management continues to make progress. AGCO's company and dealer inventories were at or near targeted levels across all regions. At the end of December 2010, our North American dealer months supply, on a trailing 12 months basis, was lower for combines, flat for tractors and hay equipment, compared to the same time a year ago. A dealer month supply in North America was as follows, tractors 4.9 months, combines 2.3 months and hay equipment, seven months.

Our other working capital details are as follows. Losses on sales of receivables, which is included in both interest expense net and other expense net, were approximately $4.6 million and $16.1 million during the fourth quarter and full year of 2010, compared to $3.8 million and $15.6 million for the same periods in 2009.

Slide 10 looks at our depreciation and capital expenditure trends. We deferred the startup of some of our plant productivity projects in response to softer market conditions in Europe. In 2011, we expect to increase our capital expenditures as we work to meet tier four emissions requirements, refresh and expand our product line, improve our factory productivity in Germany, and make investments in China and in Russia.

Slide 11 highlights the assumptions underlying our 2011 outlook. We are optimistic about the long-term growth opportunities for our industry and our business. And our strategies are aimed at helping grow AGCO profitably in this environment.In 2011, expenditures on new product development, and tier four emissions requirements, will cause an increase in engineering expense by approximately 10% to 15% or $30 million. We also look for new products, improved productivity, and purchasing initiatives to drive improved gross margins. For 2011, our SG&A expense will include expenses associated with new market expansion.

Slide 12 lists our view of selected 2011 financial goals. We are projecting 2011 sales to increase 10% to 15% from 2010 levels. Forecasted pricing benefits, market share improvements, the positive impact of currency, and acquisition impacts are all expected to contribute to the growth, including significant investments in product development and market development.

We expect 2011 earnings to be improved from 2010 levels. Our target for 2011 earnings per share ranges from $2.50 to $2.75 per share. We expect increased capital expenditures to be in the $250 million to $300 million range, and our free cash flow to remain positive in the $100 million range after funding the expected increases in capital expenditures. In the seasonably low first quarter of 2011, net sales are expected to range from $1.6 billion to $1.7 billion and earnings per share in the $0.25 to $0.30 range.

That concludes our prepared remarks. Operator, we're now ready to take

(Operator Instructions)

One moment while we compile the Q&A roster. Your first question comes from the line of Robert Wertheimer of Morgan Stanley.

Hello, good morning, everybody. One quick question. You quantified the headwind from tier four on engineering expense. Are you able to say on the gross margin side on the engines you're purchasing in, what kind of headwind slash tail wind that is, price versus the increased cost in the new engine, and can you update us on how much your engines are your own content?

Well, when you look at the cost of tier four, it's not just the engine, what you're putting into the tractor, but it's the packaging of the engine, cooling systems change, a lot of things change. And also, in a lot of these products we're putting additional features in.

These are new models with new productivity that's put into tractors and combines, as well as just putting a new engine in. So typically what we're seeing, again what we've said consistently, is that the price increases are roughly 5% to 10% that we're going to have to raise as we introduce the new tier four products, and that's fairly consistent with what we're seeing on the cost basis. So we don't expect to see a change in our margins as a result of complying with the tier four program. And these products are coming out not only in 2011 but 2012, and it's steady throughout the year. So we're putting pricing in, we put some pricing in, and we'll put additional pricing in as the new models are being introduced.

That's helpful. Thank you. And then the second question, beyond your margin in North America, which was very strong this quarter for the first time in a in a good long while. I can't really see any material, short of share gains in the big equipment -- I'm trying to figure out if that was lumpy because you guys caught up in up combine and big tractor deliveries and the absence of these are on top of that, or whether there's something structural going on there?

I think you've got most of that right. It was a much stronger quarter from a delivery standpoint than the year before because the year before we were working on getting inventories down at that point in time. Our mix was significantly better in terms of selling high horsepower equipment, and our sprayer sales, which is very high margin for us, were way up.

So from a mixed standpoint and a production standpoint, it was a very solid quarter for us, and obviously with the higher amount of sales in the quarter, it allowed us to get more leverage on engineering cost and on SG&A, which drove the margin improvement.

Great. I'll get back in line. Thank you.

Thank you. Your next response is from Jerry Revich of Goldman Sachs.

Hello. Good morning.

Good morning, Jerry.

Good morning Jerry.

Andy, can you talk about your assumptions for raw material inflation, and where that is relative to spot? Also on your December slide deck, you had 2.5 points of pricing. Is that still the assumption you're working off of, or are you considering a mid-year price increase? Thank you.

Jerry, thank you. We -- as you said correctly, we entered the year with an assumption of about a 2.5% price increase. Obviously some of the major commodities are -- costs are increasing on us. We feel like we're in a pretty good position here in the first quarter, but to expect that inflation to hit us probably in the last three quarters of the year, so right now we're evaluating our pricing, and I expect that we will increase prices starting in the second to offset our projected further increases in commodities. We haven't set those numbers yet. We're in the process of looking at how we do that and how much it is. But certainly it's going to have -- our pricing is now going to be well over 2.5%.

And it's mainly steel and rubber also.

Yes. Thank you for the color. Martin and Andy, your guidance now implies the same level of EPS growth as sales growth. Can you talk about why you expect virtually no operating leverage next year?

Yes. Actually the target of the guidance was to be conservative, and I think we are. We also believe that there is some upside potential, but we wanted to be on the safe side.

Jerry, just to put a little color there, we certainly expect to get operating leverage in 2011. We will see gross margin improvement of at least 100 basis points. We'll use some of that up in terms of higher engineering and some of these new market expenses that we're talking about. But our operating margins should be up healthily here in 2011 if we hit our numbers. There is some offset below the line in terms of other income -- other expense. We had foreign exchange gains and some other benefits there. Then our equity and earnings from our affiliates should go down because of the fact that we're going to own the Laverda business and some other things that offset there. So there are some below the line negatives that will somewhat offset some of the very positive things we hope to see on operating margins.

And, Andy, lastly, can you give us an update on how the acquisition integration is coming across the, I believe two businesses, that you closed on the parts on the Laverda side. And also, can you remind us, does your EPS guidance include the impact of inventory write up and other acquisition integration charges? That's it for me. Thanks a lot.

Jerry, we -- to update you on the acquisitions, we closed the Sparex deal at the before year end, and we closed the Amity deal, which is the air seeder business, right at the beginning of 2011. The Laverda business has not closed yet. It should close sometime in the first quarter.

In terms of acquisition integration, everything is going very well. We're doing the air seeders, the demand in orders are very strong, and everything's coming along very smoothly. In terms of our guidance, we do have the acquisition impacts in our guidance. It should be roughly about a $0.10 improvement in earnings as a result of these acquisitions .

Thank you.

Thank you. Your next response is from Ann Duignan of JPMorgan.

Good morning, guys. It's actually Greg Williams sitting in for Ann Duignan at JPMorgan. How's it going?

Good. Thank you.

Thank you. Good morning.

Good morning. Can you talk a little bit about your margin in South America, the 5.2%. Despite the higher volumes, I was just wondering if you can provide color there, and what can we expect in the margins for that region going forward? Thanks.

Yes, in the fourth quarter, we did see some margin reduction. Really, two things to point out there. One was that the production was lower in the fourth quarter in South America. We had more, I'd say more normal production schedule, or we had a shutdown late in the year in December. The prior year the demand was so high, and we were catching up on orders, that we did not have much of a shutdown. So that impacted our cost structure in the fourth quarter.

Then, secondly, which is also an important factor is that -- as we pointed out in our remarks, the geographic mix change, and our margins in Brazil are much better than our margins in Argentina. As a result of our sales growth in Argentina and decline in Brazil that pulled the margins down a little bit.

Okay, thanks.

Moving forward on next year, we expect to still have -- margins are expected to be below what we experienced in 2010, but still stay very strong.

Okay. And speaking of your production outlook and your flat to modestly up outlook for 2011, you mentioned North America, Europe, higher production, South America down. Can you provide a little bit more granularity? Which regions do you expect to out-perform and under-perform? Thanks.

It's mainly -- I think how we see it, it's mainly Europe where we could see some additional growth, while America is on the very high level. And I think that when you think about some kind of windfall, it will come from Europe.

Okay. Great. Thanks, guys.

Thank you. Your next response is from Steve Volkmann of Jefferies & Company.

Hi. Good morning.

Good morning.

I have a question about margins again. Normally we don't see both North America and Europe kind of surprising us to the upside. It's kind of one or the other generally. And I guess I'm just trying to square the strong performance in the fourth quarter with what looks like a more, maybe more just conservative guidance going forward. But it didn't sound like anything really unusual made the fourth quarter margins better than expected. Was there any type of pre-buy ahead of tier four interim, or something that might have given us an extra boost in the fourth quarter that fades a little going forward?

We didn't see a major pre-buy. Margin improvements are a very important focus of the company. So that's what we focus on in all areas. So which means, on one hand, to try to control your costs, to reduce your costs, costs to really assign your (inaudible) assets. So that's the things we are doing to improve your quality and to actually also be careful with your discounts and try to get the right prices established in the market.

So I think in the fourth quarter we started to harvest what we were working on for many, many months before, and so nothing really exciting. I think we need a certain volume, and as soon as we have it, we also will deliver.

Okay. So nothing too unusual there. I think, Martin, you mentioned in your comments, a little bit -- some signs of life in Eastern Europe and Russia. Can you give us a little color there?

Well, Russia is very difficult. What I know, because I just talked to a farmer about a Russian tractor, that it is very cheap. It doesn't work properly and needs a lot of repair. Parts are cheap, but let's say the manpower you need to fix those tractors, is of course, expensive. So that means overall, I think Russia needs Western designs. The big question is whether Russia will come back. Not if, but when, we see certain signs for recovery already now. I think Russia could also be a surprise in the way that it could be back more than expected. But it's very difficult to forecast, and we always want to be on the safe side.

Okay. Great. And then I guess my final question, what is your sense of your capacity utilization in North America? I guess I'm wondering if maybe as some of the other players get a little bit closer to being capacity constrained, I wonder if there is an opportunity for you to be -- sort of step up and be the supplier that has a little extra capacity, or correct me if you think I'm wrong about that?

In general, I would say we are fine with regard to capacities. We also -- we invested early enough. So I think overall this could be an opportunity for us. I'm also not sure whether the other guys couldn't do something and finally, might have more capacity than people think.

Fair enough. Thanks.

Never underestimate our industry.

Okay.

Thank you. Your next response comes from the line of Jamie Cook of Credit Suisse.

Hi. Good morning, and congratulations.

Thank you, Jamie.

A couple quick follow-up questions. One, Andy, on the margin front, can you help us? How should we think about margins and EAME in North America for 2011? And can you -- you talked about some of the headwinds -- some of the onetime -- below-the-line-items in 2010, FX gain benefits, some of things that are going to take away from the operating leverage in 2011. Is there any way you can quantify that?

Sure in terms of operating margins, we expect to see increases in both North America and the Europe, Africa and Middle East regions in 2011 compared to 2010. North America, even with the strong performance, we're targeting, again, some improvement there, getting up to hopefully see a beginning number of four in that number.

So hopefully in the 4% handle there, and then EAME looking at somewhere probably 150 to 200 basis-point improvement in margins in Europe, Africa and the Middle East. In terms of the below-the-line items, the main area is on the interest expense other line where we look to have about an $0.08 per share reduction, and that's built in our forecast at this point.

Okay. And then finally, is there anything, as we think about mix in 2011, is there anything unusual versus 2010 that we should be -- that we should be thinking about again? Because I'm struggling with your EPS guidance here.

I think the only thing is more on the blend between quarters. Certainly, if you look at what happened in 2010, we had relatively low sales in the first half of the year, because we were still focusing on inventory reduction, and our sales picked up dramatically in the third and fourth. This year will be back to, I'd say, a little more normal mix. So we'll see more of the sales and earnings gains here in the first half compared to the second half.

Other than that, you know, our focus is on a lot of additional investment in our business. So we will have higher engineering, higher SG&A from a year ago that we hope to offset with the higher sales and operating margins we discussed.

All right. Thanks. I'll go back in queue.

Thank you. Your next response comes from the line of Henry Kirn of UBS.

Hi, good morning, guys.

Good morning, Henry.

Could you talk about what you saw out of the Challenger brand in the fourth quarter, and your expectations as we go into 2011?

Well, from the Challenger sales, we ended up -- I have a full year number actually, full year Challenger sales were up about 10% compared to a year ago. So that brand is growing, and keep in mind that, that includes the sprayer business as well in North America. And then for 2011, we're probably looking at about the same level of sales increase for 2011. So we're still drilling that brand, we're seeing good performance in North America. It's a key brand for us in North America. As Martin mentioned, as Eastern Europe and Russia start to come back, that's one of the key brands in that region as well.

What is worth to mention is also that some of our biggest dealers invested quite a bit in additional outlets and also bought dealerships. So I think it's really starting to work.

That's helpful. And on Brazil, I appreciate the color on industry demand. Can you talk about the competitive environment there, and your expectations for pricing and market share in Brazil/(inaudible)?

Well, actually, what I think is, everybody is in the boat. So that means we need to make sure that we price for the substantial price increases we see from certain suppliers in Brazil. We don't yet have the emissions situation, and competition, I would say in Brazil is pretty much as usual.

That's helpful. Thanks a lot.

Thank you. Your next response comes from the line of Andy Casey of Wells Fargo Securities.

Good morning, everybody.

Hi, Andy.

Back to -- I think it was Jaime's question. If I look at your full year, 250 to 275, and take the upper end of your first quarter guidance, it appears as if the low end is already taken care of by the first quarter performance. And at the low end, you're not expecting much more for the balance of the year. At the high end you're expecting another quarter in the balance of the year. Can you help us with that? Because the North American and European order board commentary is very positive. I'm wondering if you're still seeing the positive mix that you saw in the fourth quarter going forward, and then I've got a follow-up?

Yes. Yes -- Andy, I don't think we would have assumed that mix carries with this throughout a full year estimate, and as I mentioned, we do expect to see most of the earnings improvement in the first half of the year, and then the second half level out to some extent.

Again, I think that the thing that could be part of a question is the amount of additional expense and engineering expenses we're expecting to invest in the third and fourth quarter is offsetting some of the sales and margin gains that we still expect to see in the results.

Okay. On that Andy, excuse me, and thank you for that, when you're looking out to the second half, it seems like a bunch of, well yourselves and other competition, have an uneven product introduction for tier four compliant products. Do you expect that to cause a limitation on potential pricing benefit?

I'm not sure I follow. I think, as you point out, these products come through, will be released all throughout the year. Some are in the first quarter, but a lot of them, as you point out are in the second half of the year. And as the products are introduced, they come with a price increase. So that's pretty much in our plan, and I think it's fairly expected in the marketplace and well known what the prices are going to basically be. So I don't expect any surprises there as it relates to tier four pricing.

Oh, I'm sorry. If you take the tier four pricing, and then if we continue to see input cost inflation through the year, does the tier four price-up and the staggered introduction from the competition, limit your ability to go out and offset the other cost headwinds?

I don't think so.

Okay. Thank you very much.

Thank you. Your next response is from Andrew Obin of Merrill Lynch.

Yes. Good morning.

Good morning.

Just a question on South America. What is happening? Because my understanding was that over a longer period of time, some dealers would have to make a decision whether to remain a dual brand dealers of Deere and Valtra, or whether to switch to single brand. Where are we in terms of that transition and could you comment as to what percentage of dealers has made a decision to remain Valtra dealers, how many have become all Deere dealers, just some more comment on that?

Well, actually, we have two completely separate distribution networks and dealer networks in Brazil. One is Valtra and the other one is Massey Ferguson. There is no plan or strategy to merge them. They have to be excluded by law, and we have also certain legal restrictions, and we need to make sure that Valtra dealers do get Valtra designs and Massey dealers to get Massey designs. So, I don't know exactly what --

I'm sorry. What I was asking is that right now, you have Valtra tractor dealers selling John Deere combines, and I know that Deere is pushing for their combine dealers to drop Valtra tractors and become exclusive John Deere dealers, and I'm just trying to figure out what's happening with your Valtra network down in Brazil and how vulnerable it is to this trend and what is happening in terms of your ability to retain Valtra dealers, or how many people are switching to John Deere? That's what I'm asking.

So far, nobody has switched, and I don't see that being a big problem in the future.

Okay. Thank you very much.

Thank you. Your next response is from Seth Weber of RBC Capital Markets.

Hello, good morning, everybody. I'm just wondering, on the South America commentary, I think you characterized the order board as being significantly lower and the market being softening. Is it possible just to give us some frame of reference for what you think softening could mean for 2011 from a revenue perspective?

Sure. What we have in terms of South America, orders are down about 30% from where they were, but keep in mind, the orders were extremely high at this point last year. So that's somewhat of a very difficult comparison. In terms of Brazil, we see that it's going to be down somewhere in the 10% to 15% range, but be offset to some extent by growth in Argentina. And our guidance for South America industry remains down about 10%. That's our current estimate.

Okay. That's helpful. Thank you. And then just on the strength in the parts business, can you just comment on that? Is that something we should expect -- I mean, up 17% in the quarter, particularly strong. Is that something we should expect to continue? You know, is there something that's driving that in particular?

No, I don't think so. I wouldn't expect that to -- I wouldn't project that going forward. I think that we did have some dealers do some year end stocking and things like that. As their confidence improves and as they see market growth, they will also invest in dealer inventories from time to time that probably had lowered them during the weaker market periods. But I wouldn't expect that to be growing at that rate in future.

Okay. And then just lastly, can you try to handicap where you think dealer inventories may be the -- I mean, you gave us where they are at the end of the year. Do you expect them to stay constant through 2011?

The dealer inventories do move in a seasonal fashion. They grow during Spring and Fall selling seasons and things like that. But I would categorize them across the board as in good shape at this point. You've got the numbers on North America, and those are pretty much in line with where we target. European dealer inventories are at or below normal levels at this point. So I think the work has been completed there. And in South America the dealer inventories are up, but somewhat in line with where the market is and also they don't carry a lot of dealer inventory in Brazil in the first place. So no real concern in terms of dealer inventory levels around the world.

Okay. Thanks very much, guys.

Thank you. Your next response is from Mark Koznarek of Cleveland Research.

Good morning, everybody.

Good morning, Mark.

I'm trying to square up a few more of these elements of the forecast. You know, in an earlier question, Andy, you commented on the margin outlook for North America and Europe, and to get to the midpoint of your forecast, it would suggest that South America is sort of the other big missing piece, the margin is down about 150 basis points. Is that roughly correct in terms of what you're looking for?

Yes. I hope it's not 150, but you're pretty close.

Okay. Then the SG&A investment that you're going to be making, the way to think about that -- you know, this is a question -- is that your SG&A growth would have been less than the revenue growth absent dis-investment and with the investment you're going to grow at or more than the revenue growth rate?

That's correct.

Okay. And with regard to raw materials, what kind of number are we talking about in terms of -- as things -- as you stand right now, if there's no further change over the course of the year? What kind of raw material inflation are we really looking at, at this point? What's the headwind you're trying to offset with additional pricing?

Well, again, it's somewhat a little premature to look at. We have to see how that we think that is going to phase in during the year, as well as look at how we have to price that. So we're kind of in the middle of the year, but I would think that we're talking at least a 2% -- 1% to 2% impact on our pricing in order to meet the commodity price increases that we'll see for the year.

That would be a 1% to 2% greater than the original 2.5%?

Right.

Okay. All right. Very good. Thank you.

For the balance of the year.

For the --

For the third quarter, second, third and fourth quarter.

Okay. So run rate basis for those final nine months.

Yes.

Great. Okay.Thanks.

Thank you.

(Operator Instructions)

One moment while we compile the Q&A roster. Your next response is from Larry De Maria of Sterne, Agee.

Thanks. I know you guys touched on it, but can you actually carve out the contribution that Russia had in the past year and what you guys are thinking about for this year? Because the checks we've seen suggest the market is starting to get better. I'm just curious how big it is now and what you guys think it could be?

The Russian sales, Larry, I don't have them in front of me to give you the number, but they were relatively small here in 2010. And we do expect pretty sizable growth here in -- a double-digit growth in the 2011 period. Greg, do you have -- yes, it was -- Greg is telling me our sales in Russia were about $40 million to $50 million.

Okay. That's down from what at the peak?

That's down probably 60% from the peak, 70% from the peak.

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

Thanks Tamera. I would like to thank everybody for your interest in AGCO today, and for those of you that do have follow-up questions, I would encourage you to either e-mail or phone me later. Thanks, everyone, and have a great day.

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