AGCO Corp (AGCO) 2012 Q2 法說會逐字稿

Good morning. My name is Tiffany and I will be your conference operator today. At this time, I would like to welcome everyone to the AGCO Corporation's 2012 second quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions) I would now like to turn the conference over to Mr. Greg Peterson. Please go ahead, Sir.

Thank you, Tiffany. Good morning and welcome to those of you joining us for our call and Internet playback of that call for AGCO's second quarter earnings. We will refer to a slide presentation which is posted on our website at www.agcocorp.com and we will also use some non-GAAP measures during our presentation this morning. And we have got those non-GAAP measures reconciled to GAAP measures in the last section of the presentation.

We will be making forward-looking statements this morning, including projections of earnings per share, sales, demand, government financing programs, market conditions, farm incomes and production, commodity prices, margins, currency translation, pricing increases, productivity, investments in product development, facilities in expanding markets, inventory and production levels, acquisition impacts, completion of facility construction and upgrades, industry demand, general economic conditions, engineering efforts, depreciation, free cash flow, suppliers' issues, and capital expenditures. We wish to caution you that these statements are predictions and that actual 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, 2011. These documents discuss important factors that could cause the actual results to differ materially from those contained in our forward-looking statements. And finally, a replay of this call will be available on our corporate website. On the call with me this morning are Martin Richenhagen, our Chairman, President and CEO, and Andy Beck, our senior vice president and chief financial officer.

Now I'd like to turn the call over to Martin. Please go ahead.

Thank you, Greg, and good morning to everyone.

AGCO posted another quarter of outstanding results with strong sales growth and record quarter earnings. We took advantage of healthy market conditions while executing against our important margin improvement initiatives, and delivered second quarter sales growth of over 14%, and gross margin expansion of 200 basis points, compared to the second quarter of 2011. Both our Europe, Africa, Middle East and North American business delivered operating margins in excess of 12%, and our South American margins rebounded to 9%. North America posted operating margins of 10% in its core business for the second quarter, the best in over 10 years.

Slide 3 summarizes our results for the second quarter and first half of 2012. In the second quarter we reported sales growth across all of our regions compared to the second quarter of 2011 on a constant currency basis. Adjusted earnings per share for the second quarter was $2.08 and reflected both strong execution and the benefit of higher production volumes.

In the second half of 2012 we plan to increase our investment in new-product development facility and markets expansion. AGCO forecast for tractor and combine production volumes for 2012 are illustrated on slide four. Second quarter 2012 production was up 5% compared to the second quarter of 2011. High-horsepower tractor and combine production was about flat with the second quarter of last year in North America and Europe, while production of lower horsepower tractors were up. Production levels in our South American factories were modestly lower than the levels in the second quarter of 2011.

In September we expect to start up production in the new assembly facility at Fendt Marktoberdorf, Germany. The production schedule in Germany was more heavily weighted toward first half of the year to compensate for lower production during the third quarter when the new assembly facility will be brought online. The production schedule at our Valtra plant in Finland was lower in the first half of 2012 compared to 2011 in conjunction with our ASAP conversion and offset some of the increase in Germany.

AGCO's border -- order boards at the end of June remain in very good shape. In Europe, the order board is down about 10% from very high levels at the end of June 2011. North America high-horsepower tractor and combine orders are down about 5% compared to June 2011 efforts. While order boards are still healthy, we are closely monitoring the impact on orders and second-half demand from the severe drought being felt across much of the US farm belt. The order board in South America is up about 20%, compared to June 2011 efforts. We expect production volumes to be up modestly for the remainder of the year. And for the full year of 2012, we expect production to be up approximately 10% from 2011 levels.

Slide 5 details industry unit volumes by region for the first half of 2012. Industry tractor sales in North America were up modestly compared to 2011 levels. In North America, industry sales of high-horsepower and utility tractors both increased due to higher levels of farm income in 2011. The combine market was down significantly compared to the second half of 2011, due to the timing of industry production and due to very high levels of demand experienced in 2011. Industry unit retail sales of tractors in Western Europe went down modestly in the first six months of 2012, and growth in the key markets of France, the United Kingdom and Germany was partially offset by declines in Southern Europe markets like Italy and Spain.

South American industry retail tractor volumes declined during the first half of 2012 compared to the first half of 2011. Dry weather impacted the first harvest in Southern Brazil and Argentina. Industry demand was negatively impacted earlier this year. Favorable exchange rates, improved weather, and healthy farm economics have stabilized the market in South America.

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

Thank you, Martin, and good morning to everyone.

AGCO's regional net sales performance for the second quarter and first half of 2012 is outlined on slide 6. Currency translation had a negative impact of about 11% on AGCO's consolidated net sales in the second quarter of 2012. Acquisitions added approximately 11% to sales in the second quarter of 2012 compared to the same period in 2011. The Europe, Africa, Middle East segment reported a net sales increase of approximately 12%, excluding the impact of currency translation during the second quarter of 2012 compared to the second quarter of 2011.

Growth was highest in Germany, France, UK and Russia, and was partially offset by sales declines in some of the Southern European markets. North American sales increased approximately 88%, excluding currency translation impacts during the second quarter of 2012, compared to the same period in 2011. Excluding acquisition impacts, the growth was approximately 45%. Increases in hay equipment, sprayers and high-horsepower tractors produced most of the growth.

AGCO's second quarter net sales in South America grew 9% from comparable 2011 levels, excluding currency. Acquisitions generated about half of the growth and higher sales in Brazil, due to improved crop fundamentals, were partially offset by declines in Argentina. Net sales in our Asia Pacific segment increased approximately 17% in the second quarter 2012, compared to 2011, excluding the impact of currency translation and the benefit of acquisition. Sales growth in Australia and New Zealand produced most of the organic increase. Part sales were $357 million for the second quarter of 2012, an increase of approximately 7%, compared to the same period in 2011, excluding currency.

Slide 7 details AGCO's sales and margin performance. AGCO's operating margins were up over 130 basis points in the second quarter of 2012, compared to the second quarter of 2011. The benefit of increased production volumes and favorable pricing environment, and only modest inflationary pressure around materials accounted for most of the margin improvement. Operating margins in the second quarter of 2012 in AGCO's Europe, Africa, Middle East region surpassed 12%. The E margins were approximately flat compared to the same period in 2011.

North American second quarter operating margins exceeded 13%, including the benefit from GSI. Core margins were up significantly due to higher sales and production, a favorable sales mix, and cost control initiatives. In South America, operating margins improved to 9.3% in the second quarter, up approximately 170 basis points compared to the second quarter of 2011. Favorable exchange impacts, improving pricing, and higher sales volumes produced the increase.

GSI, our new grain storage and protein production business, performed well in its seasonally strong second quarter. Slide 8 details GSI sales by region and by product for the first half of 2012. GSI sales grew 7% in the 6 months of 2012 compared to the same period of last year. Sales grew across all regions, with the strongest growth in Asia. GSI contributed approximately $0.30 of EPS during the second quarter of 2012.

We are closely monitoring the impact of the ongoing drought in the US on GSI's North American grain storage and protein production businesses. However, with higher international sales and better margin experience, we are still expecting approximately $0.45 of accretion for the full year of 2012

Slide 9 highlights our inventory and receivables position at the end of the second quarter. Every year, our operating plan includes an increase of dealer and company inventory required for the selling season. The inventory build in the first half of 2012 was attributable to normal seasonality, as well as the accelerated production schedules in Europe and some supplier delivery constraints. We expect to reduce inventory by the end of 2012 as we complete our plant improvements and work through some supplier issues.

At the end of June 2012 our North America dealer month's supply on a trailing 12-month basis was lower for hay equipment and higher for combines and tractors versus the same period a year ago. Our dealer month's supply in North America was as follows--tractors were 6.5 months, 5 months for combines, and 6 months for hay equipment.

Other working capital details are as follows. Losses on sales of receivables associated with our receivable financing facilities, which is included in other expense net, were approximately $5.4 million during the second quarter of 2012 compared to $5.2 million in the same period of 2011.

Slide 10 details our depreciation and capital expenditure trends. In 2012 we expect to increase our capital expenditures to approximately $375 million as we continue to work to meet the Tier IV emmissions requirements, refresh and expand our product line, upgrade our system capabilities, improve our factory productivity, and complete the expansion at Fendt, and establish assembly capabilities in China.

Slide 11 addresses AGCO's free cash flow, which represents cash provided by or used in operating activities less capital expenditures. AGCO's use of cash in the first half of 2012 was elevated compared to the first half of 2011 due to our higher inventory build and our increased schedule of capital projects. We expect to generate strong cash flow again this year and 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 these increased strategic investments, we are targeting free cash flow to exceed $200 million during 2012.

Our regional market outlook for 2012 is captured on slide 12. Our forecast anticipates continued stable demand on a global basis. In North America, the solid financial position of row crop farmers and the outlook for farm income above historical averages is expected to mitigate some of the impact of the drought that will reduce crop production this year. The expectation of lower crop yields puts uncertainty around industry demand in the second half of 2012.

In South America we expect an elevated demand in the second half of 2012 as strong crop prices, favorable exchange rates, and the clarity around government financing programs to keep demand at relatively high levels. The improvement in the second half of 2012 is expected to mitigate most of the softness experienced in the first half of the year resulting from a first week harvest in southern Brazil and Argentina.

Higher soft commodity prices are expected to produce healthy income for European grain farmers in 2012 and are expected to keep demand stable. We are forecasting modest growth in key Western European markets, offset by declines in southern Europe. Better harvests in Russia and Eastern Europe in 2012 are also expected to produce strong growth in these markets.

Slide 13 highlights the assumptions underlying our 2012 outlook. We are forecasting price increases between 3% and 3.5% on a consolidated basis offset by about 8% of negative currency impacts. In 2012, expenditures on new product development and Tier IV emissions requirements are expected to cause an increase in engineering expense by approximately 10% to 15%, or $40 million. We anticipate the benefit of new products and our productivity and purchasing initiatives to drive improved gross margins.

Our forecast includes expenses associated with site and manufacturing startup and market support costs amounting to about 20% million for Fendt, and $20 million to $25 million for expansion into China. We project the GSI acquisition will be accretive to 2012 earnings per share by about $0.45, and the strengthening US dollar is expected to negatively impact our 2012 EPS by about $0.40 per share based on the current Euro and Real exchange rates.

Slide 14 lists our view of selected 2012 financial goals. Our order boards remain healthy and we are projecting 2012 sales in the $10.1 billion to $10.3 billion range. Forecasted pricing benefits, market share improvements, and acquisition impacts are expected to be partially offset by the negative impact of currency translation.

Including significant planned investments in product development, market development, and startup costs associated with our manufacturing projects, we expect to continue to improve gross and operating margins from 2011 levels. We are now targeting 2012 earnings per share to be in the range from $5.50 to $5.75 per share. We expect increased capital expenditures to be in the $375 million range in our free cash flow to exceed $200 million after funding the expected increase in CapEx.

That concludes our prepared remarks. Operator, we are now ready to take questions.

(Operator Instructions)

Andy Kaplowitz of Barclays.

Can you talk a little bit more about your visibility in North America for the rest of the year and particularly in high-horsepower tractors? What do you think the risk is of order cancellation? Have you seen any, and what do you think that the risk is going forward?

I think we have a very good visibility and all risk and opportunities are included in the numbers we just discussed.

And you are not really seeing anything so far, you're just kind of watching them?

Exactly.

That is helpful. And then -- could you talk about the incrementals in North America? They were very strong in the quarter, obviously. You talked a little bit about cost control. We know you are starting the new facility, or you did start the new facility in North America -- is that all contributing to better performance in North America?

In North America, a number of factors influencing the result. Clearly, the GSI acquisition, the performance is strongest seasonally in the second quarter, was a key driver of the improvement. But also underlying that, we mentioned that our operating margins excluding GSI would have been about 10%, and so we're seeing in the core business a great improvement as well. I think a lot of the factors there are the key increases in some of our most profitable products, like high-horsepower tractors, sprayers, and hay equipment, were driving that improvement.

Andy, just one more follow-up on that. Could I ask you about GSI in the context of -- you did $0.39 so far for the year. I know that 4Q is usually -- you talked about it maybe being dilutive. But $0.06 seems a bit conservative. Is it just because you are watching North America so closely? How does the international strength offset that?

What we are seeing right now is some softness in the North America market. But we have been able to offset that with better-than-expected results in our international sales. So we have been very pleased with the growth that we have achieved there. As you said, what we see seasonally from GSI is, the first half is much better than the second half, and the fourth quarter is dilutive. So we are comfortable with that $0.45 per share guidance that we're giving.

And we want to be conservative also.

Thanks guys. Nice quarter.

Ann Duignan of JPMorgan.

I appreciate the emphasis on the monitoring of the situation, given the drought for 2012. But, Martin, could you talk a little bit about where you might anticipate the impact being for your business? I worry about GSI, given that it is both protein production and grain storage, neither of which are likely to be in very healthy conditions by the end of the year, versus your livestock business on the tractor side. Which businesses are you monitoring most closely to get a sense of where the impact might be, and how quickly it might show up?

One is, we are very sorry for the farmers who suffer from the drought. But as you can imagine with our [food brand], this is just only a small portion of our business. Most of AGCO's customers benefit very much from the much higher commodity prices, and have a very strong year because prices go up and, on the other hand, also import prices go down. So it will generate excellent profits this year.

We are seeing some problems in rather smaller markets for us, like Italy and Spain. This is where some of the local manufacturing companies like [Nendinia] and SAME might be hit, but we are there pretty much in the sector of high-horsepower tractors and in Europe. I think any problem one might think about in those parts of Europe will be offset by a stronger growth in Russia and Eastern Europe.

The situation in GSI is, we very strongly monitor GSI, of course, because it is a new acquisition. And so we want to make sure that we understand the business. What we see is that the synergies in the international markets are much bigger than what we would've expected. We have a lot of strong dealers in South America and in Europe and China and Eastern Europe who are very interested in that business, and we see more growth in those parts of the world, which offset, basically, the potential difficulties in the American [continent].

Thank you for that clarification.

Could you just update us on your sugar cane harvester in Brazil? When will that product come to market and should we anticipate some market share gains when you have both tractors and combines for that segment?

That is actually-- the sugarcane business we own now, and we sell. Just yesterday we sold some to Africa, so that means we also here have the opportunity to globalize that business a little more. And you will see the full impact of the sugar cane harvester in 2013.

Rob Wertheimer of Vertical Research Partners

I just had a curious question on the strong high-horsepower tractors in the US. Is that specifically tied to a particular subregion or strategy or brand? Or -- can you just talk about how you made progress in that?

It is a combination. First of all, it is our strategy, because in our portfolio we have the best-performing high-horsepower tractor in the world. This is the Fendt brand, if you connect it with a brand. That Fendt tractor in a way is maybe a little bit too high-tech for the average American farmer, and therefore we decided to take the most important elements, which is basically the drive train, the transmission, and the rear axle, and in many cases also our diesel engine, into the Challenger brand of tractors.

The Challenger is the brand which is exclusive to our [Catapede], our distribution network. And we see those big Cap dealers getting traction, investing money and focusing in this very segment. So the advantage of our tractors is they are very performing, they are very productive, they have very low cost of operating per hour, per acre. Fuel consumption is much lower than what you see typically from competitors. And our tractors have the lowest cost of ownership, all considered.

Thank you. That's helpful And then one follow-up. You mentioned in --

That was almost like a commercial, wasn't it?

(laughter) It was pretty good. So you mentioned, Martin, that the drought, even though it is tough on a lot of farmers, can be good on others. I assume that is mostly Europe and South America. And have you heard already positive sales/order indications as generally commodity prices have been driven up?

We do not want to talk about next year, but when you talk to dealers, customers, competitors in the various kind -- What I, for example, like is I like to talk to local players. Like in France, the market leader in soil preparation is a company called [Tegua Berson]. So when I talked to Patrick Berson about next year, I was basically expecting some kind of conservative statement, but they are all very positive about it. So far what we hear from Europe and also what we hear in South America is pretty positive, and I think, without giving guidance here, I am expecting also a great year 2013 for our industry. (inaudible) special because of our strength in Europe.

Jamie Cook of Credit Suisse.

Two questions. One, with regards -- you took your pricing forecast down modestly. Is that just still a function of more competitive pricing in Brazil? Or could you add color there?

And then, Martin -- while you don't want to talk about -- well, I won't talk about 2013. On Europe you seem a lot more positive, or you seem positive about 2013. I've been hearing from some suppliers, for example, Anixter reported this past week-- they talked about a slowdown in ag, and I think they were more focused more on Western Europe There is another supplier who is on the axle side. So within Europe, is it still very much South versus North? Is there anything that you are seeing on the northern side of Europe that is concerning you at all?

Actually, I am not concerned about Europe, and [whatso]. When you talk to suppliers you have to understand where are their main markets. So in axles, most probably we talk about the same company. This is a company who does most of their business in Italy for Italian manufacturers, smaller and bigger ones. And they, of course, are then hit more.

We have different concerns. We have some of our suppliers who have capacity issues, and that is also a reason why then we have some inventory problems here and there. So overall, my discussion includes, of course, suppliers. We talk to suppliers but you need to understand where they do business and what is the nature of their business overall. You get a good picture if you talk to tire guys, to hydraulic manufacturers, and so on. And I have so far not one discussion where anybody was assuming any kind of slowdown in Europe.

And then I want to make also a little statement on the drought. Of course we do business here in the open nature so that means not everything we are doing can be 100% controlled. This is a severe drought but of course we had those situations also in the past. One year, it is the rain, and we have too much water, and another year we don't have enough. Overall, of course, my assumption is not that this drought will now go on for the next five years. So that means -- I am not an expert, but if you just believe in statistics then you could assume that also next year the corn belt should come back. And what I hear from companies focused in seeding, they are very bullish about 2013 and there is no reason why to be pessimistic.

Andy, who wants to --(inaudible). Beck wants to talk about the price.

Jamie, we did tweak our pricing. I think it went from 3% to 3.5%. So 20 or 30 basis points. And actually, we think we will get a little more pricing. I think you asked about Brazil specifically. So it is not that. It is just probably in our other markets that we are just being a little more cautious. And we haven't seen quite the level of price increases that we had expected. So just a slight tweak, but not related to Brazil.

And, Jamie, Brazil is not more or less competitive than any other market in the world. The industry has consolidated, but that does not mean that we do not compete. I think we compete quite a bit, which is good for our customers. So they certainly don't have to pay too much for excellent products.

Steven Volkman of Jefferies.

Steven left. I think Steven has a call with [Don Dea] (laughter)

Let's go on to the next call.

Ashish Gupta of CLSA.

If we take a step back and think about the long term, is it fair to say that you have become more bullish on the next two to three, four years for equipment demand? Is the higher CapEx part of that? Just the lower ending stocks sets up for multiple years of high production and catching up with consumption?

Well, when I am not on a call but, for example, talk to the media, my guidance is very bullish and I mentioned that, and I'm quoted there also for the next 100 years. And you know that we always talk about the important criteria, factual criteria which result into high demand. So I think the demand for farm goods will also grow in the future, and we talked already several times about the growing factor. It is a growing world population, changing diets, and emerging markets, renewable energies, and so on. And I can add now in the meantime that also a lot of the chemical industries try to replace crude oil delivered to us by organic product.

So that means overall I am personally very optimistic about the future of farming, globally. Now to talk about -- certainly [as off] the world where I see huge growth opportunities, and this of course is also a tool for the next, let's say, five years. I am rather optimistic. And you can see that last time during the financial crisis our industry reacted late, but reacted somewhat because, of course, farmers also sometimes act like consumers in a way and can hold back investments. And we don't see that so far and hopefully also not in the near future.

And just more of a follow-up on GSI, on your comment that you're seeing a lot of interest from your international dealers. Has your view continued to evolve on that end in terms of the long-term opportunity? Does it seem like it's going to be a bigger international opportunity in the nearer term than you had? I know you talked about a five-year outlook of about $1 billion?

Yes, I think this is an easy target, how I see it. And there are certain -- let's say when you think about why, there are certain markets, like China, for example, where a big international -- many American companies invest, companies like Tyson and so on. And they basically like the idea to go in with a standard set of solutions for the farmers and for the investors. And then, in the grains segment, we talked already about that in most, let's say about 50% of the harvests in Russia and Africa and countries like that are lost after harvest. So everybody needs investment.

And compared to smaller players in our industry, now we can basically take GSI by our hand and help them to get in touch with local dealers and people who are already connected with the market and with customers. And that is a big, real synergy because we don't -- GSI doesn't have to go there and hire many people. So we have already a structure in place. And with only a little investment, we basically can grow that export business substantially.

And also I think the other advantage we have in some of those markets, we have already invested in manufacturing, but in a way that in some areas it's like a startup. When we talk for example about China, we have plenty of space and we can offer GSI some manufacturing space, which will not change our cost position in total. Same situation in Russia and some other markets. So that means for GSI, the big advantage is that they can now have easier access to those markets on a very moderate cost base.

Michael Cox of Piper Jaffray.

Congratulations on a nice quarter, guys. My first question is trying to reconcile the quality of commentary around your bullishness around 2013, versus the down year-over-year order boards at the end of June. Should I take that to mean that you are expecting orders to recover as we move closer to harvest in the northern hemisphere?

No, you need to make the right comparison. So we compare our order board here in this presentation to last year. And last year our order books were record high, so if you compare to a normal, average order book we are having a very good year. We are still doing fine. So therefore I don't expect a huge change. I think this was a normal situation and we need it also in some of our products' order book to be a little lower because we just couldn't cope with it.

We still have probably four to five months of orders in North America and Europe. So that for us is a good level.

One quick follow-up on the tax rate. It was down quite a bit from the first quarter. What should we be expecting for the tax rate in the back half of the year?

In the back half -- well, we are changing our full-year expectation, bringing it down a little more to about 26%, 27% on a full-year basis. So second half, that will pull it down a little more than what we had originally thought.

Was there any one-time type of benefit in that quarter, or is it just a mix of --

No, it is mix. It is primarily the improvement in the North America earnings drives that rate down.

Jerry Revich of Goldman Sachs.

Andy, can you say more about the margin expansion in South America versus last year, versus last quarter, however you want to frame it? How much of that was due to the weak Real versus other cost savings? It doesn't sound like, based on your earlier answer, pricing was a big part of the answer there.

Jerry, in the first quarter we had some impact from acquisitions that pulled down the margins a little unusually. In the second quarter things got back to normal. We have been doing a great job in terms of managing material cost in Brazil.

As you point out, pricing isn't great, but it is positive, so we are getting a good differential between how we're managing material cost and what the pricing is. And then the mix was a little better in the second quarter as well. So those were the key drivers. On an FX point of view, it probably gave us 20, 30 basis points improvement.

In terms of investment spending you have outlined in China, what is the timing around that? It doesn't look like you spent much in this quarter. Just give us a sense for how we should think about the back half of the year versus what we saw this quarter.

Yes, as you look at both the expenses around startup costs in China -- let's say, more like 60% to 70% of that will be in the back half. And then on the Fendt side, where we have startup costs relating to the movement into the new assembly operation, you have more like 70% of those costs in the back half, primarily in the third quarter.

And in terms of the GSI business, you have outlined the year-to-date sales of roughly $400 million, which is -- call it 60% of your full-year sales guidance -- but sharply higher proportion of profits. What is going on with the cost structure in the back half of the year versus the front half? And just help us understand, please, the typical seasonality in the business?

What happens is the fourth quarter is the lowest quarter of the year. It's probably -- the sales are less than 20% of the total. And so what you see is, in the third quarter they start ramping down production. So the production levels are the highest in the second quarter. It starts to be ramped down in the third, and then the fourth is relatively low production and industrial activity there.

And so as a result you see some reduction in margins, just not as much leverage over the cost structure there. So that is pulling the margins down. Overall, the margins are still very strong. For the full year, excluding amortization and tangibles, we should be in the 15% to 15.5% range. But in the fourth quarter, again, the margins are quite low and pull that number down for the year.

Steve Volkmann of Jefferies.

Martin, curious how your thinking might have evolved with respect to dividends?

Yes, I think I reflected about our position already a little bit, and I would like Andy to make the legally right statement in order to keep me out of jail. (laughter)

Two things. We have been obviously interested in changing our capital allocation strategy. And as you can see in our release -- the very back end of our release -- we have gotten our Board to approve a share repurchase program, and that program is designed to primarily focus on limiting the amount of dilution that is created by our equity incentive plans that we have. So we have a $50 million share buyback authorization and we should see some amount of share buyback starting here at the back end of this year.

As it relates to dividends, that is another part of our strategy. And we intend to have a thorough discussion with our Board in the back half of this year and would hope that we will have something that we can announce later this year. Our intention is to strongly consider a dividend in the future.

And I apologize if I might have missed this, but just given the production timing, especially with respect to Fendt in Europe -- did you give us any sense of what the margin trajectory third quarter, fourth quarter we should expect?

In terms of the third quarter, we should see some margin improvement, but it will be limited because of some of the issues that you have discussed -- some of these startup costs, and things like that. So we are looking at probably somewhere in that 50 basis point improvement in the back half of the year, as opposed to much more improvement. So as we get to the full year, we are again looking somewhere to 50, 75, or maybe even a little higher than that for the full year.

So 50 BPs in the back half -- that's year-over-year?

Right.

Andy Casey of Wells Fargo.

Compliments to your team on North American margin performance.

Thank you, Andy.

Back to North America, and then I would like to go international for one question. But, realizing the Midwest's horrible drought -- based on your experience, do farmers invest with crop insurance proceeds?

Yes, many farmers do, so -- but it is a individual decision. That is something, therefore, difficult to discuss, but some will be compensated.

And then, in the context of your disclosure on the good backlogs and some of the products in North America, if the conditions continue to decline, and for whatever reason farmer investment starts to decline as well, can you help us understand what you are looking at, or what you are watching to initiate production curtailment actions?

Andy, what we always do in these situations, whether the market is going up or down, is we monitor certain things very closely -- certainly orders, we monitor retail activity, and certainly that is what drives all of our business planning is the sales to the end customer; and then we monitor dealer inventory levels. So all those are critical factors in determining what our production and sales forecast should be, because obviously there is no benefit in increasing our level of inventory to our dealers. We want to see that flowing through to the customers -- end customers. So we will be monitoring that very closely, looking at our order boards, and if there is adjustments up or down we will continue to do that in the normal course of our activities.

What we do have, basically, we try to have about 20% to 30% term labor in our factories, which makes us very flexible. This year and most probably I think also next year, our problem is just the opposite. We need capacity in some of our factories, and so last year, also in the US, we hired about 500 people. Therefore, we are not looking into the direction of sizing the factories down, but we can do it if needed rather quickly.

And then could you comment if you are seeing any short-term demand impact from the Russian drought? Or is the replacement demand more than offsetting any issues over there?

Yes, the replacement amount is huge, so that means the drought will not really matter in Russia at all.

Tim Thein of Citigroup.

Just coming back on the comments you made with regards to pricing. Andy, is that relative to price cost? Is your outlook for the year changed? You mentioned that tick down in pricing -- interested to hear how that has trended relative to your outlook for material costs for the balance of the year?

I would say it is pretty stable. We are seeing not much pressure on material costs, and so a small change in pricing is probably not going to affect our overall margin outlook. So we are still confident and feel comfortable that we will get those margins that we have forecasted in the back half of the year.

And the main driving factor for steel, which is a important component for us is, the automotive industry and with their production going down globally -- not in the US, but globally -- we see steel prices also going down which is a big advantage for us.

Right, that is what I was getting at. In terms of -- have you seen that corresponding benefit that may be moving in tandem with that?

We see that, yes.

And then on the GSI breakdown, can you remind us, you gave the sales split between grain storage versus protein. Do you have a rough proxy in terms of the EBITDA contribution between those two businesses?

The margins between those two businesses are roughly the same, so you can assume it is proportional.

And it is like 50/50 in a way, something. Make it easy.

Joel Tiss of BMO

I'm glad I changed my name tag. It is making it easier to get on these calls. (laughter) I have heard a little bit about financing weakening in Europe, and I wondered if you are seeing that at all?

We do not see that. Most of our farmers' financing needs are taken care of by Echo Finance anyhow. So therefore we don't see that. And then in many European markets you have dedicated special banks, so where you might see problems in general, you don't see it in farming because you have Credit Agricole for example, as one of those focused banks in France, and you have co-op banks in the Netherlands and Germany and in Scandinavia. And they never were involved in the -- they didn't take the risk of some other banks because they were much more local and therefore, they are not -- I think I would be astonished if a farmer would have a problem to finance his investment.

And then I don't know if you answered this or not -- but the margin in the US business, is that excluding GSI? Is that a new sustainable level, you think? I don't mean across all cycles and everything, but are you hitting your stride a little more? Or is there something in there that was a little unique to the quarter that we are still dealing with?

Andy already talked about the details and he can give you an update on that. But overall, of course, there is a strategy for margin improvements for Echo globally, but certainly also here for North America, with a lot of strategic initiatives we implemented. And now Andy can go into the detail because you did it already.

Joel, I think you always have to keep in mind seasonality. So in the second quarter is a seasonally strong margin period for us. As I said, some of this was due to sprayers, which is really a first half product line. Hay equipment is very strong in the second quarter. So there is some seasonality there, but from the standpoint of -- if you look over a full year of whether these margins are sustainable -- we certainly believe they are and continuing to work on other improvement opportunities in the market there.

Seth Weber of RBC Capital Markets.

Just going back to the higher dealer inventory numbers, can you comment -- are you seeing any change in used equipment? Is that starting to back up at all? Or have used equipment prices change?

We don't see, first of all, higher dealer inventory numbers in general, so the dealer inventories are in good shape. We don't see any increase in used, and we don't see any price deterioration in used, either. So the markets are very strong.

And then lastly, your Fendt expansion should be -- I think you walked through it. Your payments are back-half loaded this year. Is CapEx, do you think, continuing to move up to the right next year? Or do you think that we will have -- this is kind of a peakish number and it should start to trend down?

As we look forward, we would expect another relatively heavy CapEx period in 2013 as well. The big project for 2013 is the manufacturing facility in China, and most of the spending for that project is in 2013. So we still have the opportunity to move CapEx up and down to some extent, but our projections are that it will be in the same level, at least in 2013.

That was our final question. Presenters, do you have any closing remarks?

Yes, thank you. We just wanted to thank everyone for their participation, and encourage you to follow up later today if you have additional questions. Thank you.

This concludes today's conference call.