AGCO Corp (AGCO) 2012 Q3 法說會逐字稿

Good morning. My name is Marley, and I will be your conference operator today. At this time, I would like to welcome everyone to the AGCO Corporation's 2012 third-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 call over to your host, Mr. Greg Peterson, Head of Investor Relations. Sir, you may begin.

Thanks, Marley, and good morning. Welcome to those of you joining us on the call and over the internet for AGCO's third-quarter 2012 earnings conference call. We will refer to a slide presentation this morning which is posted on our website at www.agcocorp.com. We will use non-GAAP measures this morning and we've reconciled those non-GAAP measures to GAAP measures in the last section of the presentation. We will also make forward-looking statements this morning, including demand for our products and the economic and other factors that drive that demand, product development plans and timing of those plans, acquisition, expansion and modernization plans, and our expectations with respect to the cost and benefits of those plans, and timing of those benefits, and our future revenue earnings and other financial metrics.

We wish to caution you that these statements are predictions and that actual events 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 comments. 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 Chief Executive Officer, and Andy Beck, our Senior Vice President and Chief Financial Officer.

With that, Martin, please go ahead.

Good morning, everyone. Thank you, Greg. Today we recorded AGCO's third-quarter results that included both healthy sales growth and earnings improvement. It is an interesting time in our industry. We are facing a once-in-a-generation drought in North America, but lower yields are being mitigated by higher crop prices and extensive insurance coverage for row crop farmers. Record farm income is being projected for the US, and demand for higher horsepower equipment remains elevated. However, the lower levels of crop production that reduce the need for additional storage and our grain storage business is being pressured in the US. While higher crop prices are helping row crop farmers, they are pressuring the margins for livestock growers, and our protein production business is also facing some short-term challenges. Despite some of these weather-related issues, we continue to make solid progress with margins in both North and South America. And in the third quarter, both regions surplus operating margins of 9%.

We also made progress with one -- with our strategic production -- with one of our strategic production initiatives. In September, we opened our new Fendt assembly facility in Marktoberdorf, Germany. The new facility provides AGCO with the most modern, efficient and technology-advanced agricultural tractor manufacturing transfer facility in the industry. Our new assembly process is designed to lower manufacturing costs and significantly increase Fendt's tractor capacity.

Slide 3, some of our results for the third quarter and first nine months of 2012. In the third quarter, we reported sales growth across all regions compared to the same period in 2011 on a constant currency basis. And adjusted earnings per share for the third quarter was $0.96, and reflected strong execution, despite lower production volume. AGCO's forecast for tractor and combine production volumes for 2012 are illustrated on slide 4. Third-quarter 2012 production was down about 4% compared to the third quarter of 2011. Lower levels of production in North America and Europe were partially offset by increased activity in our South American factories.

As you know, the Fendt production schedule in Germany was more heavily weighted toward the first half of the year to compensate for lower production during the third quarter, as we brought the new assembly facility online. We are being very conservative as we ramp up the new facility to ensure we maintain our high level of quality, and as we made progress with our SAP implementation. Our build rate in Marktoberdorf was lower than we initially planned. Consequently, our sales in September were slightly lower than our forecast. Fourth-quarter sales also will be negatively impacted.

AGCO's order boards at the end of September were down by about 30% compared to September 2011 in Europe, due to weaker demand, primarily in Northern and Southern Europe. Orders were down more modestly in North America as we begin planning to condition to Tier 4 final versions on certain products. South American order boards were flat. 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 4% to 5% from 2011 levels.

Slide 5 details industry unit volumes by region of the first nine months of 2012. Industry tractor sales in North America increased modestly compared to 2011 levels. In North America, industry's sales growth was the strongest for high horsepower tractors due to the healthy economics for row crop farmers. The combine market was down compared to the first nine months of 2011, due to the Tier 4 transition, and as a result of very high levels of demand experienced in 2011.

Industry unit retail sales of tractors in Western Europe were flat in the first nine months of 2012. Growth in the key markets of France, United Kingdom and Germany were offset by declines in Southern Europe due to dry weather and credit constraints, and declines in Scandinavia and Finland due to wet weather and the late harvest. South American industry retail tractor volumes declined during the first nine months of 2012, compared to the same period in 2011. Dry weather impacted the first harvest in Southern Brazil and in Argentina. And 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 Beck, who will provide you more information on our third-quarter results.

Thank you, Martin, and good morning to everyone. AGCO's regional net-sales performance for the third order and first nine months of 2012 is outlined on slide 6. Currency translation had a negative impact of about 11% on AGCO's consolidated net-sales. And acquisitions added approximately 10% to sales in the third quarter of 2012 compared to the same period in 2011. The Europe, Africa, Middle East segment reported a net sales increase of approximately 8%, excluding the impact of currency translation during the third quarter of 2012, compared to the third quarter of 2011. Excluding the positive impacts of the GSI acquisition, the EAME sales were about 5% higher than in the same period in 2011. The negative impact of Fendt's lower production, especially on our German sales, was offset by growth in France, Russia and Africa. North American sales increased approximately 52%, excluding currency translation impacts during the third quarter of 2012, compared to the same period in 2011. Excluding acquisition impacts, the growth was approximately 21%. Increases in high horsepower tractors, sprayers and hay equipment produced most of the growth.

AGCO's third-quarter net sales in South America grew about 14% from comparable 2011 levels, excluding currency translation impacts. Acquisitions generated about 4% of the growth. Higher sales in Brazil, due to improved crop fundamentals, accounted for most of the increase. Net sales in our Asia/Pacific segment increased approximately 24% in the third quarter of 2012 compared to 2011, excluding the impact of currency translation and the benefit of acquisitions. Sales growth in China and Australia produced most of the organic increase. Parts sales were $330 million for the third quarter of 2012, an increase of approximately 4%, compared to the same period in 2011, excluding the impact of currency translation.

Slide 7 details AGCO sales and margin performance. Adjusted operating margins were up about 60 basis points in the third quarter of 2012, compared to the third quarter of 2011. Gross margins benefited from a favorable pricing environment, and we faced only modest inflationary pressure for purchased materials. Gross margins were impacted by costs associated with the start-up and low-production at the Fendt facility in the third quarter. Operating margins were negatively impacted by market development expenses. Operating margins in the third quarter of 2012 in AGCO's Europe, Africa and Middle East segment, were down slightly compared to the same period in 2011, due to lower production volumes, a weaker mix of products, and the impact of the Fendt factory start-up costs. North America's third quarter operating margins reached 9.5%, including the benefit of GSI. Core margins were up significantly, due to higher sales and favorable sales mix, and cost-control initiatives. In the South America region, operating margins improved to 9.4% in the third quarter of 2012, up approximately 250 basis points compared to the third quarter of 2011. Favorable exchange impacts, cost reduction benefits, and higher sales volumes produced the increase.

As Martin mentioned, in the third quarter we started to feel the impacts of the US drought on our grain storage and protein production businesses in North America. Slide 8 details GSI sales by region and by product for the first nine months of 2012. GSI sales grew about 3% in the first nine months of 2012, compared to the same period last year. Strong growth in Asia was partially offset by a slight decline in North America. GSI contributed approximately $0.50 of earnings per share during the first nine months of the year. With the impact of the drought in the US on GSI's North America grain storage and protein production businesses, we are reducing the projected full-year EPS contribution of GSI to $0.30 to $0.45 (sic- see presentation slides "$0.35 to $0.40") per share for the full year.

Slide 9 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 4 emissions 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 10 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 nine months of 2012 was elevated compared to the first nine months of 2011, due to our inventory build and our increased schedule of capital projects. Every year, operating plan includes an increase in dealer and Company inventory required for the selling seasons. The heavier inventory build in the first nine months of 2012 was attributable to stronger sales, supplier delivery constraints, and the slower ramp-up in the new Fendt assembly facility in September. We expect to reduce inventory in the fourth quarter as we complete our plant improvements and work through our supplier issues. We expect to generate strong cash flow in the fourth quarter, and plan to continue investing for future growth in the form of engineering expenses and additional investments in our plants and new products. Even after covering the increased spending on these strategic investments, we are targeting free cash flow to exceed $150 million during 2012.

At the end of September 2012, our North America dealer-month supply on a trailing 12-month basis was approximately 5 months for tractors and combines, and 6 months for hay equipment. Relative to last year, this was flat for tractors and hay equipment, and higher for combines. Other working capital details are as follows. Losses on sales receivables associated with our receivable financing facilities, which is included in other expense net, were approximately $5.8 million in the third quarter of 2012, compared to $6.9 million in the same period during 2011. In addition, AGCO repurchased 224,000 of it shares during the third quarter, for a total cost of about $9.5 million.

Our regional market outlook for 2012 is captured on slide 11. Our forecast anticipates relatively stable demand across a global basis. In North America, the solid financial position of row-crop farmers and the outlook for record farm income is expected to mitigate most of the impact of the drought that will reduce crop production this year. In South America, we expect elevated demand in the fourth quarter, as strong crop prices, favorable exchange rates, and enhanced government financing programs keep demand at a relatively high level. The improvement in the second half of 2012 is expected to offset most of the softness experienced in the first half of the year resulting from the weak first harvest in Southern Brazil and in Argentina. Higher soft-commodity prices are expected to provide healthy income for European grain farmers in 2012, supporting retail demand. We are forecasting modest growth in key Western European markets, offset by declines in Southern Europe due to dry weather and credit constraints, and declines in Scandinavia and Finland due to wet weather and lower crop production.

Slide 12 highlights the assumptions underlying our 2012 outlook. Our sales forecast includes price increases between 3% and 3.5% on a consolidated basis, offset by 7% of negative currency impacts. In 2012, expenditures on new product development and Tier 4 emissions requirements are expected to cause an increase in engineering expense by approximately 10% to 15%, or $40 million. We anticipate that our new products and our productivity and purchasing initiatives will drive improved gross margins.

Our forecast includes an increase in costs associated with the start-up and ramp-up of production at our Fendt tractor facility. For the full year, the impact of start-up costs and lower productivity during the ramp-up period throughout the fourth quarter is estimated to be approximately $25 million. In addition, our forecast includes $20 million to $25 million for expansion in China. We project the GSI acquisition will be accretive to 2012 earnings per share by $0.35 to $0.40. In addition, the strengthening US dollar is expected to negatively impact 2012 EPS by about $0.30 to $0.35, based on the current exchange rates.

Slide 13 lists our view of selected 2012 financial goals. We are projecting 2012 sales in the $9.8 billion to $10 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 start-up costs associated with our manufacturing projects. We expect to continue to improve gross margins from 2011 levels. We are now targeting 2012 earnings per share of about $5.20 per share. Earnings per share forecast was reduced since last quarter to take into account lower sales expectations at GSI in North America due to the impact of the drought, lower sales projections in Europe due to weaker Northern European market conditions, and the impact of sales and margins of the slower ramp-up of production at our Fendt tractor operations. We expect capital expenditures to be in the $375 million range, and our free cash flow to exceed $150 million, after funding the expected increase in capital expenditures.

Operator, that concludes our remarks. We are ready to take questions.

(Operator Instructions)

Andy Kaplowitz with Barclays.

Good morning, guys. Martin, you guys talked about orders being down pretty significantly in Europe, you know, toward the end of the quarter especially. We saw that in the data. But can you talk about a little bit more what you saw, especially in Northern Europe, in credit conditions? Did that have an effect? Or was it really mostly weather and you expect it to be more temporary as you go forward?

In Northern Europe, it's mainly the weather conditions. And in Southern Europe you can see also some financial restrictions, mainly in Italy, which is a huge tractor market for small tractors.

Got you. And Martin, what kind of visibility do you have going forward? Do you think it can still get worse? Or should it be stable, you know, at these levels? I mean, how do you look at it going forward in that market?

Well, of course we don't want to talk about next year yet. But I'm not too nervous about 2013 sales.

Okay, thanks for that, Martin. Just shifting back to North America. You know in sort of the core North American high-horsepower market, did you see the pattern that -- you know, maybe some of us expected, where you saw maybe sort of lighter orders in the beginning of the quarter, then sort of picking up as farmers saw their insurance payments start to come in? Or you know, could start coming in. I mean, how have orders progressed through the quarter, and the visibility in that market as you go forward?

Yes, they've been relatively consistent with the normal seasonal patterns. You know, there is some expectation that with some tax law changes, that we could see the normal kind of year-end buying for tax reasons. So that's kind of the expectation. But we -- I guess in summary, we haven't really seen any major change, just continued strong demand for the [big equipment].

Okay, that's great. I'll get back because there are other people ask. Thanks, guys.

Ann Duignan with JP Morgan.

Hi, good morning. Martin, could you talk a little bit about the outlook for GSI? You know, how concerned are you that demand for grain storage and protein buildings may be under significant pressure? Not just in the short-term because of the drought, but longer-term because of the absence of tax benefits like section 179.

Yes, I'm not too much concerned about the long-term opportunities here. It's pretty much more related to the fact that most farmers, and those farmers who actually normally invest in grain storage, basically sold their crops already because of the high commodity prices. And the big demand. So therefore, we have a literally full year. And I think in general, you will see GSI outperforming in the spot markets quite a bit. So we just go after those markets together, and I think that we will show a nice upside potential. Maybe, Andy, you want to add something?

No, I think that's exactly right. What we are obviously seeing is there was some weakness here this third quarter, and for at least the balance of the year. Because of the drought causing the yields to be so much lower, there was not a need for both conditioning equipment, which is one of the higher-margin pieces of GSI, as well as any storage business. And then the higher prices are obviously affecting protein producers at this time. So as we look at the balance of the year, we see it as relatively weak. But we don't see this as any long-term issues, but just short-term driven by the current economics out there because of the drought.

Yes, and I know you don't want to give guidance for 2013, obviously. But wouldn't it be prudent for us to at least forecast that that business would be under pressure at least through the first half of next year?

I would not recommend to do that. But it is up to you. So you are, in tendency, always a little bit more conservative. I will never forget when you put us on $1 earning in the year where we made $3.

(laughter) Well, I probably overestimate and underestimate, that's for sure. I'll get back in line just in the interest of time for everybody else. Thank you.

Jamie Cook with Credit Suisse First Boston.

Hi, guys. This is [Ashley Lindiyon] in for Jamie Cook. Could you guys talk about South America more? Sort of, what is behind that steady margin improvement through this year? And is that sustainable? And then, what are you seeing on the competition front there?

Yes, what we're seeing in South America is that our margins have improved. The market conditions are also improving in South America. So from a production and sales standpoint, we are seeing some upside there. The market conditions are improving because the next harvest looks very promising for Brazil. In addition, the government has enhanced the FINAME financing terms and conditions, which is also creating more demand in the market. So from a production standpoint, that's helping us. In addition, we have been very active in working on cost-reduction initiatives, pricing initiatives, in order to reduce our product costs, focusing on material-cost reduction and product design costs. And I think some of those impacts are now showing in our margins. And so we've been very margin-focused in Brazil. And that has been the key of the management team. And so far, the results look good for the third quarter.

When it comes to competition, as you might have read, is that some of our Indian players decided to go to Brazil. What you need to know is that India is a big market for tractors, but horsepower is limited by design to around 70, 75. Which means that those players basically address the small farm segment. It's really not the professional farming segment. And we offer, already, for a couple of years, tractors made by our joint venture partners in India, TAFE, Massey Ferguson-branded, Massey Ferguson-quality tractors, to Brazil. So it's nothing we worry too much about.

Got it. And then could you go into sort of what was the price in material cost impact in this quarter? And sort of how are you guys seeing that going forward?

Yes, so this year we have had -- I would characterize it as modest inflationary pressure on our materials. And that continued through the third quarter. We, I think, saw that pricing-wise, for our products, we were able to get somewhere between 3% to 3.5% pricing across our markets. And then we did feel some inflationary pressure fro our materials. So we're looking at between 1.5% and 2% in terms of net-pricing benefit. For the full year, we're looking more closely -- just over 1% in terms of net pricing benefit for the full year. So, definitely that helped to our margin situations this year.

Alright, great, thanks, guys.

Michael Cox with Piper Jaffray.

Thanks a lot, guys. My first question is on your EPS guidance revision. As I go through the math, it looks like the GSI reduction in the higher Fendt costs would be about half of the reduction. And I just want to make sure I understand that the remainder would be tied to the Scandinavia and Southern Europe weakness. Or is there something else that we should be thinking about?

No, I think you've pretty much got it right in terms of the change. I would attribute about half of it to the Fendt situation, and then the other half between Northern Europe and GSI.

Okay, that's helpful. And then, within that decline in order boards that you spoke of in Europe, could you perhaps call out what you are seeing in Western Europe by comparison to those other regions? Just so we have a sense for how that large region for you guys is performing in relation to some of those peripheral areas?

Well, yes. Again, Western Europe is also very difficult to categorize as one market at this point. As we pointed out and Martin already discussed, it's a relatively mixed situation there. Overall in Western Europe, I would say that the orders are down between -- typically between 10% and 20%. But again, in Southern Europe, the market is much weaker. In Northern Europe we are seeing some weakness. And in some of the key markets like France and Germany, those markets are still staying relatively stable, and we are seeing still good demand in those key markets for us.

Okay. And then one last question on the GSI side. As you -- the weakness you called out here as we come towards the tail-end of the year. Do you feel those are delayed orders? Or how does this work in terms of through the distribution channel there? And does that create an inventory issue within the channel?

No. No inventory issue at all. So that's all, I'd say, taken care of.

Yes, typically that order -- from order to fulfillment at GSI is typically just a couple months. So they don't carry a very long -- large backlogs. And these aren't really delays or anything like that. It is just, you know, a temporary slowdown. And we, obviously, have been able to ramp down inventories and our production in line with what we see demand going forward. The fourth quarter GSI is always a relatively low quarter. It's their weak seasonal quarter. So there wasn't much expected in the fourth quarter anyhow.

Okay, thank you very much.

Seth Weber with RBC Capital Markets.

Hi, guys, Adam Nielsen here on for Seth. How are you? Just wondering if you could take us through margin outlook by region for 4Q?

For the fourth quarter?

Yes. Color on directionally where we're going.

Yes. North America margins we're looking to be slightly flat to slightly down, mainly because, again, GSI has kind of a weak fourth quarter. And so that's the reason why we are seeing margins come down there. If you take GSI out in the core North America business, we would still be expecting some increases in the fourth quarter. Europe, European -- or Europe, Africa, Middle East business is where we're going to see margin declines. Again, we have lowered our production rates, and the mix is much worse than what we would've seen last year because of the lower production levels, particularly at our Fendt business, which is our premium product and carries strong margins.

The Asia/Pacific margins are down only because we are looking to add some additional market development costs there that we've talked about all year. And there is a really heavy level of that in the fourth quarter. And then in South America, we're looking for margins to be flat to slightly up as, again, sales and production look to be strong in the fourth quarter.

And that's a quarter-on-quarter basis? Or year-on-year?

That's quarter-over -- that's versus a year ago. Fourth quarter versus a year ago.

Okay. And does the lower outlook sort of push out the timeframe of any potential dividend introduction?

I wouldn't say that that's -- has any consideration. I think we are still very confident in our future outlooks and the long-term performance of AGCO, as well as our industry. And so those are the key considerations as we contemplate the timing of a new dividend for AGCO. And that situation is really not a factor.

Great, thanks, guys. I will jump back in line.

Jerry Rabich with Goldman Sachs.

Hi, this is Ravi Gill on for Jerry. Can you take a minute to reconcile for us your earnings versus production guidance? Looks like you expect production to be up sequentially, but earnings to be flat. Why is that, particularly, with a lower-period cost at Fendt?

Yes, that's a good question. It gets into the mix of production. When we talk about production, we're talking about units. And so what's happening is we're replacing -- we're seeing some growth in production in small equipment, particularly in South America, which is not a very vertically integrated facility that we have in South America. And we are seeing down production, primarily in Europe, which is our much heavier manufacturing facilities, and with some of our higher-margin products. So the overall mix is detrimental to production absorption, as well as margins.

And can you talk more about maybe the margin expansion opportunity going forward in Europe following the Fendt upgrade?

Well, with the Fendt upgrade, what the project enables us to do is two things. One is to be able to produce at higher levels of volume. In the future, we're very positive about market trends for professional farmers in Europe, in Eastern Europe and Central Europe. And we believe that the Fendt product will continue to grow in demand. And so we were effectively out of capacity in that facility and needed to make this major change in our production capacities. As we did that change, we also designed the factory in a much more productive way, improving all systems and improving the flow of the manufacturing operations, to where we will get, once we're up and running at stable production levels, should get an improvement in our productivity. And so we get cost reduction from productivity improvements, as well as the ability to meet market demand.

So, guys, I think what we need to see [and reinstate in] for the third record year in a row, despite the slowdown at Fendt, and that is actually a very [slow-go] approach. Because we need to make sure that we don't jeopardize the high level of quality [advent]. And we need to make sure that we really do get everything done properly. As soon as we approve that, which I assume will take us maybe another month or something, we will be back. And you will see some of that also next year. So I am not too concerned about -- it's basically, we are running out of the months 2012. So we need a 13th month but we don't have it. So you will see some of that, of course, next year for us. And it's not related to sales. So the Fendt performance, everything has been sold. And unfortunately, some of our customers now have to face delays, which is not a big problem because the need for the tractor is more in spring then in winter.

And final question before I jump back in queue. Can you talk more about where you stand on productivity enhancement opportunities in the US?

Well, we're -- I think we demonstrated that we're doing quite well with our improvements in margins in North America. As we pointed out, our margins are going to grow here this year. And if even when you pull out GSI, the margin improvement is quite substantial for our North American operation. And that does go back to selling, sales growth in some of our key, high-margin businesses, where we're focusing our efforts in high horsepower tractors, sprayers, hay equipment, where we have certain strengths that we're capitalizing on. And then, effective cost reduction initiatives and purchasing area, and in our plants. And so, everything is going right according to plan, and we will continue to make efforts next year to improve as well.

Great, thanks guys.

Robert Wertheimer with Vertical Research.

Hey, good morning. My first question is just a big picture on -- and I know it's early -- on Tier 4 final. Could you talk about whether any of these stepped-up R&D expenses, you know, do you feel like you're ahead of the curve, behind the curve? Have you got test units running at the right emission levels? I'm just curious, you know, how you feel about that.

Technically, we are ahead of the curve. We are --

Sorry, go ahead.

So we have basically very early in time taken the right decision. And, therefore, we feel very good about our engineering efforts on the products we launch.

Okay, I'll stop there. And just to be clear on the change in guidance, you had mentioned the increased cost at Fendt. The slower ramp in 4Q is definitely included in that, which I got to be like $0.07. And it seemed like you were saying that was a little bit bigger. So I just wanted to see if the slower ramp was included in there. And I'll circle back after the call if I don't get it then.

Yes, definitely the slower ramp is included. And that's reflected in our lower sales guidance that we gave, Rob. And of the lower sales, Fendt is about half of that reduction. So yes, it definitely reflects that slower ramp.

And as I mentioned, it's not caused by the market, it's caused by the fact that we can [deliver].

Okay, perfect. And then is there any hiccup in production? I mean, so you're choosing to ramp slower and, I guess, to make sure everything's going smoothly in quality. Is there anything unexpected you saw when you, you know, sort of started things up, or are you just being cautious? And I'll stop, thanks.

Well, yes, we saw some unexpected things. And it was a major project, so that not only that we did build a complete new assembly plant, but we also have a new factory layout and new software. And this combination, that of course adds complexity to the project. And we were slightly more optimistic about it.

Great, thanks.

Ashish Gupta with CLSA.

Hi, good morning, guys. Martin, I was just wondering if you could give us some perspective on Europe a different way. I know you guys talked about how the order book was down considerably. But given that we are in such a weak level of activity already, can you kind of talk about how you think about the market structurally? I mean, it seems like we have a lot of demand to catch up on in the years ahead.

Yes, I think you need to be careful that you don't get the message wrong. So the order book is down from previous year, or from last quarter, but it is still on very high and robust level. So I am not expecting any structural change in Europe. And I'm very optimistic that also Europe will see pretty strong demands 2013 and the years to come.

Great. And so, just switching gears here, now that you are about a year into GSI, can you give us an idea how you're thinking about the progression of the international opportunity? Are you still sort of feeling good with the five-year target? I think it was $1 billion in revenue. And do you see upside to that now that you've got more experience in the business?

We still believe in that. It's -- I think it would be too naive, so to say, to just also raise the bar. But the target is, I think, a pretty good one and I am very confident that we will be there in five years.

Great, thanks very much.

Vance Edelson with Morgan Stanley.

Hi, thanks. Could you just comment on the current development activities in China, in particular? What are the steps you are taking now, what are the next steps to take? And how long do you think it will be in this development stage before the current activities start to pay off? Thanks.

Sure. You know, the stage that we're in China is still early days. We are localizing certain products and getting them officially listed on the subsidy list in China. So we are in the stages where we are trying to get products available for sale. And we should start selling more products starting next year. As we are doing that, we are in later stages of the development of a new platform of tractors that will be produced in China. This platform of tractors goes from about 130-horsepower and below. And they will be produced in China and exported all over the world, sold in all of our markets.

As we work to start establishing ourselves in the local market, we are also working on our industrial capabilities to be ready to produce this new platform of tractors. Which should produce better margins across the world, and provide us with a very competitive product offering in China, as well. But it is still -- it's very early days. We are building up not only our capabilities there in terms of sales and marketing, brand awareness, as well as starting the new facility that we are going to build the tractors in.

Okay, very helpful, thank you.

Ross Gilardi with Bank of America.

Yes, thanks very much. I just had a couple of questions. Most of mine have been answered. But Greg, I just want to follow up on GSI. Just thinking back to Farm Progress. You know, your guidance at the time seemed pretty bullish on the outlook. And I'm just wondering, did things get that much worse in September? And, in general, how much visibility do you really have on GSI's product line?

Yes, Ross, as we talked about -- and I think Andy mentioned it earlier on the call. The typical order-to-delivery time, and order board for that matter, for GSI is much shorter than in our machinery business. It's only a couple of months. And so, yes, we did see some deterioration in the order flow that we were experiencing, really up until the middle of the summer time. And as the drought continued to worsen, we just -- it wasn't a matter of orders getting cancelled, but it was just a matter of new orders not materializing. So, yes.

And as we talked about, there just isn't the demand for this incremental storage. Martin mentioned that a lot of the grain has already been sold, which -- more of it was sold this year at the time of harvest as opposed to storing it, just because the spot prices were so high. But also there just wasn't as much -- because of the lower yields, there wasn't as much grain to have to store. So it was a combination of not just the grain storage, though, in terms of our lower outlook for this year. But also on the protein production side. As you are aware, the feed costs for the chicken producers and the hog producers are much higher. And so the profitability of those folks are definitely being pressured. And we are not seeing new orders in that part of the business either.

Okay, great. And how about pricing? Are you seeing any impact in terms of pricing due to the weaker, short-term demand outlook for GSI?

No.

No, that seems to be holding okay. It's just a demand issue at this point.

Got you. And then, hopefully this isn't an off-the-wall question. But it seems like there has been a fair amount of M&A in the grain storage sector, just very broadly around the world. You know, with Archer Daniels buying GrainCorp in Australia, and I think Glencore has been active in this market. How do some of these businesses relate to what GSI does? And do you see yourself having to diversify your grain storage business further into the supply chain over time to make your overall competitive offering more attractive?

You know, I think we are already -- I mean, if you look at the products that GSI offers, I think we offer probably one of the most full-product lines, if you compare what we do to our competitors. We're going to continue to look for opportunities to expand the offerings. We talked about that we are only doing hogs and chicken. We probably have opportunities to look in other areas. And then on the grain storage and handling side, there's always additional piece, parts and components that we can add to the process that will enrich our products. But today, if you look at what we offer, all the way from unloading the crops off the combine, conditioning the crops, and then getting it into the silo, and monitoring, and all of that, GSI provides that equipment. Which is not very common if you look across the competitive landscape. Most just do a piece of that and not the whole solution. So I think we are already -- the product line that we're already offering I think is pretty diverse.

Got you, okay. Thanks very much.

And there are no further questions. Are there any closing remarks from you?

Yes, just we would just like to thank everyone for joining us today. And we would encourage you to follow up if you have additional questions. And have a great day. Thanks.

Thank you for your participation. This does conclude today's conference call. You may now disconnect.