AGCO Corp (AGCO) 2013 Q2 法說會逐字稿

Good morning. My name is Sarah and I will be your conference operator today. At this time, I would like to welcome everyone to the AGCO Corporation 2013 second-quarter earnings release and 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)

Thank you. Mr. Peterson, you may begin your conference.

Thank you, Sarah. Good morning and welcome to those of you joining us here on our second-quarter earnings results call. We will be going over some slides this morning. You will find those slides posted on our website at www.agcocorp.com on the Investors page. The non-GAAP measures that are used in the slide presentation are reconciled to GAAP measures in the last section of the presentation. We'll also be making some 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 costs 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, 2012. These documents discuss important factors that could cause the actual results to differ materially from those contained in our forward-looking statements. A replay of this call will be available on our corporate website. On the call with me this morning is 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 to everyone with us on the call. Slide 3 summarizes our results for the second quarter and first six months of 2013. As you can see from the slides, we made significant progress in the second quarter towards both our growth and profitability improvement goals. Our record second quarter sales were 13% over the second quarter of 2012. We generated solid sales growth across all of our regions despite challenging conditions in certain markets.

In addition, AGCO's focus on margin improvement produced operating margins over 10% in the second quarter. We are successfully increasing margins through repurchasing actions, factory efficiency projects and new product development. Second-quarter operating margins exceeded 15% in North America, where over 12% in Europe, Africa, Middle East and over 11% in South America. Sales growth and improved profitability produced record earnings in the second quarter of $2.15 per share.

Performance against our working capital target is also on track and we are positioned for another year of strong cash flow generation. As Andy Beck will discuss in more detail, we have increased both our earnings guidance and our forecast for free cash flow. I also want to emphasize that we are continuing to invest for the long-term. Our product development expenses will be nearly up 50% this year and our capital expenditures program is expected to exceed $400 million for 2013.

AGCO's tractor and combines production volumes are illustrated on slide 4. Second quarter 2013 production was up about 7% compared to the second quarter of 2012. The production growth was strongest in South America, with more modest growth in our North American and European factories. I'm also very pleased to tell you that we achieved record production volume at our new Fendt assembly facility in Germany in the second quarter and reached significantly import productivity levels.

As we discussed last quarter, our full-year Fendt production is forecasted to be higher than in 2012. A large portion of the increase were [fewer] in the second half of the year due to the low production rates experienced during last year's ramp up in the new facility. Our third and fourth quarter European sales and income will benefit from Fendt 's higher production levels. We expect total AGCO unit production for the full year of 2013 to increase between 6% and 8% as compared to 2012.

Slide 5 details industry unit volumes by region for the first half of 2013. In North America, industry sales grew across all categories of tractors. The strongest growth came from the high horsepower segment due to the healthy income levels for row crop farmers. The combines market also showed strong growth, compared to the same period of 2012. Industry unit retail sales of tractors in Western Europe were down modestly for the first six months of 2013. Markets result by country remain mixed during the first half of the year, with weather-related declines experienced in the UK, Finland, Southern Europe, partially mitigated by growth in France.

Industry sales in the important German market were down slightly in the first half versus 2012. South American industry retail tractor volumes increased significantly during the first half of 2013 compared to the drought impacted first half of 2012. Favorable exchange and financing rates, improved weather and attractive soft commodity prices have energized the market in Brazil. Industry sales were also up strongly in Argentina. 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 2013 is outlined on slide 6. Currency translation had a negative impact of approximately 0.5% on AGCO's consolidated net sales in the second quarter of 2013, compared to the same period in 2012. The Europe/Africa/Middle East segment reported net sales growth of approximately 12%, excluding the impact of currency translation during the second quarter of 2013, compared to the second quarter of 2012. Strong growth in France and Germany, largely enabled by Fendt's improved production capabilities, generated most of the increase. North American sales grew approximately 8% during the second quarter of 2013 compared to the same period in 2012. Sales increases experienced in the professional farming segment produced growth in sprayers, combines and high horsepower tractors.

AGCO 's second quarter 2013 net sales in South America grew about 28% from comparable 2012 levels excluding currency translation impacts. Higher sales in Brazil and Argentina accounted for most of the increase. Net sales in our Asia/Pacific segment increased approximately 18% in the second quarter 2013, compared to 2012. Excluding the impact of currency, growth in China and East Asia produced most of the increase. Parts sales were $382 million for the second quarter of 2013, an increase of approximately 7% compared to the same period of 2012 excluding currency. For the first six months of 2013, parts sales were $664 million, up approximately 1% compared to the same period in 2012 excluding the impact of currency translation.

Slide 7 details AGCO's sales and margin performance. Gross margins improved about 60 basis points in the second quarter 2013 compared to the prior year period. Margins benefited from higher sales and production volumes, limited material inflation, pricing and cost reduction initiatives. Operating margins expanded nearly 90 basis points in the second quarter, despite the negative impact and market development expenses and higher engineering expenses associated with Tier 4 requirements. Europe/Africa/Middle East operating margins were up over 70 basis points in the second quarter of 2013, from the same period in 2012 due primarily to higher production and sales levels at Fendt, partially offset by higher engineering expenses. Our third and fourth quarter margins were also benefit from favorable cost comparisons to the Fendt assembly plants start-up costs incurred in the back half of 2012.

As Mark mentioned earlier, North America's operating margins exceeded 15% in the second quarter of 2013, and were up over 230 basis points compared to the second quarter of 2012 due to higher sales and unfavorable sales mix and cost control initiatives. In the South America region, operating margins improved over 170 basis points in the second quarter 2013. Favorable exchange impacts, cost reduction benefits and higher sales volumes reduced the increase. You may also recall that the first half of 2012 was negatively impacted by very dry weather in Brazil and Argentina. Margins in the Asia-Pacific region were down modestly due to increased market development expenses in China.

Slide 8 details GSI sales by region and product. GSI sales were down approximately 4% in the second quarter and first half of 2013 compared to the same period last year, due primarily due to the timing of protein production equipment sales in China. The negative effects of last year's drought on US grain storage sales in North America have now lessened. The outlook for improved grain production in the US this year is generating stronger demand for storage and conditioning equipment and we have increased the forecast for GSI sales in the second half of the year. We are now forecasting GSI sales to be up 5% to 10% for the full year of 2013 compared to 2012. Longer term, the global trends of population growth and changing diets are generating demand for additional grain storage and protein production capacity. This countercyclical nature of the protein production sector also supports more stable earnings in GSI.

Slide 9 looks at our depreciation and capital expenditure trends. In 2013, we expect to further increase our capital expenditures as we work to meet the Tier 4 admissions requirements, refresh and expand our product lines, upgrade our system capabilities, improve our factory productivity and establish assembly capabilities in China.

Slide 10 addresses AGCO's free cash flow, which represents cash from operating activities less capital expenditures. Our seasonal requirements for working capital were less than the first half of 2013 compared to the first half of 2012. We expect to generate strong cash flow again this year, and plan to continue investing in our plants and new products. We also expect an increase in inventory at year-end as we build the necessary transition stock ahead of Tier 4 final introductions during 2014. At the end of June 2013, our North America dealer months supply on a trailing 12-month basis was approximately five months for both tractors and combines, and seven 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 $6.5 million during the second quarter of 2013 compared to $5.4 million in the same period in 2012.

Our 2013 regional market outlook is captured on slide 11. We are anticipating relatively flat demand on a global basis. The revised outlook reflects an increase in the South America market, while the North American/Western European market forecasts does not change. In North America, the strong financial position of row crop farmers and the expectation of farm income above historical averages, should support healthy demand from the professional farming sector. Strong farm fundamentals are expected to continue in Brazil in 2013 and increased funding levels from the government financing programs are expected to stimulate growth in excess of 15% compared to the levels in 2012.

We are expecting softer demand in Western Europe, with weakness in the UK and Northern Europe, due to lingering impacts of a wet spring and continued softness in Southern Europe due to tight credit and dry weather. Solid demand across France and Germany is expected to mitigate some of the decline in Northern and Southern Europe. We are currently forecasting 2013 demand in Western European market to be down between 0% and 5% compared to 2012.

Slide 12 highlights the assumptions underlying our 2013 outlook. Our forecast assumes price increases of 2% to 2.5% on a consolidated basis, and we expect the impact of currency translation to be modestly negative. In 2013, expenditures on a new product development and Tier 4 emissions requirements will cause an increase in engineering expenses of approximately 15%, or about $50 million. We also look for new products and our productivity and purchasing initiatives to drive improved gross margins. Our SG&A expense will include expenses associated with manufacturing site start-up and marketing support costs amounting to about $10 million for our Chinese operations.

Lastly, our effective tax rate forecast remains 33% to 34% for the full year of 2013. As you may recall, we did make a change in the fourth quarter 2012 in the accounting for our US deferred tax assets which resulted in an increase in our effective tax rate for 2013. For the first half of 2013, the higher effective tax rate impacted our earnings per share by about $0.31 and the full year impact is expected to be about $0.44 per share.

Slide 13 lists over view on selected 2013 financial goals. We are projecting 2013 sales in the range of $10.8 billion to $11 billion. We also expect improved gross and operating margins from 2012 levels, after significant investments in product development, market development and start-up costs associated with our manufacturing projects. We are increasing our earnings-per-share outlook. We are now targeting earnings per share in the range of $6.00 for the full year of 2013. We expect increased capital expenditures to be in the $400 million to $425 million range and free cash flow of approximately $200 million after funding the expected increase in capital expenditures and higher inventory levels associated with the Tier 4 product transition. And with that, operator, we're ready to take questions.

(Operator Instructions)

Rob Wertheimer, Vertical Research.

Very, very strong margins in a lot of regions. I wanted to ask about EAME and you probably, or at least I assume you had a positive mix benefit from France and Germany being stronger and maybe had a drag from the continued ramp at Fendt. Are you able to quantify either of those? Is this a normal margin, or is it depressed, or a little bit ahead of trend?

Well, I would say that it's probably still a little depressed. We did still have some inefficiencies in our Fendt operations throughout the second quarter. That probably amounted to around $5 million or so, but we also did have a much higher increase in sales in Fendt, and so from a mix standpoint, that certainly offset that. From the rest of the business, you're right that France and Germany do provide some strong margins and also our combines sales were improve -- we had improved margins on the combines, as well.

Will the Fendt start-up issues, I guess volumes are going up. Will they completely be rolled off in the back half?

Yes. Yes. Certainly, we're seeing our production levels be at really normal levels now. I think we indicated that the production was higher than ever in the second quarter. And from a productivity standpoint and we're reaching target levels now, so our second half should be what we would say normal operating business at this point. And as we compare our results to last year, that was when we had the start-up costs, so our margins will be much improved in EAME in the second half.

Exactly. And then if I can just do one last one on Fendt. I presume a lot of the strength you're seeing is share gain? It's -- I mean, maybe I'm not sure how strong the markets in Germany and France are, but are you seeing more share gains as you have more production capacity, or is it larger farmers or stronger? I'll stop there. Thank you.

[Fendt] in general is -- Fendt, of course, is now also reaching out to new markets and you can see an increased interest in Fendt. We do include also the US so that means overall that high technology product, you could compare with automotive, with cars; it's more and more attractive for farmers.

Jamie Cook, Credit Suisse.

Congratulations on a nice quarter.

Thank you, Jamie.

You're welcome. Two questions. One, just on the pricing front, you took your forecast down modestly. Can you just talk about the drivers behind that? What region specifically? And just on the -- your view on the competitive environment. And then, too, if you could talk about North America. One, you're assuming GSI gets better in the back half of the -- or you're up this year after being down in the first half. If you could give a little more color on that? And then, your margins on your core business were, I think 12% or something like that, which is pretty strong. Can you talk about how much was mix? I mean, how much was mix, and then the operational improvements, as well? Thanks.

Yes, Jamie, I'll take -- I'll start. You asked about pricing. We did see pricing move around. We originally, I guess last quarter, we're estimating about 2.5% pricing for the full year. Now we're saying somewhere between 2% and 2.5%.

We also need to find a place where to sandbag a little bit.

So -- we --

I appreciate that, Martin.

Yes, so we faced a little more competitive pressure in Europe, so our pricing in Europe isn't going to be quite as rich as we thought that -- so, we saw a little pressure there. Otherwise the pricing is similar in most of the other regions. You asked about GSI sales, the change in our forecast. A lot of the -- so we have improved, we've seen improvement in the US in terms of some grain storage, as well as protein, more on the grain storage side in the US. And then internationally, we've seen some improvement in Asia, Asia-Pacific region, especially in China for the protein. And the Asia sales are going to show up later this year, so there's a little bit of a timing associated with that. So, I think -- does that cover most of your questions? What else did I miss?

And the margins on the core business. And then also, Martin, I wanted to say I think --

North America, right. So our North American margins. In the US, so we did benefit, as Andy mentioned, from some nice mix. We sold especially sprayers and higher horsepower tractors helped us, and that's just a function of the high income levels for the row crop farmers. So that was the biggest deal, but we also, as Martin mentioned too, the -- our purchasing initiatives helped us, not just in North America but globally. And some of the improvements we made in our factories also helped.

And then Martin, just one quick question. I think it's the first quarter where you've exceeded your longer-term target with a margin, 10.7% margin. Can you just talk about, does this make you more bullish on your longer-term margin assumptions? Could we see a change? Just your thoughts around that.

Jamie, on a very confidential note just between you and I, when we launched AGCO's vision in 2005, and we still use the same one, it's high-tech solutions for professional farmers feeding the world. It was not higher horsepower tractors for big American farmers. So that means in our vision we already assume that we would invest, if possible, in related areas. And therefore, GSI is a very meaningful acquisition for us, helping us a lot and you will see that more in the future, also in emerging markets. So then you see what the demand is, it's countercyclical, as Andy Beck already mentioned.

So now you can ask me or you could ask me what does the vision mean. Can you be a little bit more concrete? Can you put in numbers? And I would call that my personal, private, internal ambition, which I shared with my Board last week when we were at Wall Street for our Board meeting. And, I think my personal ambition is $15 billion in sales. It's 12% margin and it's $10 earnings per share.

But I do not want to do is tell you when that will happen and how because then I would have to report every quarter how we are making progress. But I think we are on a great path, and we are on a -- we have a great growth strategy and you will like AGCO more in the future. You saw what we did in the past, so that means the fact that we could achieve quite some improvements over the last years makes me a little more confident that we also can do more in the future. And so my focus is pretty much on being number one in margins more than being number one in revenues.

Thank you very much. I appreciate the color. Congratulations.

That was just between you and I.

Stephen Volkmann, Jefferies.

Martin, I know you didn't want to tell Jamie, but just between you and me, what's the timeframe on that $15 billion in revenue?

My vision is three years, but that is, again, very confidential.

While we're at it, what's the other, the list of the other things you're sandbagging on? Actually, if I can ask a different type of question. Obviously, people are still concerned about where we are in the cycle here, so I'm wondering if you have any -- if you're hearing anything from your dealers or your customers regarding order books and so forth? Anything you could give us color-wise? We all, obviously, see the macro stuff but what are you seeing vis-a-vis the next several quarters of demand levels?

First of all, I think I'm not as concerned. People talk about farm [goods] and (inaudible) things like that. That is nothing new for the European farmer. I think the big, professional guys know how to handle it and it could even generate some additional demand for smaller tractors in the small tractor for small farms segment. So, overall, I'm pretty -- first of all, order books are still pretty strong.

I'm pretty optimistic that also next year will be a good year. It's too early to talk about it, so everybody tries to find out what's going on next year. We start that planning in October and we will come to the Board in December and talk about it more in detail. But I think overall, the advantage of AGCO versus some of our other competitors is our very balanced global footprint. So that means due to the fact that we are so strong in South America this year, we can benefit from it.

I personally believe that Europe will come back because some of the issues in Europe are very much related to bad weather conditions. I've been in -- I will be in England next week so when you go to Ireland, Scotland, England, so they were really hit by a very rainy and cold spring. And so that also did hit them financially. Same, a little bit, for the Nordic countries and then, in Eastern Europe, some of the retail finance programs come in a little late and people, farmers are sitting there waiting before they place orders.

So that means for the future, I would expect Europe to be up. I think that farm income in America, for American farmers is very strong. So, you recently certainly heard about certain input cost going down in the area of fertilizers and also pesticides and chemicals, so therefore, what matters is not only commodity prices, which are still on a pretty high level, but also what (inaudible) factors in our lower cost for input.

So that means overall, I think farmers will have another very good year in 2014. To me, it looks pretty stable. And you know from me, I always make this statement that the Farm business and our industry is not cyclical any more, because I'm in that business for more than 20 years. I wasn't facing any cycles. And when the financial crisis came in, we did do much better than anybody else. So therefore, when you talk about cycles, you'd rather talk to the Car Guys, or the truck industry or people like that. Or, maybe [ski gear], they're very cyclical because they sell mainly in the winter.

All right, maybe that's seasonal, but maybe a quick follow-up for Andy. How should we think about -- assuming maybe someday there might be some sort of a downturn. You guys have made a lot of margin improvement progress, but how should we think about decrementals? How much of this is volume related and how much can you keep above and beyond volume?

Well, it's -- what you look at in terms of incremental margins is our incremental margins on sales, probably on a gross margin basis is in the 25% to 30%. That's consistent with what we've seen over the last years. So, most of the margin improvement that we're looking, we're achieving, is on productivity in our plants, it's on reducing the cost of our products through changing suppliers or renegotiating with suppliers, so none of this is volume related.

There is obviously a volume aspect to our margins. Our overheads run 10% to 15% of our cost of sales and there's an element of that which is fixed and so that's going to impact margins if our production is down. But all -- almost all of this improvement that we're achieving is on the initiatives that we've driven internally.

Which also means that our breakeven point is much lower than it has been some years ago.

Andy Kaplowitz, Barclays.

Nice quarter.

Thank you, Andy.

Martin or Andy --

We don't hear it often enough to be honest.

It was a very nice quarter. So, Martin or Andy, maybe if I can pressure you a little bit on the order book in terms of quantifying what's going on? You guys are big in sprayers, have you -- do have an early order program here in North America? And maybe if you give us any color on that? What's going on and more specifically in order books would be helpful?

Sure. On sprayers, I don't have any specifics. I would believe that the order program would probably be coming on a little later than now so, I don't think we would have any new information there. But in general, our orders in North America are very flat with the end of last year, but up significantly over where we were a year ago. We have very good visibility in North America, about four to five months, which is above-average for us, so we're feeling good about our order board as it relates to the balance of this year. Orders in South America are also up significantly, and a little down in Europe compared to the end of the year, 2012.

Okay, that's helpful and then maybe specifically on Brazil, maybe you could talk about the sustainability of this year's upturn? I mean I know, Martin, probably what you're going to say, but how much of this do you think is just low financing rates? And then, politically, it seems pretty unstable down there now compared to maybe six months ago. Can that affect the ag market there as we go into next year?

The political turmoil is mainly in the big cities and on the countryside, everything is unchanged and stable. So I would be very surprised if there would be any impact from those problems for our Business. Then, overall, as I said, I don't want to talk about 2014, but I recently talked to the guys in Brazil about next year. I was thinking that preparing the budget discussion, they would be a little pessimistic and tell me that next year is more difficult or sales would go down, but they didn't.

Okay, that's interesting, Martin. Maybe if I could ask you about Argentina. Argentina has been a difficult country over the last year plus, but you did cite strength in Argentina in your release and on the call. So, has it gone easier to do business there? Is it just that you've been increasing your local content there and that's helping? What's going on in Argentina?

Yes. In Argentina, what's happening was the market was severely limited a year ago because of these import restrictions that were placed by the government. So, we, along with our competition, were unable to get the proper amount of units into the market to fulfill demand. Because AGCO and the other competitors have taken steps to increase the local content, they have relaxed the import restrictions, so we're seeing a much more normal demand levels this year and we're -- I think the market's up almost at 100% at this point. So, it's more about the loosening of the import restrictions, and that's getting us back to a normal market.

And is that a pretty recent acceleration? Like more in 2Q than 1Q or did it happen starting in the beginning of this year?

I think it's been throughout the first half.

Ann Duignan, JPMorgan.

Most of my questions have been answered, so I'll stick with the South America. You reported revenues ex-FX were up 28%, and that was significantly below the market. Martin, could you just talk a little bit about what's going on, particularly in Brazil in terms of market share, particularly in tractors? And what AGCO is doing to stem the share losses and regain some share in that region?

I'm not sure whether we want to regain market share so much, because what is happening is that in certain regions of Brazil, farmers are struggling and that's mainly in Mato Grosso. In Mato Grosso, you have a lot of farmers who suffer, who don't make enough money, who go bankrupt. And so, those are areas where we are not so much focused on market share but some of our competitors saw it as an opportunity. So when you look into a market like Brazil, you have to basically look into profitability as much as into market share.

So, then you see above, and when you look into retention rates, we are doing very, very well so that means we don't lose existing customers to competition. And, the other question is, what do you plan in order to make sure that, that also doesn't happen in the future? We localize, we are in the process of localizing and not importing. Localizing new, more advanced technologies in the country. I don't want to go into details yet because I think we have a pretty good competitive advantage and I don't want to elaborate this strategy here over the phone.

Okay, thank you. That's absolutely important, I think, for investors. And to follow-up with that, you bought a sugarcane harvesting company in Brazil not that long ago. Can you talk a little bit about the launch of those products and when those could be, perhaps, material?

Well, we sell already sugarcane harvesters because it was an existing factory. Of course, this is a kind of niche business; the volumes are rather small. The world market for self-propelled sugarcane harvesters is somewhere around maybe 500, 600 units so, and we have maybe a share of 15%. What we are doing is we are basically improving the product and bring it up to our quality standards. And what we also like is that this business comes not only with self-propelled sugarcane harvester but also other equipment. We basically -- sugarcane farmers need like planters, like transportation, equipment and so on.

So, and therefore also, when you think about, this is another element of our strategy for Brazil. We start or we try to broaden our full-line offering and as you remember, we bought that sugarcane business, we invested into implements, we localized the self-propelled sprayer, we come in with a compete new generation of combines harvesters, so therefore when you judge about our market participation you need to also have in mind that is getting broader and broader, and all localized.

Okay, thank you. Yes, the sprayer being localized would be important, I guess. And then just finally, a quick follow-up on GSI, the increased demand in the US. Any idea whether that's individual farmers, or is it the processing customers?

I think it would be both. There's still a lot of growth opportunities and a lot of demand on the on-farm storage and so that's probably where it's a little more volatile of the demand. The demand with the processors is pretty regular in terms of their investments.

Okay. I'll leave it there and get back in line. Thanks.

Steven Fisher, UBS.

Just coming back to Brazil, what's the timing of when the 2014 FINAME rates will be available, and how are you thinking about how the macro trends there should affect the rates? And then, if the rates do end up going up materially, how do you think that would affect demand?

In terms of the FINAME rates for 2014, there has been no announcement yet and there is no specific timing or timetable. We obviously would like to get that information sooner rather than later so farmers know the -- know what is going on and wouldn't either accelerate or delay their purchases.

So, from the standpoint of the timing, I would say that we'd hope to see something, probably early fourth quarter of what's going to happen, but there's no specific timetable. In terms of the impact, there's really, in terms of expectations, there's no expectation that the rates are going to change materially, so we don't believe that there will be an impact into next year's demand.

Okay. And then over to Europe, I mean it seems like perhaps you produced ahead of where demand is or may be in line. And I guess can you discuss your thoughts and plans for production relative to demand in Europe going forward? I mean it sounds like you're expecting Europe to come back around and grow next year. So does that mean we should expect to see increased production there as well?

Yes, two things. One is, we don't produce ahead of demand and second. I still believe that Europe sales are not over yet because we have, at the end of the year, a very important farm show in Germany called Agritechnica, and this is the biggest farm show in the world. And basically what happens is this generate some additional demand. But overall, we manufacture to demand and not ahead.

Andy Casey, Wells Fargo Securities.

I wanted to return to the earlier goal discussion about achieving $15 billion top line over time. I guess --

That was not a goal discussion to be precise.

The confidentiality aside.

That was my personal ambition.

Okay.

It would be your goal and is also not a goal which I have. So, that's what I think we want to do.

Okay. And, within that, Martin, in your personal ambition, the $15 billion would represent somewhere between 35% and 40% upside from where you are today. And that's to be done against a market that you consider to be flat for a prolonged period. Do you think --

I didn't say that the market was flat, so that's not my statement I made.

Isn't that what a process industry means?

I didn't say that the market in our industry would be flat in the future.

Okay. Well, less cyclical, I guess. So sorry for the misinterpretation there.

I also don't think that we are already active and participate in all markets, which also need to take into consideration. But I also don't want to discuss this ambition, because, as I said, this is not up for discussion. It's just what -- it's just an ambition.

Okay. Okay, well, I'll follow up later. Thank you.

Jerry Revich, Goldman Sachs.

Andy, can you give us an update on how you're thinking about the cost reduction opportunities on the Fendt facilities now that you're close to the finish line in terms of getting all the start-up costs out of the way? At which point do we start to see the benefits come in? Will we get the full run rate benefits in the fourth quarter this year and how should we think about magnitude and timing as your thoughts have evolved based on experience there?

Sure. Yes, in that third and fourth quarter, we start to see benefits from -- as we -- as you look year over year in terms of how we perform on the Fendt business. Basically, we'll be back to normal productivity and profitability rates, and so if you recall in the third quarter of last year, there was an impact of, I think between $5 million and $10 million and then in the fourth quarter, more around $30 million as it relates to the Fendt impact. So we should see that be reversed here in 2013.

Andy, just beyond the reversal, in addition to providing higher capacity because of the automated processes that you added, I believe you're targeting $15 million to $20 million of cost savings. Do I remember that right? And if so, what's the timing on when you expect to see those (multiple speakers) --

Those were productivity rates, and so our production and our sales are going to be higher here in the second half of the year than last year and higher than Fendt's history. So what we do there is we're able to grow our production, really, while keeping a lot of the labor down and not having to grow labor as quickly as we would have in the past. And so that's creating the productivity gains.

So as we continue to grow our production and increase our sales in Fendt, those productivity cost savings will emerge. And so, there's probably some of that, that will be in the second half of 2014 -- '13. But also as the Fendt business continues to grow, hopefully, we'll see the majority in the rest of that productivity gain.

Okay. And Greg, in the comment that you made earlier on the North America manufacturing improvement driving the variance this quarter, can you just give us an update on production rates out of the Jackson Facility? And give us an update on which additional projects are you shifting around for -- or producing more in North America and any other moving pieces we should think about from here?

Right. So, you're -- probably in Jackson, as we talked about last year, we're now assembling our high horsepower tractor, so essentially all of our newly remodeled two or three years ago, I guess, and launched tractors are being assembled in Jackson. And so we're still shipping most of the major components from Europe and then as we go along, we'll continue to localize more and more of that. So that will impact our cost structure and make us less exposed to some of the exchange that we currently are.

And then we also talked about a month or two ago about some additional investments that we'll continue to make in Jackson that will help us improve in terms of our efficiencies. And so you'll see some savings on direct labor going forward in North America and that will help our margins on those products as we continue to assemble those here.

Okay. And lastly on material costs, those are coming in lower than expected across the board. I'm wondering how much of a benefit was it for your business in the quarter and is that part of the reason why you're able to take the foot off the gas in some of the pricing actions down over the balance of the year?

Yes, from a material standpoint, we saw very little cost increases and we also have our initiatives going in terms of globalizing our purchasing activities, which is driving cost reduction. And so from the standpoint of looking at pricing versus the material cost, inflation, we were -- we cleared over 100 basis points here in the second quarter, and would expect that to continue in the third and fourth quarter.

Michael Cox, Piper Jaffray.

Congratulations on a great quarter, guys. My first question is on Europe, and you commented on some increased competitive pressure. I was wondering if you could shed a little more light on where you're seeing that within Europe? Or maybe if that's on specific product categories?

We don't see increased competitive pricing pressure, so we have maybe to face the same competition globally in all markets, and it didn't change a lot. So no change from last year or the year before.

Okay. And then on Southern Europe, has obviously been a weak market for some time now. Is there any hint that, that be might be bottoming?

Well, Southern Europe, first of all, is not so important for us, so the biggest southern European market is basically Italy and those are small tractors, mainly [compact] tractors we even don't offer. If some survivors, local survivors, local manufacturers and then of course, one of our competitors is big in Italy. So, it doesn't hurt us so much.

The market which is more interesting for us is the -- and we are more into northern Italy where the bigger farms. And we have a strong position there and the market, which is important for us, is not Portugal, Greece, because they don't have professional farming there. They're into fruit, wine, olives, things like that and the farm size is very small.

So, it's Spain, and Spain actually is doing better than the other markets. I've just been there some weeks ago, and we had a meeting with the Minister of Agriculture. And together, we worked on a -- on some kind of incentive on how to basically, one, help the farmers in Spain to improve and then, second, also it would create some additional demand. I don't want to go into detail here, but you will hear about it soon from the government.

Okay. Very good. And lastly, maybe one quick one for Andy. CapEx, as you look ahead at 2014 with a couple of these big projects rolling off, should we expect CapEx to decline next year?

No, we're -- we don't expect CapEx to decline in 2014. It should be at the same levels or even could be a little higher in 2014. And 2015 would be the year where we would expect some declines in our CapEx.

Very good, thanks a lot.

Yes, I would even make it more precise from 2015 on, because I think we have a lot of important projects in the pipeline and after we have basically worked ourselves through that peak, you should see some more long-term reduction of CapEx.

Adam Fleck, Morningstar.

Sticking on the EAME theme, we've seen Russia pretty weak recently. One of your competitors was talking about the fact that it's pretty dismal right now. I'm just curious, beyond the combine tariff situation, what you guys are seeing in your expectations for that market?

We don't have an issue with the combines tariff because our product is localized, and we do have -- we take advantage of Russian finance, retail finance programs from the government. As we are in the process of announcing a joint venture in Russia, so that will happen somewhere in late August or early September. So, I think the question on our side is not whether there is a market. The question is when it will realize and we talked about it for many years now. I think we're getting closer and closer. So that means for 2014, for example, I would expect Russia to be up.

Okay, great, that's helpful. And then sticking to that segment, I know it's a much smaller piece of the business but can you update us on your sales in Africa and the Middle East specifically? I remember it grew at a very strong pace last year; is that traction continuing here in the first half?

In our African sales in the first half of the year are slightly down from a year ago. So, I think our expectation is it's going to be relatively flat this year.

Okay. Is that just a product of timing or again, I know it's very small, but just curious as to what you're seeing there?

No, actually, also the fact that the -- basically just went into the joint venture in Algeria. And so we are ramping up production so therefore I think mid-term, you will see more favorable numbers. And then also, Africa needs a very reliable, easy-to-service, and handle smaller tractor. And we are in the process of developing that product, as you might know, and launch it towards the end of this year, and then in steps or so during the next couple of years.

Seth Weber, RBC Capital Markets.

Just going back to Europe. Just a distinction between what you're seeing on the dairy/livestock markets versus the, of the row crop markets? And then a follow-up question, just what you're seeing on the used equipment markets, both in Europe and North America?

No issues with used equipment in Europe; most of the used equipment goes, depending on the size, the big items go East and the small items go into markets like Africa. So, when it comes to North America, it's pretty much used that's mainly going south so, overall, we are doing fine, I think. What was the other question?

Just if there's any differences between what you're seeing in Europe between the dairy/livestock farmers and the crop farmers?

Yes. Well, crop farmers are doing actually globally pretty well because of the rather strong crop prices for the last years. And in Europe, dairy firms recovered because the prices went up, milk prices went up. And there's a lot of discussions about -- around the idea that quality milk should be honored by higher prices so the consumer is more prepared to accept higher prices than maybe in the US.

Okay and just lastly for Fendt, are you still targeting the 18,000 units this year?

Yes.

Presenters, do you have any closing remarks at this time?

Just I would like to thank everyone for their participation and encourage them to contact me with follow-up questions. Thank you very much.

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