AGCO Corp (AGCO) 2014 Q4 法說會逐字稿

Good morning. My name is Kevin and I will be your Conference Operator today. At this time, I would like to welcome everyone to the AGCO 2014 fourth-quarter earnings release conference call.

(Operator Instructions)

Greg Peterson, Head of Investor Relations, you may begin your conference.

Thanks, Kevin, and good morning to those of you joining us. This morning we're prepared to talk about AGCO's fourth-quarter 2014 earnings results, and with that we'll refer to a slide presentation which is posted on our website at www.agcocorp.com in the quarterly results section. The non-GAAP measures used in the slide representation are reconciled to GAAP measures in last section of the presentation.

We will make forward-looking statements this morning including demand for our products and the economic and other factors that drive that demand. Product development plans, 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 the benefits and also future earnings, future revenues 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, 2013 and subsequent Form 10-Qs. These documents discuss important factors that could cause the actual results to differ materially than 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, I'll turn it over to you.

Thank you, Greg, and good morning. We appreciate you joining us on the call. I'll begin my remarks on slide 3 where you can see that in the fourth quarter of 2014 AGCO sales were down approximately 13%. While our products are performing well in the market, our results reflect the impact from softer industry wide demand, our resulting production cuts and the negative impact of currency translation.

Fourth quarter was highlighted by the progress we made with both inventory reduction, our expense saving program. By lowering production approximately 20% compared to the fourth quarter of 2013, inventories declined over $80 million on a constant currency basis from December 31, 2013 levels.

We also took steps to adjust our cost structure in response to lower demand and production levels by lowering our workforce by approximately 9% from year-ago levels. Our cost reduction efforts are being balanced with our commitment to customer support and the need to maintain our market presence. We generated over $130 million of free cash flow in 2014 and we expect to generate considerable more in 2015.

Our balance sheet is in excellent shape, and it's enabling us to return more cash to our shareholders. In January, we announced a 2015 dividend increase and in December we authorized a new $500 million share repurchase plan which funds our buyback program through 2016.

Slide 4 details industry unit retail sales results by region for the full-year of 2014. Nearly ideal growing conditions produced record crop production across the global ag markets in 2014.

The record harvest contributed to an increase in year end grain inventories. The resulting reduction in commodity prices has negatively impacted the economy for local farmers but favorably reduced import cost for dairy and livestock producers.

In North America, industries sales increased in the lower-horsepower category which are typically sold to dairy and livestock sector. While sales of higher margin, high-horsepower tractors and combines declined significantly in the full-year of 2014 compared to the same period of 2013. Industry unit retail sales of tractors in Western Europe were down about 9% in the full-year of 2014 compared to industry sales in the full-year of 2013.

Market results by country remained mixed with a significant decline in the key market of France. We're also experiencing lower demand in the important markets of Germany and Scandinavia. And South American industry retail tractor volumes decreased significantly during the full-year of 2014 compared to the same period in 2013.

The decline was most pronounced in Brazil and Argentina. Demand in Brazil has been negatively impacted by farming delays in the government financing program earlier in the year and by weaker demand from sugar producers.

AGCO's tractor and combine production volumes are illustrated on slide 5. As I mentioned earlier, we made a 20% reduction to our production schedule during the fourth quarter of 2014 compared to the fourth quarter of 2013 in response to softer market conditions. Production of our high-horsepower equipment was down more significantly and was partially offset by increased production of smaller-horsepower tractors.

Globally our order book for tractors was down about 10% at the end of December compared to December 31, 2013 with more pronounced declines in North America and more modest declines in Europe and South America. We expect production volumes to be down again for the full-year of 2015 with the 2014 levels with more significant reduction in the first half of the year. Bigger declines in higher-horsepower equipment are expected to be partially offset by increases in lower-horsepower machines.

I will now turn the call over to Andy Beck who will provide you more information on our fourth-quarter results.

Thank you, Martin, and good morning to everyone. I will start with a look at AGCO's regional net sales performance for the fourth quarter and full-year of 2014, which are outlined on slide 6. The euro and Brazilian real both weakened during the fourth quarter and currency translation negatively impacted net sales by about 7% during the quarter and about 2.4% for the full-year of 2014.

Softer market conditions are pressuring sales results across all of our regions. The Europe, Africa, Middle East segment reported a decrease in net sales of approximately 6%, excluding negative impact of currency translation during the fourth quarter of 2014 compared to the fourth quarter 2013. With softer demand from the arable farming sector, France and Finland reported the largest decline.

North American sales were down approximately 16% excluding unfavorable impact of currency translation during the fourth quarter of 2014 compared to the higher levels experienced in the fourth quarter of 2013. Lower sales of high-horsepower tractors, sprayers and implements were partially offset by growth in GSI products and in hay tools. AGCO's fourth quarter 2014 net sales in South America were up 2% compared to the fourth quarter 2013 excluding negative currency translation impacts.

Sales declines in Brazil were offset by increased sales in other South American markets. Net sales in our Asia Pacific segment increased approximately 13% in the fourth quarter of 2014 compared to 2013, excluding negative impact of currency. The improvement resulted from sales growth in the Australian/New Zealand market.

Part sales were $312 million for the fourth quarter of 2014, which were up about 7% compared to the same period in 2013, excluding the impact to currency. Part sales increased approximately 5% in the full-year of 2014 compared to 2013 on a constant currency basis.

Slide 7 details AGCO's sales in margin performance. Our margins held up reasonably well in the fourth quarter considering the lower demand and production environment. Our expense reduction efforts provided much of the support lowering our operating expenses as a percentage of sales in the fourth quarter of 2014 compared to the fourth quarter of 2013.

On a consolidated basis, adjusted operating margins declined about 50 basis points compared to the fourth quarter of 2013. Europe, Africa, Middle East margins were stable at 9.8% in the fourth quarter of 2014 compared to the same period in 2013. The early benefit of our cost saving program offset the negative impacts of lower sales and production volumes.

North America's operating income declined about $23 million in the fourth quarter of 2014 compared to the fourth quarter of 2013. Sales declines and a weaker product mix contributed to the lower operating income.

In the South America region, operating income increased about $7 million as the benefit of higher margin export sales outside of Brazil was partially offset by lower sales and production volumes as well as material cost inflation in Brazil. Margins in the Asia Pacific region were impacted by startup costs associated with our new factory in China.

Slide 8 details GSI sales by region and by product. GSI sales were up about 10% for the full-year of 2014 compared to the same period in 2013. The largest increases occurred with grain storage sales in Europe, North America and Brazil.

We are forecasting GSI sales to be up again in 2015 compared to 2014. Longer term, the global trends of population growth and changing diets are generating demand for additional grain storage and protein production capacity.

Slide 9 looks at our depreciation and capital expenditure trends. We are -- we increased the investment in some of our plant productivity projects and new products over the last few years to support our growth and margin ambitions. As the weaker demand environment unfolded during 2014, we reduced our CapEx program. In 2015, we expect a modest increase as we continue to make strategic investments to refresh and expand our product line, upgrade our system capabilities and improve our factory productivity.

Slide 10 addresses AGCO's free cash flow which represents cash from operating activities, less capital expenditures. We finished the year generating over $500 million of free cash flow in the fourth quarter and about $150 million for the full-year of 2014 excluding restructuring payments.

As a result of the strong free cash flow AGCO has generated over the last few years, our balance sheet and liquidity position remains strong. We were successful in lowering our inventory in 2014 and we expect to further reduce it in 2015 by over $100 million from ending 2014 levels.

In 2015 we plan to continue investing for long-term growth and profitability improvement as well as the additional investments in new products. After covering the spending on these strategic investments, we are targeting significantly improved free cash flow for 2015.

Other working capital details are as follows. At the end of December 2014, our North America dealer a month supply on a trailing 12-month basis was 6.5 to 7 months for tractors and hay equipment and about 5 months for combines. Losses on sales of receivables associated with our receivable financing facilities, which is included in other expense net, were approximately $5.8 million during the fourth quarter of 2014 compared to $6.8 million in the same period of 2013.

As we focus on healthy returns for shareholders, we expect to make cash returns an important component of our long-term capital allocation plan. The new $500 million share repurchase authorization will allow us to continue repurchases through the end of 2016.

We are also committed to responsibly growing our dividend in the coming years. We expect to fund these programs with operating cash flow.

Moving to slide 16 highlights the assumptions underlying our 2015 outlook. While we are optimistic about the long-term growth opportunities for our industry and business, the priority for 2015 continues to be reducing our expenses and lowering our dealer and Company inventories to better align ourselves with current market demand. Our 2015 forecast assumes softer industry demand across all regions and a sales decline ranging from 15% to 17%.

Our plan includes price increases of approximately 2% on a consolidated basis, and at current exchange rates, we expect currency translation to negatively impact sales by about 8%. In 2015, engineering expenses are expected to run about 3.6% of our sales.

We also expect lower sales and production as well as weaker sales mix to negatively impact gross margins. These negative impacts are expected to be partially offset by the benefit of new products, productivity and purchasing initiatives and our restructuring actions.

As a reminder, our restructuring program reorganized our sales, marketing, finance, human resources and manufacturing support organizations. By the end of 2014 we reduced head count in these areas by about 9%. We've also made cuts in other marketing and promotional programs and other operating expenses.

In total we will be reducing expenses by about $150 million, or about 10% of the cost in these areas compared to 2014 levels. We are forecasting operating margins ranging from 5.5% to 6% in 2015 and we are targeting an effective tax rate of 36% to 37% for 2015.

Our outlook for 2015 for the three major regional markets is captured on slide 13. This early view anticipates softer market conditions in all three regions. In the United States, the USDA estimates that farm income will be down 14% in 2014 and most experts are projecting a similar decline in 2015.

With the decline expected in 2015, row crop equipment is expected to be down more significantly and lower-horsepower equipment is expected to be relatively flat. Our North American industry view calls for retail tractor sales to be down 5% to 10% in 2015 compared to 2014 in total, with much higher declines in the higher-horsepower categories and more level sales in the lower-horsepower categories.

While we've recently received positive news on the extension of favorable terms on the Brazil government financing programs through the first half of 2015, there is uncertainty on the funding levels of the financing programs caused by budgetary constraints. Unfavorable economics for the sugar producers in Brazil and the impact of lower commodity prices are also expected to contribute to weaker South American industry demand in 2015 compared to 2014.

We also expect further weakening in the western European market. The new EU subsidy scheme will begin shifting payments from western state to the newer eastern members in 2015.

With lower commodity prices, the outlook is for reduced farm income in 2015. The weak European economy is also expected to weigh on equipment demand this year.

Slide 14 lists our preliminary view of selected 2015 goals. We are projecting 2015 sales to range from $8.1 billion to $8.3 billion with softer marketing conditions and the negative impact of weaker local currencies reducing both sales and earnings. These factors should be partially offset by pricing and modest market share gains. We expect gross and operating margins to be down from 2014 reflecting the negative impact of lower sales volumes and a weaker sales mix.

The benefit of our cost reduction efforts are expected to partially offset the volume-related impacts. Based on these assumptions, we are targeting 2015 earnings per share of approximately $3. We expect capital expenditures to be approximately $325 million and free cash flow to be approximately $300 million.

I'll finish our prepared remarks on slide 15 which illustrates our 2015 production schedule for tractor and combine production hours. We are targeting a much lower seasonal build in our Company and dealer inventories during the first half of 2015 and the sequential step down in production in the back half of 2015 will be less steep than in 2014.

On a year-over-year basis, we expect production to be down between 15% and 20% in the first quarter, and down 10% to 15% in the second quarter, while full-year production is expected to be down between 7% and 10%. In the first quarter of 2015, sales and earnings per share expected to be significantly lower than reported for the first quarter of 2014 due to lower production levels outlined on this slide. First quarter 2015 earnings per share are expected to be in the $0.25 range.

And with that, Operator, we're ready to open up the call for questions.

(Operator Instructions)

Jamie Cook, Credit Suisse.

Good morning and congrats on the quarter. My first question, the thing that really surprised me in the quarter were your margins in EAME despite the sales number that you put up there. I wasn't expecting a 9.8% number -- margin on lower sales year over year. So was there anything unusual in that number, were the majority of the restructuring actions targeted towards that region? And I'm trying to think about how I should think about margins for the year given what you put up in the fourth quarter.

And my second question, Andy, on the dealer inventory levels, I think you said 6.5 to 7 months on tractors and hay equipments, 5 on combines. Can you talk about any initiatives that you have in 2015 to reduce inventory levels at the dealer level and where you expect to be on -- as we exit the year? Thanks.

Yes, the margins in EAME, I will take that. They're not a result of some kind of extraordinary event, but the result of a very detailed reengineering. We started comparably early in [time of that] because we were -- we saw basically EAME struggling and being in a difficult situation. And so we decided to basically react very, very quickly. And I think this was exactly right and is somewhat rewarded by higher margins. And I think this is also the direction we have to take in all other regions.

And Jamie, in terms of dealer inventory as you pointed out, when we look at North America, our dealer inventories were higher at the end of 2014 than 2013 indicating that we have some work to do here in 2015 to further reduce those. The dealer inventories were up about 5% in North America. In Europe and South America actually our dealer inventories are actually down from a year ago. So we're in pretty good shape in our foreign operations and don't see too much adjustment. We are anticipating a minor adjustment in dealer inventories in Europe in 2015, and then a more substantial reduction in North America in 2015 which should affect our overall sales by between 1% and 2%, and almost all of that's in North America.

Jamie, when you go to benchmarking with the only major family-owned European player based in Germany, you would see that their margins in the meantime are half of ours in Europe and they're focused in this region. So this shows that we obviously did a good job.

But in terms of -- I don't think you guys answered how we should think about margins in that region for 2015 on an annualized basis.

Because that's your job, well I hand it over to --

Martin, I think I like your answer better. But go ahead, Andy.

(Laughter) So we're talking overall our margins are going to be -- operating margins, that is 5.5% to 6%, which is going to be down somewhere between 100 and 150 basis points in total. Europe will do a little better than that, probably whereas this year they were just under 10% for 2015, they'll probably be 8.5% to 9%-ish for next year or for 2015.

All right. I'll let someone ask about the first-quarter earnings. I'll get back in queue. Thanks.

Jerry Revich, Goldman Sachs.

I'm wondering if you gentleman can talk about the margin performance in South America as well, and looks like your volumes were pretty good in the quarter when you back out FX, I'm wondering if that's new product introduction on the sugar cain harvester or any other changes in inventories? Can you give us more color on those two items in South America?

Sure. So keep in mind that last year in Brazil that the year ended pretty abruptly, so demand and order boards and the whole industry was down in December. But having said that, our performance in South America in the fourth quarter, we did outperform in Brazil modestly compared to the industry but most of our out performance happened in the export market. So in the other South American markets outside of Brazil.

And that is a positive in terms if you think about our margins, our costs being in real and we had a fairly significant decline in the real valuation versus the other currency. So the margin on those sales outside of Brazil helped the overall margins in the South American region. So net, net a little out of performance -- the out performance in Brazil but most of it happened in the other countries in South America.

Okay, thank you, Greg. And I'm wondering if you could talk about the pricing gains, target of 2% for the year. Can you talk about how that might vary by region? And I would imagine that might be pretty tough to achieve in high-horsepower in North America which I know is a smaller part of your portfolio, but maybe you can comment on that in light of the lower trade-in values.

Yes, Jerry, the 2% is the average, but it's fairly consistently around the regions. We expect to get around that amount. Keep in mind that that does include tier 4 price increases as well. And so as we look at what the price increase without tier 4 is, it might be a little more than 1%. So the amount of pricing for tier 4 is an important aspect and it's carry over of the high-horsepower models that were introduced in 2014 and now we'll be introducing lower-horsepower tier 4 models during 2015. I think that the pricing for the higher-horsepower equipment has gone reasonably well for tier 4 and it'll be a little more challenging think as we get in to the lower-horsepower categories.

Also we were in a position to adapt our and adjust our capacities on time. So our inventories and dealer inventories are in pretty good shape and we are not forced to dump product in the market as some of our competitors need to do.

Okay, thank you very much.

Andy Kaplowitz, Barclays.

Guys, good morning, it's Alan Fleming standing in for Andy this morning. Nice quarter.

Thank you.

I wanted to follow up on Jamie's earlier question on EAME margins. Is FX helping you guys in Europe with your European production footprint? And can you talk about your European inventories? Did you guys -- was production down more or less than 20% in Europe in the quarter?

I'll make a statement to the (inaudible) situation and then Andy can go a little bit more in the details with the financials. So the talent or the opportunity we have in Europe is as you well know that there are -- all our factories are in euro countries. So that means all our factories, due to the lower euro, do get more competitive. And now that doesn't help you within the European Union but it helps you to do business outside the European Union like in countries like Switzerland, UK, some of the Scandinavian markets, Africa, and also you need to remember that a lot of components go from Europe to our Jackson tractor family factory, so also there we should see benefits. And now the idea is to take advantage of this favorable low euro and tied to some more gain markets and be more competitive in the non euro territories.

I couldn't have said it better myself, so let's add a little more color to that we --

This is why I'm the CEO, Andy. (Laughter)

Exactly. so to add a little more color to that to make sure it's clear, the benefit that Martin is talking about will show up in the markets where the product is sold. So it wouldn't show up in the European segment. But the benefit he's talking about, when Martin is talking about, if we sell European-produced product in North America will show up in the North America results. So when you look at the Europe, Africa, Middle East results for the quarter, currency, transactional currency didn't have any impact on their results.

Okay, I appreciate that. And then you touched on FINAME briefly. Have you started to see any change in your business down in Brazil with the extension of the favorable rates and do you think now that maybe the down 10% could be a little conservative if demand looks a little better in the first half of the year?

No we -- I think our forecast is still pretty consistent with what we see right now. The rates are favorable and that was a positive surprise that they were maintaining the rates for the first half of the year. The anticipation is that it won't be extended for the full year so it will -- should help the first half.

As we mentioned in our remarks, one of the bigger issues is the level of budget funding of the programs and we're just starting to see the first deals be funded for 2015. So we're off to a relatively slow start and we're hoping to see the government get going in terms of getting a steady flow back to normal in terms of buying deals and funding deals. So it's a lot to -- we have to monitor this fairly closely throughout the year to see what the pace of funding the deals will be and that will be a big indication to how the market will go next year -- this year.

Okay, I appreciate it, Andy. I'll pass it on.

Seth Weber, RBC Capital Markets.

Can you help calibrate a little bit on the -- when you talk about the high-horsepower equipment in North America being down a lot. Can you calibrate that for us? Is it down 20%, down 30%, how you're thinking about that?

And then can you give us a little bit more color on what's going on with the dairy and livestock markets? I assume dairy is getting a little bit weaker here and maybe just around the world, how you're seeing the dairy and livestock markets? Thank you.

Seth, on the first question, in terms of high-horsepower equipment in North America, which I'm including high-horsepower tractors, combines, sprayers, tillage equipment, things like that, we're looking at over 20% declines. That's what we've got built in to our forecast right now. So the mix of those products over 20% down.

In terms of dairy livestock, we're still seeing fairly strong results on the -- more on the livestock side and the hay business side. And we're starting to see some more weakness in the dairy side due to lower milk prices and some changes in policy in Europe. So that should affect -- that's a negative impact more in Europe for us than probably in the US.

So the good thing is for the small tractor business, you remember that we invested quite some money in a complete redesign of our low-horsepower models. And they are based on components coming from low cost countries or best cost countries as we call them. Those tractors will be launched during 2014 and 2015 here in the US and they will make us very, very competitive in this area.

Okay. That's helpful.

We will beat the hell out of Kubota.

(Laughter) Okay, thank you. And then a quick follow up for Andy. Does the $3 number include benefit from share repurchase or does that exclude any activity for 2015?

It includes some benefit for share repurchase, probably somewhere in the $0.07 to $0.10 improvement range.

Okay, thank you very much, guys.

This is from last year's program, so this --

Including this year's program.

So that's carryover from the 2014 program plus --

Carryover plus new repurchases that we've assumed.

Right. Okay, thank you very much.

Nicole Deblase, Morgan Stanley.

Greg, maybe you gave that 8.5% to 9% margin range for EAME. Is there any chance you'd be willing to give us some color on the other three segments?

So if you look, again, to refresh, we're going to be down 100 to 150 basis points in total to put some context around these. And I would say pretty much with the exception of our APAC region which should be more break even-ish this year, those 1% to 1.5% declines will be pretty consistent across the other regions.

Okay, got it. That's helpful. And then an update on what you guys are seeing from a used equipment pricing perspective. I think last time we talked about this last quarter it was down 4% to 5% year on year.

Yes I believe that we're still seeing higher inventories across our industry of used equipment. So that is pressuring the prices. And I think that will continue for -- during 2015. AGCO's used inventory levels in North America I think are in pretty good shape. As a percentage of our total inventories, they're fairly consistent to what we historically have.

And so we work very hard on remarketing our used equipment. We have special programs to help our dealers do that. We were the first in the industry to have a certified program to remarket used equipment and provide warranty support on those and so I think we're in pretty good shape with our used inventories.

Okay, thanks. I'll pass it on.

Ann Duignan, JPMorgan.

Good morning. This is [Tom Finish] on behalf of Ann. One question, you cut 570 jobs at Fendt in January and moving to one shift. Can you remind us how much capacity you added at Fendt over the past few years?

The good news is that with this one shift we're now in a position to basically do what we did some years ago in a two shift, in some areas even a three-shift operation with a lot of overtime. So that shows that the factory became much more productive and much more efficient.

Okay. Thank you.

Rob Wertheimer, Vertical Research Partners.

A quick question on Europe. We can see some of the data for Germany and France and even the UK which was down, I don't know, 18%, 20%, 30% for the quarter. Obviously Europe's a much more diverse and patchy place and your retail sells are much better than that. So could you give a sense of how the whole European market trended in the quarter? Did you outperform it by a bunch? Or was it less bad than those three major markets might indicate?

Overall in the fourth quarter we have Western European tractors down about -- the industry is down about 15%. And then we did do better than that in our results. The biggest declines were, as we've said before, in France and Scandinavia, I think were the biggest areas of decline.

So you -- Scandinavia too. Okay, so you had said your dealer inventory was lower year over year. So I guess the implication is that wasn't channel load but rather retail sell through that you did better on, right?

We don't do that. In Europe we have very, very professional dealers and they managed their inventories very, very well.

Okay, perfect. And then if I can ask, do you still have older admissions to your engines? Are you able to say what the inventory draw down was in 4Q and for the full year and if you have any left?

Yes, we -- Rob, as you know, the tier 4 program extends through 2015. So we'll be -- we'd be introducing all our new lower horsepower tier 4 products during the 2015. So at the end of the 2014, we had a buildup of engines to transition us to the production before, keep production going until we're ready to introduce those tier 4 new models this year. So the inventory that we had at the end of 2014 was still over $100 million for --related to tier 4 engines.

Okay, thank you.

Ross Gilardi, Bank of America.

Martin or Andy, I want to talk a little bit more about FINAME for 2015. You were commenting on that it was favorable that rates were left unchanged, our understanding is that FINAME rates went up 300 basis points but they left rates for the motor (inaudible) program unchanged. But our understanding is that program has become a lot less relevant in the last three to five years and accounts for only a small portion of ag equipment purchases in Brazil. Is that consistent with your view?

Well I think the reason that it had been less important is that as you say there's a distinction between the PSI rates and the motor (inaudible) rates. The PSI rates and the motor (inaudible) rates were consistent over the last few years, so now they've deviated and the motor (inaudible) rates continue to be at the 2014 rates. So our view is that program will be more heavily utilized in the first half of the year to take advantage of those lower rates.

But the funding level as you had said before is still pretty uncertain? Do you have a sense as to what portion of ag equipment demand has been purchased through that motor (inaudible) program over the last couple years?

I don't.

We have it somewhere but we don't have it here, so we will come back to you with this answer.

Okay. And then maybe on your forecast for 2015 on the top line, you guys are guiding down 15% to 17% which seems a lot worse than what you're expecting if you look at the market outlook by region, which of course doesn't incorporate all your different products, but can you help us bridge the gap there a little bit?

Sure. The biggest impact is the exchange impact which is as we said about 8% of that. So without foreign exchange, we're down 7% or so, something like that. We have pricing at 2%. And so from our industry expectations, that is somewhere between 5% and 10%. There is some reduction for dealer inventory as I said between 1% and 2% and then we have some gains in some of our products like GSI. We flatter expectations for products like our part sales. And so not everything in our portfolio is going to go down by that -- the forecast that we said for each market.

Got it. Thanks, Andy, that's helpful. And then back to currency, and some of your procurement initiatives, is there any way to say what portion of your material spend is non-US dollar denominated? I'm still trying to understand a little bit better whether or not you're getting a big FX margin tailwind by -- because you've obviously been centralizing your procurement a lot more on low cost countries that have seen their currencies battered over the last three to six months.

Well, I think what you need to look at is the production by -- in the local currencies versus how much of the production in each of the factories are imported from and have foreign currency exposure. In Europe, they're not importing significant amounts from foreign sources, so it's relatively euro-based. And then the US, there is some importation from Europe as Martin explained. Our Jackson factory is producing high-horsepower tractors and we're getting our engines from Europe and we're getting other components from other European suppliers. So most of the benefit is going to be in our North American operation from importing fully produced product as well as imported components from Europe.

Got it. And then my last one, your margins in Europe and Brazil were quite resilient -- or in Latin America were quite resilient and even in Latin America were even better. In North America, I'm surprised they weren't even better given that GSI had a very good year. So would you attribute most of that, what seems to be underlying erosion in Europe, X GSI to the mix impact towards small-horsepower?

In North America?

Yes.

In North America, yes the biggest impact in terms of margin decline relates around mix. And the decline in the high margin, high-horsepower products and an increase in some of the lower margin, lower-horsepower equipment.

Got it, okay. Thanks, guys.

Vishal Shah, Deutsche Bank.

I wanted to maybe get a sense of your cost savings cadence for 2015. How should we think about first half versus second half cost savings? And maybe can you talk a little bit about the outlook for GSI segment in 2015?

Sure, in terms of cost savings, as we said in our comments, a lot of the head count reduction we actually achieved by the end of this year and it certainly helped us in the fourth quarter and should carry fully into 2015. There are some restructuring actions that will -- are happening during the first quarter but we expect to have basically everything done by the end of the first quarter. So from the standpoint of the run rates, we should be where we need to be by the second quarter. Greg, will talk about GSI.

Right, so for GSI in total, we expect to be up close to 8% to 10% 2015 versus 2014. With growth in all the segments with the exception of Europe, Africa, Middle East where we had pretty heavy sales in Eastern Europe, CIS countries in 2014 that will be lower in 2015. So other than that we expect to see growth across all the regions.

Thank you.

Steven Fisher, UBS.

To what extent do you guys expect incentives from the players in the industry will cause an increase in brand switching this year relative to what you may see on a normal basis?

I don't see the weaker market conditions really having too much of an effect on that. To your point, there might be some discounting going on as some manufacturers are working down inventories that could give a customer a deal they couldn't pass up. But for the most part, we still believe customers are very loyal to brands and very loyal to their dealers and those are the areas that we continue to work on.

Our investment in new products and our investment in our distribution network are the real keys to success in our business. And we're trying to continue to effort those even in the weaker market conditions we have.

Yes, I think the biggest problem in the US is with Case to have some of their biggest dealers are close to bankruptcy. And that is basically pricing in a combination with also inventory management. And I think they have to do their own work, but that's not our call.

Okay. And then a bigger picture question, may be tough at this point, but do you have any visibility as to which of your markets would turn positive organically first, and why on a more sustainable basis rather than just a quarter?

That's the million-dollar question. Maybe in Europe I could imagine that it could be the UK because of the exchange rates. So they should maybe do a little better than in previous years. France depends very much, I think it's more emotions and it's the overall political situation which makes farmers hold back their investments. But in (inaudible) they could recover. And nobody knows about Eastern Europe, well mainly Russia and Ukraine because there's this around politics.

Brazil has a certain potential despite the problem in sugar cane. We have costs related to the oil and gas price situation. So that will be a problem for Brazil to be fixed. They have basically kept prices for ethanol, sugar cane ethanol and those caps I think could go down maybe. That would hit them even more. But on the other hand the big sugar mills work on efficiency and productivity and they have some very promising projects in the pipeline.

So overall it's a very difficult question. I also think that we should have in mind, as mentioned during Andy's presentation, the harvest conditions in 2014 were excellent. So while commodity prices went down, the volume of course went up and the yields went up. So therefore I think farm income was most probably not as bad and I think everybody has the funds and the money to invest. The question -- the big question is will they do so?

Great. Thanks for the thoughts.

There are no further questions at this time. I will turn the call back over to the presenters.

Thank you, guys.

Thanks. We appreciate your interest today and if you have additional questions, I encourage you to follow back up with me at your convenience. Thanks and have a great afternoon.

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