AGCO Corp (AGCO) 2015 Q1 法說會逐字稿

Good morning, ladies and gentlemen. My name is Ryan and I will be your conference operator today. At this time, I would like to welcome everyone to the AGCO 2015 first-quarter earnings release call.

(Operator Instructions)

I would now like to turn our call over to Greg Peterson, Director of Investor Relations. Please go ahead.

Thanks, Ryan, and good morning. Welcome to those of you joining us for AGCO's first-quarter 2015 earnings conference call. We will refer to a slide presentation this morning which is posted on our website on our Investor page at www.AGCOcorp.com.

The non-GAAP measures used in the slide presentation are reconciled 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, and our expectations, with respect to the costs and benefits of those plans and timing of those benefits, our future revenue earnings, and other financial metrics will also be discussed. 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, 2014, and subsequent Form 10-Qs. 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 this morning -- 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. And with that, Martin, please go ahead.

Thank you, Greg. And good morning, everybody. We appreciate you joining us on the call. My comments start on slide 3, where you can see that, in the first quarter of 2015, AGCO sales were down approximately 27%. We felt the effects of weaker market demand, inventory reduction initiatives, and the impacts of a stronger dollar compared to the first quarter of 2014. Demand for agriculture equipment softened in all the major world markets during the first quarter, as weaker farm fundamentals continue to impact our industry.

Our quarter was highlighted by strong execution on our inventory reduction plans, and cost reduction initiatives. By lowering production compared to the first quarter of 2014, and curtailing the seasonal build in working capital, inventories were lower by over $175 million, on a constant-currency basis, for March 31, 2014 levels.

Our results also reflect the benefits of the workforce reduction initiated in the second half of 2014. These cost-reduction efforts are being balanced with our commitment to customer support, and maintaining an aggressive sales and marketing presence. Our balance sheet remains in excellent shape and is enabling us to return more cash to our shareholders. During the first quarter, we paid a higher dividend, compared to the first quarter of 2014, and made progress on our share repurchase program.

Slide 4 details industry unit retail sales results by region for the first quarter of 2015. Increased grain stocks and preliminary crop production forecasts continue to pressure soft commodity prices and farm income across the key agricultural markets.

Lower income levels produced softer industry equipment demand, during the first quarter of 2015. Retail sales in North America declined, with the largest drop in high-horsepower tractors and combines, partially offset by growth in hay and forage equipment, due to healthy conditions in the region's livestock sector. Industry unit retail sales of tractors in Western Europe were down about 12% in the first quarter of 2015, compared to industry sales in the first quarter of 2014.

Difficult economics for dairy producers, and lower grain prices, impacted market demand across Western Europe. Reduced industry sales in South America were the result of lower demand from sugar producers in Brazil, weakness in the general economy, and uncertainty about Brazil's government financing program.

AGCO's 2015 production schedule for factory production hours are shown on slide 5. We are working toward a much lower seasonal build in our Company and dealer inventories during the first half of 2015. In addition, 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, production hours were down 21% in the first quarter and contributed to the significant decline in our Company inventory, compared to the first quarter of 2014.

The lower production also contributed to weaker first-quarter earnings, compared to last year. We expect second-quarter production to be down 15% to 20%, while full-year production is expected to be lower by between 12% and 14%, compared to 2014 levels. The 2015 production mix will be weaker than last year, with more significant reductions in higher-horsepower equipment.

Globally, our order board for tractors was down about 5% at the end of March, compared to March 31, 2014. Orders were up in Europe, down in North America, and down more significantly in South America.

I will now turn the call over to Andy Beck, who will provide you more information on our first-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 first quarter of 2015, which is outlined on slide 6. The euro and the Brazilian real both weakened during the first quarter, and currency translation negatively impacted net sales by 11.7% during the quarter.

Softer market conditions are also pressuring sales results across all of our regions. The Europe/Africa/Middle East segment reported a decrease in net sales of approximately 10%, excluding the negative impact of currency translation during the first quarter of 2015, compared to the first quarter 2014. From a market perspective, Germany, Scandinavia, and Russia reported large decreases.

North America's sales were down approximately 25%, excluding the impact of unfavorable currency translation during the first quarter of 2015, compared to levels experienced in the first quarter of 2014. Lower sales of high-horsepower tractors, implements, and combines were partially offset by growth in GSI products and sprayers.

AGCO's first-quarter 2015 net sales in South America were down 14%, compared to the first quarter of 2014, excluding negative currency translation impacts. Sales declines in Brazil accounted for nearly all the reduction.

Net sales in our Asia/Pacific segment decreased approximately 15% in the first quarter of 2015, compared to 2014, excluding the negative impact of currency translation. Declines in Asia were offset by modest improvements in the Australia/New Zealand market. Part sales were $260 million for the first quarter of 2015, which is down about 4%, compared to the same period in 2014, excluding the impact of currency.

Slide 7 details AGCO's sales and margin performance. First-quarter margins were negatively impacted by a lower demand and production environment. Our headcount-reduction efforts, and the ongoing benefits of global purchasing, mitigated some of the margin erosion. On a consolidated basis, first-quarter adjusted operating margins declined over 300 basis points, compared to the first quarter of 2014.

Europe/Africa/Middle East operating margins held up relatively well, at 8.9%, down about 90 basis points from the first quarter of 2014. Higher margins on new products and purchasing benefits offset most of the negative impacts of lower sales and production volumes. North America's operating income declined about $38 million, in the first quarter of 2015, compared to the first quarter of 2014. Softer demand, dealer inventory actions, and a weaker product mix contributed to the lower operating income.

In South America region, weaker margins resulted from lower sales and production levels, as well as material cost inflation. Margins in the Asia/Pacific region were impacted by start-up costs associated with our new factory in China.

Slide 8 details GSI sales, by region and by product. GSI sales were up about 2%, excluding currency impacts, for the first quarter of 2015, compared to the same period in 2014. Sales growth in North America and South America was offset by lower sales in Eastern Europe and China.

We have reduced our forecast GSI sales in 2015, but still expect sales to be up in 2015, compared to 2014, on a constant-currency basis. GSI's counter-cyclical nature is evident this year, with weakening grain sales being mostly offset by stronger protein sales.

Slide 9 looks at our depreciation and capital expenditure trends. After completing a number of major plant productivity projects and making heavy investments in new products over the last few years, we reduced our CapEx program last year.

In 2015, after factoring in the stronger dollar, we expect our CapEx to be about flat, compared to 2014, as we continue to make strategic investments to refresh and expand our product line, upgrade system capabilities, and improve our factory productivity.

Slide 10 addresses AGCO's free cash flow, which represents cash used in operating activities, less capital expenditures. Our seasonal requirements for working capital are greater in the first half of the year, and thereby resulted in negative free cash flow in the first quarter of 2014, as well as 2015. The benefit of our inventory-reduction efforts that Martin mentioned earlier is evident on this slide. We cut production to curtail the seasonal build, and our use of cash during the first quarter was lower by over $250 million, compared to 2014.

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

At the end of March 2015, our North America dealer-month supply, on a trailing 12-months basis, was higher for tractors and combines, and lower for hay equipment. Tractor inventories were in the 7- to 8-month range, and combines were about 6 months.

Losses on sales of receivables associated with our receivable financing facilities, which is included in other expense net, were approximately $5 million for the first quarter of 2015, compared to $7.5 million in the same period of 2014.

Moving on to the next slide, we continue to make cash returns an important component of our long-term capital allocation plan. In the first quarter, we repurchased shares under a $500-million authorization, which is expected to be utilized through 2016. The share repurchases, and our dividend, are expected to be funded with operating cash flow.

Slide 16 highlights the assumptions underlying our 2015 outlook. While we are optimistic about the long-term growth opportunities for our industry, and our business, the priority for 2015 continues to be controlling our expenses, and dealer and Company inventories.

Our 2015 forecast assumes softer industry demand across all regions, and as sales decline, ranging from 19% to 21%. 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 11%.

In 2015, engineering expenses are expected to run about 3.6% of our sales. We also expect lower sales and production levels, as well as a weaker sales mix, to negatively impact gross margin. These negative impacts are expected to be partially offset by the benefit of new products, our productivity and purchasing initiatives, and our restructuring actions.

We are forecasting operating margins ranging from 5.75% to 6% in 2015, and are targeting an effective tax rate in the range of 35% to 36% for 2015. Our outlook for 2015, for the three major regional markets, is captured on slide 13. Our forecast anticipates softer market conditions, all three regions.

In the United States, the USDA estimates that farm income will be down again in 2015. As a result, we expect softer equipment demand, with road-crop equipment expected to be down more significantly, and lower-horsepower equipment expected to be relatively flat. We lowered our forecast for the South American region, and now expect industry demand to be down about 15% from 2014 levels.

In April, the Brazilian government raised the interest rate on its subsidized financing programs that run through the first half of 2015. There is also uncertainty on the funding levels of the financing programs, caused by budgetary constraints.

Unfavorable economics for sugar producers in Brazil, and the impact of lower commodity prices, are also expected to contribute to the weaker South American industry demand in 2015, compared to 2014.

We also expect a decline in the Western European market, impacted by lower dairy and cereal prices, reducing farm income in 2015. In addition, the weak European economy is expected to weigh on equipment demand this year.

Slide 14 lists our preliminary view of selected 2015 financial goals. We are projecting 2015 sales to range from $7.7 billion to $7.9 billion, with softer market conditions and the negative impact of currency translation 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 levels, reflecting the negative impact of lower sales volumes and a weaker sales mix. The benefit of cost-reduction efforts are expected to be partially offset by volume-related impacts.

Based on these assumptions, we are targeting 2015 adjusted earnings per share of approximately $3 per share. We expect capital expenditures to be approximately $300 million, and free cash flow to be approximately $300 million.

In the second quarter of 2015, sales and earnings per share are expected to be significantly lower than reported for the second quarter of 2014, due to lower sales and production levels discussed earlier. Second-quarter earnings per share are expected to be approximately $1 per share.

And, with that, operator, we are ready to take questions.

I would comment with some additional remarks regarding our focus in 2015. So, the most important initiatives we work on are: one, quality, where the target is to become number one in perceived quality; second, the reorganization of our internal distribution, and also the dealer network in Europe, in EAME; third, a very important initiative in research and development, our platform solutions, where we show substantial progress -- and the fact that we do that while the markets are a little slower, helps, basically, to focus in this area.

We also put a lot of emphasis and focus into precision farming and fuels, where we want to be the leader in our industry, and we will be there soon -- you can see that from the latest press releases; IT, where we show progress in the consolidation of the various IT systems, globally; and, finally, very important in 2015, is our purchasing excellence program, where we really tried to benefit from the lower commodity prices, and the low oil prices.

With this, I finally hand over to our Q&A.

Thank you, Martin. Ryan, we're ready to go ahead and take some questions.

(Operator Instructions)

Our first question comes from the line of Jamie Cook from Credit Suisse. Your line is open.

Hello. It is Andrew sitting in for Jamie. Can you just comment a little bit more on your Europe results? It appears that most of the -- on the margin line, most of it is driven by AGCO specific efforts. So, can you just comment a little bit more of what we are seeing in the region? It sounds like things are tracking a little bit weaker, since Q4.

And then, given the margins were pretty impressive, were you surprised at how well the cost initiatives have worked out in the quarter? And you mentioned new products; is that tracking ahead of schedule? And just how do you anticipate that margin, going forward? Is it at a sustainable level?

Yes. One, I certainly believe it is sustainable. Second, when you do something important like this, and it is a major reorganization and a core-process redesign we went though, some of the results come in as a little bit of a surprise.

So that means, we obviously did a very good job in Europe. And, we think that we can also perform on the same level during the rest of the year.

Okay. That's helpful. And then, can you comment a little bit more on your dealer inventory levels? I know you said they were down over $175 million, but how did this track to your expectations for the quarter,? And then, what are you expecting for the remainder of 2015, in that regard?

The $175 million is actually on our company inventory. So, the inventory on our balance sheet is $175 million below last year, when you take currency out of the equation. So, on a constant currency basis.

When you look at our dealer inventory, which we are also focused on, we are making good progress. Our North America dealer inventory is down a little less than 10%, when compared to about a year ago. Our Western European inventories are down 5% to 10%. And in South American, our dealer inventories are down about 5%, compared to a year ago.

We still have work to do in North America. Most specifically, we would like to get about a one-month reduction in our dealer inventory out this year. And so, we are impacting our sales. As you noticed, our sales in North America, were down, fairly significantly here in the first quarter.

And, part of that was because we did not build up as much dealer inventory, as we did a year ago. And so, that affected our sales. But, it is also showing out in the cash flows and the dealer inventory results that we have. So we are confident that we continue to make progress in this, throughout the year.

And I'm proud of the achievements because I think, I am pretty sure, we outperform our peers.

All right. Thanks.

Your next question comes from the line of Stephen Volkmann from Jefferies. Your line is open.

Thank you. Good morning. A couple of end market questions, if I may. I'm curious about -- you talked about GSI being sort of counter-cyclical and so forth, but there has been some signs of the dairy and livestock sector weakening a little bit, especially here in North America.

And, I'm wondering how you think about that. How much visibility you have, is that the next shoe to drop? Or, do you feel fairly confident that segment, that impacts your smaller tractors and GSI and so forth, is still sustainable?

We are fairly confident that we perform as indicated. But, when it comes to the details, I would like to hand over to Andy.

Sure. What we are seeing is, as we said in GSI, some strength on the protein side. And you have to recall that, for GSI, that is poultry equipment and equipment relating to pig production. And, we are seeing some weakness, softening on the pig side. But on the poultry side, still very positive. And so, that is where most of the growth is coming from.

On the grain side, we are doing quite well in markets like South America. We're much weaker in Eastern Europe, because of the political situation there. And then in North America, we are seeing good activity on the commercial side, but some weakness on the on-farm, farmer grain-storage side. So overall, our grain-storage business, should be relatively flat, with some increased sales on the protein side.

Okay, great, that's helpful. And then maybe my follow-up, maybe this is for Martin. It is on Europe, and I know you spend a fair amount of time over there. But, some of the other companies we cover are seeing some modest signs of life in Europe, as they have done various types of QE. And they have, obviously, the benefits of currency.

And, given that European farmers generally sell in dollars, any chance that there is some risk to the upside in the European end market assumptions?

Not really. So that means overall, my careful impression is that we somewhat seem to bottom out, globally. So, I think that we more or less are at the end. And, we can see some light at the end of the tunnel. Not only in Europe, so therefore, I am slightly optimistic. And I am very positive about us making what we promised this year.

Okay. Thank you.

Your next question comes from the line of Steven Fisher from UBS. Your line is open.

Thanks. Good morning. It is Eric Crawford, on for Steve.

Good morning, Eric.

So just real quick, a housekeeping question first. Share repurchase, is that still expected to contribute $0.07 to $0.10 towards the EPS guidance for the year?

Yes, I think it will be above that, at this point. Depending on -- it still depends on the rate that we go. But as we see it today, I would say it is going to be north of that estimate at this point.

Okay. Any order of magnitude to help us with?

I would guess more like $0.15 to $0.20.

Okay, great, thank you for that. And then, the sales guidance, ex the currency impact, was really only taken down a touch. So I'm curious, I think you mentioned orders in some of the regions, but how orders are coming in, relative to expectations, across the board, and any regional color would be great.

I think it is pretty much -- order intake is pretty much in line with our forecast, which I think we took down more substantially in South America. Maybe you didn't get that but, this is a more -- a bigger variance to our budget.

Yes, from the order standpoint, as Martin said in his comments, our orders are down in North America. But actually up, from a year ago, in Europe. And so, that is where we're seeing the most upside.

But, our order coverage is reasonable for North America and Europe. South America, as Martin said, is where we are seeing the weakness. The order board is down significantly. And our order coverage is not as strong. And that reflects why we brought down our industry assumption. And we brought down our sales forecast in South America here, for the balance of the year.

Right. Well, with orders up, I thought I heard Martin mention that. With orders up, I guess this ties into Steve's question earlier on, and Andrew's, really. Potential upside to the margins that you are getting in Europe; they are already at the high end of the 8.5% to 9% range that you called out. So, just wondering if, with orders up, if you are going to get some possibility of upside to that.

I think we have already reflected that in our new -- in our forecast. We are facing headwinds on currency. We are facing headwinds in South America, bringing the market down.

And the source of offsetting that is the European results. So yes, we are more positive in what we can accomplish in Europe this year. A little on the sales side. But more importantly, on the margin side.

When you ask for some more flesh to the bone, overall, I think we came in with a very well-balanced plan. And we share with you a very well-balanced forecast. If you now ask about risks and opportunities, I think that there are most probably more opportunities than this, seen as of today.

Excellent. Well, really nice execution. I think you should be commended. And thanks for the time.

Can I have that in writing, please? (laughter) Thank you.

Thank you.

Your next question comes from the line of Ann Duignan from JPMorgan. Your line is open.

Hi, good morning.

Good morning, Ann.

It is Ann Duignan, I'm not sure where that last name came from.

I like Annie Deany. (laughter)

Well, back to reality here. As I look at your outlook by region, I look at where we are, year to date. And, we are already at the low end of your guidance, almost across the board. And in particular, how comfortable are you that have you taken down customer care sufficiently, with all the changes that are going on in the financing programs?

If anything, there might be some pre-buying going on out there, right now. We are looking into a dark hole in the back half of 2015. Does stock market represent the greatest risk to the down side, do you think, at this point?

I think the most uncertainty right now, is certainly, South America. Because, it is not just looking at the economic situation of the farmers. It is more of the uncertainties around the financing programs, in terms of what the rates the FINAME programs will have in the back half of the year, and the availability of the funding.

So, some of the weakness we are seeing, currently, is because the BNDES is not funding the deals on a consistent basis, and that is causing uncertainty in the market. Dealers are not getting paid as quickly as they would like. So, they are not putting as many orders in.

So, it is causing the market to be disrupted, to some extent. So, that is where the uncertainty is. And as I've said, our order boards look a little better in North America, and a lot better in Europe. So, we have more confidence there.

Ann, what we are doing now is, we put our North American guy in charge of South America. And we, basically, work towards a major reorganization. So, that means, we look really into all corners and all details. And I think therefore, we are doing the right things.

Okay. So, it will be more self help, rather than industry support.

Yes. I think so.

Thank you. On Western Europe, once again, industry sales are below -- on the low end of your guidance, below your guidance, year to date, on tractors. Where are you seeing the strength in orders, specifically?

Ann, it is across the board. But, I think the first couple of months of the year were relatively week. The month of March, in the industry, was actually down about, I think, 6% or 7%. France was down very significantly in the first two months of the year, but was much flatter in March.

So, still a little early to tell. But, I think we are seeing some of those first couple of months get offset now, by a little stronger conditions. So I think we're still in line with what our industry assumption is. In terms of orders, it is across the board. There is not one specific market that is driving that order board.

And, is it your sense that the farmers are getting used to the notion of the cap reforms, and maybe the serial side of it better than the dairy side?

Yes, I think the cap reform is not a real issue, so farmers know it, and it is not a surprise.

Okay. I will get back in line.

Your next question comes from the line of Larry De Maria from William Blair. Your line is open.

Okay, thanks. Good morning. A couple of questions. First, on price, you maintained a 2% positive price. Can you break that down a little bit, by region? And where, maybe there is some pressure, or not?

Yes. So far, early in the year, Larry, we are looking at, in the first quarter, we had somewhere between 1% and 1.5% pricing. A little lower in North America. A little higher in Europe and South America. So, as we go through the year, we would expect to see that unfold.

And it makes sense, as you think about our inventory reduction efforts that Andy was talking about. So, we are still looking at 2% for the full year. Probably a little more in Europe and a little less in North America.

And, when we think about the risks to the year, do you consider that a relatively major risk into the second half, on price?

Well, certainly, as our inventory reduction plans go, I think -- and the way the rest of the industry succeeds or doesn't succeed in lowering inventory levels, will dictate what pricing looks like, I think. But right now, we are still optimistic that that 2% is what we will achieve.

Most of it is already implemented and the rest is basically, how we handle discounts. Because our inventories are pretty much in shape, we don't have to do some special efforts, like some of our competitors.

Okay. Thanks. That makes sense.

And then just curious, in North America, ex GSI and the traditional core business, are you losing money there? And if so, is there a line of sight to improve the profitability.

Of course not.

No, we are not -- the forecast is to be very profitable for the full year in North America, without GSI.

Without GSI, okay, thank you.

Your next question comes from the line of Andrew Kaplowski from Barclays.

Hello. It is Alan Fleming phoning in for Andy today. Nice quarter.

Maybe you can just talk about your company level inventory, across the regions. Are there any regions where you maybe have a little bit more work to do versus others? Europe versus North America, are you a little bit further, in terms of wanting to get your inventories down in Europe?

No, it is usually where the market is the weakest. So, the inventory levels are pretty much in line, where we want them to be, in most regions, a little more challenged than North America and South America. And, our European inventories are in good shape.

Okay. And then maybe, just a quick question on your Asia -- the startup costs in Asia this quarter. How is that facility, and the start of that facility, trending, versus your expectations? And, when should we start to see those startup costs moderate?

Well, what is going on in our new factory in China is that, we are on-boarding new ranges of the low-to-mid horsepower tractor line that we are putting in that facility. And so we are -- this is an important year, where we are getting a lot of the new products in, and down the line, and start to sell them this year. But we won't fully complete that process until next year.

And so -- but we should see some improvement in 2016, because we will have a relatively good compliment of tractors going down the line, and being produced, and shipping around the world. And that will enable us to absorb the fixed costs that we have in that facility. And, we will start to see good results out of APAC, as well.

And actually, 2015 too, should -- will get better, as we go through the year. So, closer to breakeven as we go through the year.

Okay. I will leave it there. Thanks. That's helpful.

The next question comes from the line of Tyler Etten from Piper Jaffray. Your line is open.

Hello. Nice quarter. I was wondering if you can talk about the production reductions being more front-end loaded? If we see another large crop coming out of North America, do you think that there is risk to further production reductions in the back half?

I think our production schedule is all dictated by what our industry assumptions are, and what our sales assumptions are. If those change, then, positive or negatively, we will have to change production, and the like. So, it all comes down to what those industry assumptions are. I think they are reasonable and that is what we think -- that's where we think it is going to go at this point.

Obviously, what the crop is this year, where crop prices go, are an important factor that drives industry demand. And so, it will be something that we will keep a close eye on during the year.

Okay. I guess a better question would be to ask, if there are further levers you can pull to reduce production costs, without having to do any major restructuring, if that were to happen?

Yes, what we have in many factories either already in place, or we are in the process of negotiating our flexible working hours. So we have it now in most of the European factories. We have it in Brazil. And, we are in the process of getting to an agreement here in the US, which then would basically help us to, basically, handle both directions.

All right. Thank you.

Your next question comes from the line of Rob Wertheimer from Vertical Research. Your line is open.

Hi, good morning. It is Joe on for Rob.

First question, just your comment about parts globally being down 4% ex currency, are you able to comment by region, in terms of the parts activity you are seeing? I think that you've seen earlier in the quarter, the sentiment seemed to be a little bit downbeat, reflecting maybe a little bit more downward pressure on parts activity there. So, just curious what you are seeing around the world.

I think that is pretty much across the board what we see. And typically, when you have a weaker market, the dealers do some destocking of their inventory levels. So, I think that is what we are seeing right now. But, I think the parts sales will be relatively stable as we get into the real activity periods of planting and harvesting throughout this year.

Okay. And then, just a second question on the production plans, and what you lay out on slide 5. And seeing that 2Q looks sequentially flattish with 1Q, and then another step-down into the back half of the year. Could you talk about the actions that offset some of the production headwinds, in terms of, what is an implied margin raise from 1Q. And, sort of where you might feel a little bit more pressure on lower production, what is going to help offset that? Whether it is mix by region, or other actions?

In terms of our margins, we are getting positive benefit from pricing and really, very modest material cost increases. So we are doing -- and we have improved our forecast, in terms of where we think our component costs will be. And so, that is helping us. We do have increased costs related to tier 4, and some of that pricing relates to tier 4. But overall, a net positive on pricing and costs, material costs.

We also have the restructuring actions and the savings that we have going on in our plants. We took down a significant amount of our overhead structure. We moved to one shift in a lot of our facilities this year, which helps our labor productivity. And, as a result, those are the things that are offsetting the negatives that you talked about.

One is the lower production, which reduces our ability to absorb fixed costs. And also, we are also having -- facing a lot of headwinds on mix. So, as the market decline is mainly in the high horsepower sector, and much more flat sales in the lower horsepower sector, that is not helping us from a mix standpoint. So, those two things are driving the margins down.

Great. Thanks very much for the detail.

Your next question comes from the line of Michael Feniger from Bank of America. Your line is open.

Hello. Filling in for Ross at B of A. Martin, back to one of your earlier comments, do you believe we are bottoming out in Europe? Or is that a comment about global demand potentially bottoming out this year?

Yes, it would also include Europe. But it is, I think, pretty much globally based on the latest view we shared with you.

Fair enough. And then, you mentioned how your inventories are down, but that is not really the case with some of your competitors. Do you guys have a view of how used equipment prices are trending so far?

Well, maybe Greg can talk about it.

So, after being down probably 10% or 15% in 2014, depending on which survey you look at, they are probably down low single-digits so far this year. So, I would say pretty stable, in terms of used equipment pricing. A little different, depending on region and models and stuff. But, relatively stable so far.

And then I will just ask one more. You guy did make a comment, you gave us great color on Europe, that the first two months were weak, but it was better in March. I was hoping if you could give us that color of how the order book trended through the quarter, maybe even April for North America, and the other regions.

Well, in terms of order book, I think it has been fairly consistent in North America. And in South America, it has been declining, as a result, primarily of the increase in the interest rates of the FINAME program that were announced during the month. And so, that has put a decline on our order intake rates. And as a result, we reduced the industry forecast.

Great. Thanks.

Your next question comes from the line of Michelle Shaw from Deutsche Bank. Your line is open.

Hi, can you hear me? Hi. I just wanted to maybe better understand the inventory situation, and the impact on pricing. I understand that some of the competitors are lowering prices. How is that impacting the market, and your guidance of (inaudible)?

It is all baked in. So, that means we don't see a bigger effect, basically, during the rest of the year.

And just on the -- overall markets and regions, do you see after market sales down as much? Is the sales of the service charge coming down? Or, do you think the price is down more than usual? Thank you.

It is difficult to understand you. But the line is not good. So, we just talked about the parts business. And, the service business actually, is pretty stable, as far as we hear from our dealers, so no issue there.

Thanks.

Your last question comes from the line of Seth Weber from RBC Capital Markets. Your line is open.

Hey, good morning. I just wanted to go back to the costs initiatives. SG&A and engineering were both lower than what we were expecting for the quarter. Are these good run rates from here?

Or, is there still more -- are those numbers going to continue to come down from here? I know these programs started last year, so I'm just trying to figure out where we are in the cadence there.

The run rates are probably pretty good for now. Some of the moves may be currency driven. But, we got all the headcount reductions and the restructuring done, mainly, by the end of the year.

So, that had our first quarter be pretty much intact, in terms of what we were trying to accomplish. There was some additional work that we accomplished throughout the quarter. But, for the most part, you can use that as the run rate.

And when it comes to engineering, we basically don't want to change our strategy. So, we try to do what we had planned to do in our strategic plans, but we try to do it in a more efficient and cost-effective manner.

Right. Okay. So, thank you. So, Andy, is there a percentage of revenue that we should think about, for SG&A? Or, do you think about it as a dollar number?

Well, I was referring to dollars, because the percentage of sales are going to move with the various seasonal changes in our sales levels.

In engineering, we think it should be between 3% and 4%.

Right. This year is 3.6%.

Right. I got that. Thank you. And then, maybe just Greg, on used equipment inventories, have they started to moderate or come down at all?

They have moved similar to the direction that our dealer inventories have moved. So, we talked about typically down 5% to 10% across the regions.

Okay. Great. Thank you very much.

You're welcome.

We will now turn our call back over to Greg for offline questions.

Thanks, Ryan. I wanted to thank everybody for your participation today, and I encourage you to follow up if you have any additional questions. Thanks. And have a great day.

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