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AGCO Corporation (NYSE:AGCO)

Barclays Industrial Select Conference

February 21, 2013 1:20 pm ET

Executives

Andrew H. Beck - Chief Financial Officer, Chief Accounting Officer and Senior Vice President

Greg Peterson - Director of Investor Relations

Analysts

Andy Kaplowitz - Barclays Capital, Research Division

Andy Kaplowitz - Barclays Capital, Research Division

Okay. I think, we're going to get started right now. There will be some people whose sort of straddled in. We're very happy to have AGCO Corporation with us here today. They were the preeminent equipment firm in the world. With us today is Andy Beck, the CFO; Greg Peterson, the Director of Investor Relations.

Generally speaking, you're very familiar with it right now. We're going to do a fireside chat. We'll also do some of these automated questions. So maybe first what we can do is just sort of, Andy, if you can just talk -- or Greg, just talk about your sort of major end markets. It's probably the best way to start. And sort of what you're seeing right now in Europe and South America in the U.S. and then we'll sort of branch out from there.

Andrew H. Beck

Okay. Well -- wow, that's pretty loud. What we're seeing across is, I'd say, generally stability in the markets. Not a whole lot of movement on any of them at this point in time. If you go across the different geographies in North America, as you know, we've seen elevated levels of demand in high-horsepower tractors and combines, we believe that will continue this year. That's driven a lot by the level of farm income that's been achieved by those farmers over the last few years as well as expectations for another strong year of farm income, given where their -- the crop prices are and what we would hope to be a normal year in terms of production in the field. So those farmers are continuing to be active and replacing equipment. They're looking for new productivity enhancements in their business, and they can achieve that often times through buying new equipment. Also they're trying to limit downtime, they're trying to limit maintenance cost, and so it's a good payback for them to continue to invest.

So we see that continuing on the downside, some of the folks in the protein business, dairy business are a little more affected by the high crop prices and high feed costs that's affecting them and those markets aren't as strong. We are seeing strength in commercial hay business right now because of the fact that hay is being used as an alternative feed, and also we're seeing export demand for hay right now. So there are pockets of strength even within that kind of segment.

And you move to Europe, situation is very similar to what we had in 2012 where the market is really a mix of different situations. In Southern Europe, the market remains relatively weak. They have had some weather issues and the economy continues to drag demand down. And the key markets for us, particularly France and Germany, the market stays relatively strong and demand seems to be -- and our orders are still flowing in quite in nicely there. And farm income is kind of driving their performance so far this year.

And then we you move north, which is an important market for us, in Scandinavia and Finland, they had some very wet weather during the harvest last year, so we've seen demand down there. And again, in Europe, it's also a very heavy dairy sector, and that segment of the business is weaker.

So when we talk about demand levels comparing Europe to North America, especially in the high-horsepower sector, we would say that the North America demand is relatively high compared to what you've seen in the past years. But in Europe, maybe not everyone focuses on this, but really demand is either midpoint or below midpoint at this time, when you look at Western Europe across the board. So there's -- we hope there's some opportunity for that market to go up in future years if the income levels and some of the economic concerns start to stabilize a little more.

As you move to Brazil, that's probably the best opportunity for a stronger market this year. We have -- everything's lined up pretty well in Brazil. We see that the farmers are going to have a good income levels so far and the crop prices, particularly soybeans, are very good. The real has weakened, so that allows them to export soybeans profitably. And lastly, the government programs are in place. There's -- all of the equipment is financing and subsidized by the government. And the subsidized financing program for Brazil has been extended all throughout 2013 at very low rates, at 3% rate in the first half of the year, 3.5% in the second half of the year. And so that also is driving farmers to make equipment purchases. So where we saw in the fourth quarter, very strong demand in South America, that appears to be carrying over into the first part of 2013.

Question-and-Answer Session

Andy Kaplowitz - Barclays Capital, Research Division

So maybe I could ask about Europe. Obviously, we know that some of the economic malaise there is kind of drifting to farmer sentiment. But as you said, it's sort of midpoint or below versus its cycle. So can we -- what would we need to see to just to get it better? I mean, we got high crop prices, I know it's in more dairy. But can we get the markets better if just weather improves? Or do we really just need a better European economy and otherwise it gets to be like this?

Andrew H. Beck

Well, again, when you talk about Europe, across the board, it's very difficult to make broad general statements because each country has really different dynamics that are going on. But in general, I don't think we need to wait for the European economy to improve to see an improved demand. They haven't had, across the board, a really good year in terms of production over the last few years. Just spots of good, spots of bad. And so I think that's extremely important. I think they're going to have a good crop, but the prices to your point where they are, I think there'll be some more confidence back in the market. And then the dairy sector is more of an important sector in Europe than what you'd see in Europe -- I mean, in the U.S. And so some improvement in milk prices, improvement in maybe some of the input costs that are going in to get those group of farmers more profitable, but certainly help their situation. And so there's a really large segment there that is down and has been down for a number of years. And so those are areas where there is an opportunity probably for some improvement.

Greg Peterson

And then longer-term, Andy, I think if you look in Central Europe and Eastern Europe, that's probably the source of growth opportunities for us longer-term. There is a function of somewhat financing of the government. Governments need to be more supportive in terms of the financing programs. We are seeing some of the Western financial institutions participate there, so that is a good sign. But ultimately, we need the Russian market and the Eastern European market to continue to improve and grow and some of the regulatory hurdles that we have to get over, I think, would also be nice if some of those were lower for us.

Andy Kaplowitz - Barclays Capital, Research Division

So I asked your peer about the tariffs on combines. You're not as big -- you really don't have that issue. But at the same time, it goes to show you the riskiness of that sort of Eastern European sort of Russian environment. But how do you gauge what to do in these regions considering Russia has lots of arable land that would be good to sell into?

Andrew H. Beck

Exactly. Well, they are too important market in the future to ignore. So we obviously understand the need to manage that risk accordingly and do what we can to remain flexible and mitigate changes that can occur in those markets. But certainly, we see the opportunity as substantial. And so we're doing everything we can to increase position and our sales in those markets. So for the example that you're talking about where there's been an import duty change, our reaction is that we all need to find a way that probably localize more of the production so that we can meet certain standards. So there are different things that we'll have to do. We'll need to be adaptive to those changes in the market. And I think we're fairly used to that because in a lot of cases, a lot of these markets do have local requirements. The conditions are different. And we're constantly working our way through those to make sure that we have met the requirements to participate in different markets. And so I don't see that any different in Eastern Europe than we do in Brazil or other markets over time.

Andy Kaplowitz - Barclays Capital, Research Division

So I want to get back to Europe, but maybe we can talk about Argentina in the context of sort of what's happening in Eastern Europe. Argentina kind of fell off the cliff probably about a year from -- a year ago, and so you've been trying to -- you've had more local product there also. How do you look at the Argentina market? Are they going to have a robust crop? Is there growth potential in that market or is that sort of a troublesome market?

Andrew H. Beck

Well, when you -- as you say, when you start talking about the actual ag economy there, it's a very important segment of the South America ag economy, certainly very important for us to participate in that market. And another example where government regulations and changes are causing us to make changes in how we want to do business. So we're -- there's more local content requirements that the Argentina government has put in place. And until such time that we can meet those requirements, probably not an opportunity for us to grow substantially over the base of volume that we do today, but we're still 30% to 40% market share player in Argentina as these regulations are affecting the entire market. And so really it's hurting the local farmer more than us. But what we're doing is spending some more local production capabilities into the country so that we can participate long-term in the Argentina market, which we think will be an important market and a source of revenue and income for us in the future.

Andy Kaplowitz - Barclays Capital, Research Division

Because I want to ask you about your forecast in Latin America. Your peer rates forecast in Latin America, you kept at the same, so their guidance is higher than yours. Is it -- are you more towards [ph] Argentina? Is there something else going on? Are they just -- you guys are more conservative than they are?

Andrew H. Beck

I don't have any idea or try to compare to what they see. We're just trying to give our best view of what we see in the market. Certainly, there's probably more upward potential bias than downward, at least of what we see today. But it's still very early in the year. And for sure that the market will be up compared to the first part of 2012. First part of the 2012 was drought conditions in Brazil, and so what we're seeing now is a much more robust market. The comps get much tougher in the back half of the year, and I think some of these very favorable programs that are in place will kind of run their course at that point. So I think we're -- we might be a little more conservative about what the second half looks like compared to the end of 2012. But I don't think we're in disagreement that it's a great market this year. The farm -- the fundamentals for the farmer are very good, and it should be a good year to be in business in Brazil.

Andy Kaplowitz - Barclays Capital, Research Division

Okay, let's ask a couple of automated questions to keep you guys engaged. If we can go to questions 1 and 2. Do you currently own the stock? One, yes, overweight; two, yes, equal weight; three, yes underweight; or four, no.

[Voting]

Andy Kaplowitz - Barclays Capital, Research Division

Okay. So 72% don't own it, 16% overweight. It's kind of about average from what we've seen from other machinery companies. There's not a lot of ownership from this. You got to work on that. Second question, please. What is your general bias towards the stock right now? One, positive; two, negative; three, neutral.

[Voting]

Andy Kaplowitz - Barclays Capital, Research Division

Okay. So there's a lot of sort of negatives and neutrals, which is interesting. Now one of the questions that I'm sure you get every day is, and I know how Martin would answer this, is the cycle ending, why is the cycle not going to end. I think Martin has publicly stated he doesn't believe in the cycle. What should we think? I mean, I think this comes to that more than anything else, it may through the European exposure, but probably it's that question. So how do you respond to that question?

Andrew H. Beck

Well, I think the -- you have to -- we've been asked that question for 4 or 5 years straight now. And so far, we've been right that the market dynamics are different than what they were in historical terms. And why is that? What are the changes? First of all, what we have is a much -- first of all, I think, this discussion about the cycle is much more geared around the North America business only as we talked about. That's the area where high-horsepower tractors are selling at above average levels. We're not seeing that in Europe, we're not seeing that in Brazil. Brazil is really trending up because of additional farmland and things like that put in place. So this is more of a North America question which is, for us, a quarter of our business. But it does impact the mentality I think of a lot of the questions we get to your point. The market is really changing, the business is changing. In the past, buying farm equipment was a long-term business decision done when things are very good. Now we're talking about much larger farms, more professional purchasing organizations doing that type of decision making and they're managing fleets of equipment. So a fleet manager is looking at turning over a certain level of its fleet every year. Also, they're looking at total cost of ownership. And there's a lot of products out there in terms of short-term leases that allow them to reduce the cost of ownership. They think about what their fuel costs, their maintenance costs are. And what we see a lot is a big aversion of our customers to downtime. And that is the biggest cost that they have. They want to be in the field, doing what the operation they want in the field at the exact -- the proper time in order to improve their yields and the productivity, and downtime is a kind of a killer to that. So having up-to-date equipment within warranty periods allows them to mitigate that risk. And so I think that's extremely important. Greg, anything else?

Greg Peterson

Yes, then on the macro side of the farm economics equation, if you look at the demand for growing, that's growing every year as we talked about it all the time, population growth, protein consumption. Our view, long-term, is that those trends are going to continue, and we're going to see -- continue to see inventory levels of grains that relatively of low levels compared to other times in history. So we think that's going to support commodity prices and support farm income. So you take a higher level of farm income and then you add to that the fact that the farmers' balance sheets are as good as they've ever been. It kind of adds to Andy's view that as we go forward, we may see some ups and downs in the industry, but we don't expect to see the kinds of -- the magnitudes of decline or the magnitudes of growth maybe that we've seen over time instead. But the improved macroeconomic situation, we think, will continue to a lot of the farmers to invest in their businesses.

Andy Kaplowitz - Barclays Capital, Research Division

And I think it's also fair to say that you guys have sort of driven sort of the horsepower equation. And I mean, the farmers continue to do more with your equipment than they did just a few years ago. And that has incentivized farmers to continue to buy more equipment there.

Greg Peterson

Yes. And that kind of goes in with the -- as we talk about the higher commodity prices, Andy, the critical times for a farmer when he plants and when he harvests. And if you can throw more horsepower into either one of those activities, you can get it done within the very short window that they have to optimize either the planting or the harvest. At harvest time we're seeing farmers add another combine, for instance, to their harvest. And that's simply to shorten the window when they get their crops from the field because what that does is allows them to harvest at optimal times, it reduces or allows them to get their crop in, minimize the amount of drying cost and handling cost, at the end of the day by making that investment in more equipment they can improve their yields and improve their overall levels of income.

Andy Kaplowitz - Barclays Capital, Research Division

Okay, that's good. Let's shift gears and go back to talk about GSI for a second. I know you get lots of questions on that. Your guidance was flattish for the year, right, with weakness in the U.S. and the strength in the emerging markets. How confident are you in sort of the forecast you gave that the emerging markets will sort of continue to be -- they've been an out-performer for you in that business. So can you talk about that side? I mean, I think we tend to know the U.S. side better but not as well sort of the emerging market opportunities that you have in the GSI business.

Andrew H. Beck

Certainly. And that's where we see a lot of growth opportunity for the future. So we're not just talking about this year, but continued growth outside of U.S. for both grain storage and protein production systems. So if you start with the grain storage, when you get outside of some of the developed agricultural markets, grain storage is not a practice that's widely used. So in China, Eastern Europe, Africa, grain storage is nonexistent for the most part. And so you see a lot of crop losses, the crops not conditioned properly for maximizing yields. And so as those markets mature, farming practices mature, we'll see the need for grain storage. And GSI is a global business with global capabilities, and we should be able to take advantage of that growth. You take a market like Brazil where grain storage is important but not fully utilized, there's still a lot of storage done of crops in bags rather than in silos, where we're just getting started in the business. And of course we have a very strong presence in Brazil with our farm equipment business. And so we think that we can leverage our distribution network, our customer contacts, our knowledge of the market and start to promote grain storage in such a way that we can start getting -- have already started getting business from that standpoint. So we think there's opportunity to penetrate that market because of our presence in Brazil. On the protein production side, there's certainly a lot of growth opportunities because of the trends towards people eating more protein, particularly in India and China and other parts of the world, and there needs to be a buildup of infrastructure to support that demand. So in China, we had a substantial growth and we plan to have substantial growth again this year in terms of our abilities to outfit a customer like Tyson, with the capabilities of locally producing protein for their customer base in China. And so we do everything from getting the permits, to building the facilities, to installing the equipment to creating a turnkey operation. And we know how to do that. And so rather than put that at risk, these customers like the reliability that GSI brings to them. And so we're seeing substantial demand in China, and that should continue to grow as the demand for protein continues to grow. So we don't see this as a 1- or 2-year but a multiyear growth opportunity in a lot of these emerging markets around the world. And what GSI did not have was those international capabilities that we have. We have infrastructure, we have facilities, we have back-office, all these things that if you're going to do it on your own, you have to make your way through those to be able to get to the point where you're ready to be in the market. We can accelerate that for GSI, and we have been. We've been -- we get asked about synergies. Some of the major synergies that we're providing is we are providing facilities for GSI to get into the market quicker. So in China, they're putting their -- we're putting some production locally in China and they're going to be in the same facilities we are. And same with Brazil, we're providing a lot of support for that business. So I think there are synergies, and I think that we can help facilitate the natural growth that should occur in the market. And as I said, GSI has probably the broadest product line in the industry with global ambitions, and I think we'll get our fair share of that business.

Andy Kaplowitz - Barclays Capital, Research Division

Okay. And can you talk about the U.S.? When you drive around the U.S. Midwest for instance, do you see a lot of new storage bins? And I guess the concern I have is, is the market already saturated at all? I mean, given the weakness in the market, are you properly structured for the market? Do you need to take anymore cost out of that business? Or are you kind of where you want to be?

Andrew H. Beck

First of all, the grain storage, there's still not a lot of on-farm storage. So I think there's still opportunities for growth there. Farmers obviously didn't need a lot of storage last harvest because the yield levels were so poor. But if we get a better harvest this year, and particularly if they see that the forward prices are lower, that might spur them to want to invest in some storage so they don't have to sell at harvest. They can delay selling it and manage the sales of their crop more optimally. So that's the real equation for the farmer, is how they want to manage selling their crop. The other big part of GSI on the grain side is the handling and the conditioning of crops. And certainly last year didn't need to do much conditioning. The moisture levels were so low. So if we get back to normal again, we think there'll be a lot of demand for handling and conditioning equipment. So there's still, we believe, a lot of opportunity there for farmers to optimize and to make more money. And that's obviously what we're trying to offer the farmers in those situations. You're also seeing a lot of movement of grain in terms of where it's being moved, in terms of farm consolidation. So we're seeing obsolescence of grain storage not because the storage bin is physically obsolete, but it's in the wrong location now. In terms of consolidating in operation, a farmer may want because he's bought a number of farms together and have all the storage in one place. So there's an opportunity for us. And then the export market, routes are changing or velocity changing, and that requires more storage as well. So there's still a lot of opportunities, a lot of demand that can occur in the market. Certainly, we need a good crop with a lot of high yields in order to spur some of that, but we see those demand drivers still in place.

Andy Kaplowitz - Barclays Capital, Research Division

Okay. I want to ask the audience for a couple of questions, if you guys have any questions. But let me just ask you, before we get to them, about margins in general. You've been doing -- you've been improving your U.S. margins over time, you have the well-stated goal out there at GSI, you're not that far away. Maybe you could talk about some of the things you continue to improve in the U.S. to get there. And then over in Europe, you have some -- because of the transition or you've had some lower margins there. But as we look into 2013, it seems like they shouldn't be impeded by that anymore because you get better to the extent that the market is okay. So maybe you can just talk about your margins. And you've done well within Latin America.

Andrew H. Beck

Margin improvement is a key focus for AGCO, and we have put a lot of time and resources to improve the situation. As you say, you pointed out, our weak point used to be North America. I think that we have shown that we've delivered there and improved the profitability. The core business margins in 2012 were around 8%. And when you throw GSI in, they're at 10%. And so they're comparable really to the rest of the business now. So what we're looking for going forward, really global initiatives that should drive margin improvement across the company and by being more global in how we do business. So for example, in purchasing the materials, in the past, we've been too regionally focused, local-facility-focused, and not taking advantage of the global leverage that we can create. So we've restructured our purchasing organization, and they're now not regionally focused at all, they're focused by commodity. So if you're on a global casting purchasing team and you're looking at all the castings that the company is buying and creating strategies of how to leverage the supply base to best serve all our facilities. And we think there's a lot of opportunity there, and we delivered in terms of margin improvement and purchasing cost reductions in 2012. And we have another big improvement that were targeting here for 2013, and we think there's opportunities beyond that as well. So there's opportunities of leveraging purchasing power, there's also opportunities with how we develop our products. And we talked about, for a number of years, a project where we're creating a platform solution for our low-horsepower tractors where we're eliminating 4 to 5 different platforms to one single platform, where we're using a lot of common parts a lot -- all common designs, and we'll produce major components in China for the products. So we're using low-cost environments as well. And that is the first of, I believe, many platform opportunities that we'll be taking advantage of in the future. So there's opportunity beyond some of the early initiatives that we have right now that will carry us into many years down the road as we develop new projects -- new products. So I think we have a lot of opportunities to improve, and we're certainly focused on doing that.

Andy Kaplowitz - Barclays Capital, Research Division

Okay, great. Anyone in the audience who have a question that they want to ask? Go here in the front.

Unknown Analyst

Can you guys talk about what you're seeing in used equipment markets both in Europe -- in the U.S. and in Europe? How those markets are holding up and then what the risks are to the new side of the business from the used markets?

Andrew H. Beck

That's a great question because I believe that the health in -- the health of the used market is really the key to continuing the pace of sales that we see on the new side of the business. So we've talked earlier about how a lot of these customers now want to turn their fleets over more rapidly, but that only works if there's a used -- secondary customer, secondary market that's going to be able to handle that as well. And so far, I would say that when you look at used prices and used inventory levels, and those are remaining to be pretty stable. So those markets are continuing to absorb the rate of new equipment sales. The one area that's probably a little weaker than others is combine inventory levels in the U.S. But I think, first of all, that didn't really affect us as much. We're not a big player in that market. But certainly, we're all working on -- we have incentives in place to help stimulate that used equipment sale in the market. So trying to manage that and keep that not to be an issue. When you look at Europe, for the most part, used inventory levels are in pretty good shape and the local market is absorbing the demand for used equipment. So what we saw in really strong demand years in Western Europe, was there is a kind of a need for a lot of the equipment to move east in order for the used equipment to have enough -- there'd be enough demand to move it out. That's not happening at the rate that we saw in the past, and so that's not a key risk at this point.

Andy Kaplowitz - Barclays Capital, Research Division

And a question over there.

Unknown Analyst

So can you elaborate on the Fendt's expansion? How many incremental tractors you get from a capacity standpoint when you think about working to that capacity, sort of the timing of when you think your 3-, 4-year opportunity working to that capacity, how much market growing or you can gain market share as well?

Andrew H. Beck

Sure. We -- AGCO acquired Fendt in 1997. And at the time, they were doing about 8,000 tractors a year in the facility that we were using really up until late last year. And so we were successful in helping the Fendt brand grow across, not just in Germany but across Western Europe. And last year and really over the last several years, we've been producing at about 15,000 or 16,000 unit number. So that was pretty much the capacity of the existing plant. And that makes, for the AGCO business, that makes the high end of our product line both in terms of technology as well as horsepower. And that's been the fastest growing part of the market, in most of the developed markets. So as the big professional farms really are more prevalent, they are demanding the high-tech kind of products that they offer. So it's critical that we expand. And as you say, we opened last fall and that gave us capacity somewhere around 23,000 or 24,000 tractors. So that's close to a 50% increase in the capacity available for us. We branched that now so that our production is pretty much what we would consider at a normal level. And to your question about the use of that excess capacity, it'll be kind of split between both the existing Western European markets or again we're seeing consolidation in farm sizes as well as some of the developing market opportunities in Eastern Europe and Russia. In those areas, farm sizes are already very large, very comparable in the U.S. So we feel like we have a real opportunity to grow the business in that direction as well.

Andy Kaplowitz - Barclays Capital, Research Division

Any other questions? Okay. Let's go to the automated system for questions 3 and 4. In your opinion 3-cycle EPS growth for AGCO will be: One, above peers; two, in line with peers; or three, below peers.

[Voting]

Andy Kaplowitz - Barclays Capital, Research Division

In line. Not learned a lot from that. Okay, question 4, please. In your opinion, what should AGCO do with excess cash? One, bolt-on M&A; two, large M&A; three, share purchases; four, dividends; five, debt paydown; or six, internal investment.

[Voting]

Andy Kaplowitz - Barclays Capital, Research Division

Okay. So share repurchase are ahead of internal investment at second. So let's talk about this for a little bit. I mean, you just came out of a dividend, you did share repurchases before that. Some people ask me, well, they only come out with a $0.10 dividend, or like you can't win with this stuff. So maybe talk about your strategy? And then also, we did -- you're still increasing your CapEx, about 20% year-over-year. A lot of the other companies I cover sort of flat to down this year. Why should you be investing versus these other guys?

Andrew H. Beck

Well, I think that's a good question. On the investment side, we are in a kind of cycle or period of high investment as we try to take advantage of opportunities that we see in some of these emerging markets and also give ourselves capacity levels to hopefully grow in the future. So Greg just previously described what our plan was with our German Fendt facility, and that was certainly a large investment that we think we certainly needed and will get a good return on investment. What we're seeing in the next couple of years are a lot of investment in products, which some are regulatory-driven because of Tier 4 emissions requirements, but also I talked about the platform for production in China. We're building a Chinese facility right now, and that should give us a substantial return in the future as we can bring lower-cost products on that low-horsepower segment into all our markets, as well as give us a base of operations to participate in the Chinese market in the future. Over the last few years, we've really focused on investing in our business, in processes and systems and our products. And all those things, we believe, will put us in a position to be even more successful than we are today. As we look at what's going to happen in the future, our investment levels, at least the way we project them right now, will be relatively high here in '13 as you point out. We're in the middle of that Chinese investment, a lot of Tier 4 investment requirements, and '14 will be an elevated level. We see right now that the CapEx that we'll need will come down in 2015. And so that will get us back to maybe little more normal benchmark levels of CapEx, and so that should allow us to generate more cash. When you talk about share repurchases and dividends, to your point, we've introduced both here in the last 6 months for the year. In share repurchases, we've done -- we did about $20 million of repurchases in 2012. The main goal of the share repurchase program is to limit dilution because of equity incentive plans and things like that. So we're just trying to kind of keep the count of where it is today. The dividend was sized. Obviously it's relatively modest, but sized in accordance with how much cash we're generating in the U.S. So maybe a little difference in some other companies you might compare us to, we're about 25% of our business is in the North American market, which is primarily in the U.S. And so from an income or payout standpoint, we can't be up at high percentages there because we do not want to be in a position where we're forced to prepay a 3-year cash in order to fund our dividend or share repurchase. So we're trying to do what we think is sustainable. And as our North America business improves, and we think we can improve our North America business through investment within GSI as well as internal improvement in our high-horsepower tractor business, that we can hopefully grow what we're doing on the dividend side as well. But we did it in accordance to having a balanced capital allocation approach, looking at what was sustainable and looking at -- obviously trying to remain conservative in terms of how we look at what we have in terms of bubbles and investment, debt paydown those kinds of things.

Andy Kaplowitz - Barclays Capital, Research Division

So bolt-on M&A and large M&A tend to be dirty words for this crowd. But I'm sure that Martin is not afraid to go out and buy things as they've done in the past. And you talked about some parts of the portfolio that you could still improve, so I mean, should we still think that that's still a very viable thing over the next year or 2? You may go out and more harvest in Europe in India or something like that?

Andrew H. Beck

Well, I -- those are obviously hard questions to answer because you can't really make the specific plans. But I would say that we continue to be active in discussing opportunities. We evaluate them when we come -- when they come. And we have a criteria that says, "Can we add value to AGCO by adding this? Is it giving us a technology? Is it giving us some market presence we can't do on our own or can't do as fast as we could with an acquisition?" And we want to obviously generate return for our shareholders. For the most part, I would say that the bias would be probably on the lower side of the acquisition size. But we will continue to look at those and try to make the best decisions we can. And then we do have, I think, a fairly successful track record in taking acquisitions and encompass and integrating them into our existing business and making them more valuable. Greg described the great example with Fendt business, and we think we can do that. And so hopefully we make the right opportunities come about and we make those calls. But those are opportunistic-type situations that we evaluate in the normal course of business.

Andy Kaplowitz - Barclays Capital, Research Division

Let me just ask you, we talked a little bit about China. You had a little impairment in China, in your harvesting business. I mean, how do you look at China over the next couple of years for your growth? Obviously, they're starting to move to larger farms, it seems like a good opportunity. You've got a factory and things out there. But at the same time, it's tricky business.

Andrew H. Beck

It's a challenge, challenging market, and you have to take a very long-term view, I think, if you want to participate in China. Nothing is quick and easy in that market. Just to get to your products in the market takes a long period of time to get qualified for the equipment subsidies that are offered. And so you really have to take a long-term view on that. The market we think will continue to evolve. You just look at the amount of farm production needed to feed the Chinese population and they're already -- they have 20% of the population, 10% of the farmland or something like that. And so they're always going to be looking and they need to be looking for ways to be more productive. And you have trends about the urbanization of the country, the industrialization of the country, which will open up opportunities for ag production to be more professional, more commercialized and that will add to the mechanization of farmers that we see. So we're already seeing trends in the market towards higher horsepower equipment, more professional-type practices. We're seeing co-ops being formed that buy equipment. So there are things that are happening even today where they would demand a product that AGCO would offer more than maybe a local manufacturer would offer in terms of reliability, quality and features that a product has. So we're certainly going to participate on the higher end of the market and try to take advantage of some of these trends that we think will happen over a period of time. So it's not -- you asked about the next couple of years. We're thinking more in the next 5 to 10 years as we're trying to build this business to where we're active strong participant in the market and we're getting a good return there.

Andy Kaplowitz - Barclays Capital, Research Division

Okay. Let's ask the last couple of electronic questions and then [indiscernible]. In your opinion, what multiples of 2013 earnings should AGCO Corporation trade? One, less than 10x; two, 10 to 12; three, 13 to 15; four, 16 to 18; five, 19 to 21; six, higher than 21.

[Voting]

Andy Kaplowitz - Barclays Capital, Research Division

It's not a surprise. Number two, 65%. But we're getting that sort of view of the cycle when it comes down. So people view the cycle better and then higher. Let's do question 6. What do you see as the most significant investment issue for AGCO Corp.? One, core growth; two, margin performance; three, capital deployment; four, execution strategy?

[Voting]

Andy Kaplowitz - Barclays Capital, Research Division

So again, not a surprise. But I would say, for you guys, I mean, there's only so much you can control core growth in the market. It's really up to execution strategy, right, just to sort of get the company where it needs to be.

Andrew H. Beck

Well, I think we talked about growth. There are growth opportunities in our industry. There's the developed markets that are probably more a replacement demand business at this point. But there are emerging markets, as we talked already during the day, about where modern advanced farming practices are still not there, the mechanization levels aren't there. And so our focus is on participating actively in this market. So our -- we're building presence in terms of either service and support distribution or all the way to manufacturing presence in a lot of these markets to make sure that we do take advantage when these markets grow in the future.

Unknown Analyst

I think that's where it would end. And thank you very much, guys. Appreciate it.

Andrew H. Beck

Thank you.

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