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AGCO (NYSE:AGCO)

Q4 2013 Earnings Call

February 04, 2014 10:00 am ET

Executives

Greg Peterson - Director of Investor Relations

Martin H. Richenhagen - Chairman, Chief Executive Officer, President, Chairman of Executive Committee and Member of Succession Planning Committee

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

Analysts

Seth Weber - RBC Capital Markets, LLC, Research Division

Jamie L. Cook - Crédit Suisse AG, Research Division

Andrew Kaplowitz - Barclays Capital, Research Division

Robert Wertheimer - Vertical Research Partners, LLC

Jerry Revich - Goldman Sachs Group Inc., Research Division

Stephen E. Volkmann - Jefferies LLC, Research Division

Michael Shlisky - JP Morgan Chase & Co, Research Division

Steven Fisher - UBS Investment Bank, Research Division

Adam William Uhlman - Cleveland Research Company

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the AGCO Corporation fourth quarter earnings release call. [Operator Instructions] I would now like to turn the call over to Greg Peterson. You may begin.

Greg Peterson

Thanks, Victoria, and good morning. Welcome to those of you joining us on the call for AGCO's fourth quarter 2013 earnings results. We will refer you to a slide presentation this morning, which is posted on our website at www.agcocorp.com. In that presentation, the non-GAAP measures used are reconciled to GAAP measures in the last section of the presentation.

We will make forward-looking statements this morning, including demand for our products and economic and other factors that drive that demand; product development plans and timing of those plans; acquisition, expansion and modernization plans; and our expectations with respect to the costs and benefits of those plans and timings of those benefits; and our future revenue earnings and other financial metrics. We wish to caution you that these statements are predictions, and that actual events may differ materially. We refer you to the periodic reports that we filed from time to time with the Securities and Exchange Commission, including the company's Form 10-K for the year ended December 31, 2012 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. The replay of this call will be available on our corporate website.

On the call with me this morning are Martin Richenhagen, our Chairman, President and Chief Executive Officer; and Andy Beck, our Senior Vice President and Chief Financial Officer.

With that, Martin, please go ahead.

Martin H. Richenhagen

Thank you, Greg, and good morning to everyone joining us on the call. 2013 was a very good year for the global farm equipment industry. In most cases, farmers made high levels of income, and industry demand was healthy across our major markets. AGCO took advantage of the generally strong market conditions and delivered record sales and earnings. The fourth quarter was more challenging, especially in Brazil, where the funding for the government financing program was exhausted in early December.

I will start on the Slide 3, which summarizes our results for the fourth quarter and full year 2013. We saw solid progress on both the top and the bottom line during this quarter. Our fourth quarter sales were about 6% higher than the fourth quarter of 2012. We ended the year with a solid quarter in North America as improved harvest and healthy farm economy produced strong demand. Our sales growth in Europe outperformed the markets due to improved Fendt production capabilities. Sales in South America remained strong, but were flat compared to last year's robust fourth quarter. We continued to make strides with our margin improvement progress in all regions, evidenced by over 160 basis points of improvement in our fourth quarter operating margins compared to the fourth quarter of 2012.

Sales closed and higher margins produced record earnings in the quarter of $1.40 per share. We generated over $400 million of free cash flow in 2013 after making heavy investments in plant productivity, new products and Tier 4 emission requirements. Our strong cash generation is allowing us to continue making strategic investments in improved technology and in our production capabilities, while we are returning more cash to our shareholders.

Slide 4 details industry unit volumes by region for the full year of 2013. In North America, better crop yields and near-record income levels supported high levels of demand. Industry sales grew across nearly all categories of tractors, with the strongest growth in the high horsepower category. The combine market also saw it close compared to the high sales levels experienced in 2012. Industry unit retail sales of tractors in Western Europe were down slightly for the full year of 2013.

Market results by country remains mixed due to the full year -- of the year with weather-related declines experienced in the United Kingdom and Finland, partially mitigated by growth in France. Industry sales in the important German market were flat in the full year versus strong sales in 2012. South American industry retail tractor volumes increased significantly during the full year of 2013 compared to 2012. Favorable exchange and financing rates, improved weather and attractive soft commodity prices generated strong demand in the Brazilian market. Industry sales were also up sharply in Argentina.

AGCO's tractor and combine production volumes are illustrated on Slide 5. Fourth quarter 2013 production was up about 10% compared to the fourth quarter of 2012. The majority of the increase was in Europe where build rates at our new Fendt assembly facility in Germany were much higher than the ramp up period in the fourth quarter of 2012. For the full year, total AGCO unit production increased about 5% as compared to 2012.

As we look into 2014, we expect production volumes for the full year to be approximately flat versus 2013 with declines in higher horsepower equipment offset by increases in lower horsepower machines. At the end of December 2013, AGCO's order board all are down across all the markets compared to a year ago. As a result, we will start the year with lower production in the first quarter versus the prior year and finish the year with slightly higher production in the remaining quarters.

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

Andrew H. Beck

Thank you, Martin, and good morning. I will start with a look at AGCO's regional net sales performance for the fourth quarter and full year of 2013, which are outlined on Slide 6. Currency translation negatively impacted consolidated sales by approximately 0.3% in the fourth quarter of 2013 compared to the same period in 2012. The Europe/Africa/Middle East segment reported an increase in net sales of approximately 10%, excluding the positive impact of currency translation during the fourth quarter of 2013 compared to the fourth quarter of 2012. Sales growth, largely enabled by Fendt's improved production capabilities, was strongest in Germany and the United Kingdom. Sales also increased strongly in Africa. These improved results were partially offset by declines in Central and Eastern Europe.

North American sales grew approximately 2% during the fourth quarter of 2013 compared to the high level experienced in the fourth quarter of 2012. Sales increases in mid-range tractors, grain storage equipment and sprayers were partially offset by declines in other products. AGCO's fourth quarter 2013 net sales in South America were relatively flat compared to the very healthy levels in the fourth quarter of 2012, excluding negative currency translation impacts. Higher sales in Argentina and some of the other smaller South American markets were mostly offset by declines in Brazil.

As Martin mentioned earlier, funding for the FINAME program for 2013 was closed on December 13. The early end to the 2013 program resulted in softer December sales, higher inventory levels and a lower order board at December 31, 2013, compared to the ending 2012 level. Net sales in our Asia/Pacific segment increased approximately 6% in the fourth quarter of 2013 compared to 2012, excluding the impact of currency translation. Growth in protein production equipment sales in China produced most of the increase.

Parts sales were $315 million in the fourth quarter of 2013, an increase of approximately 7% compared to the same period in 2012, excluding the impact of currency. For the full year, parts sales were $1.3 billion, up about 5% compared to the same period in 2012, excluding the impact of currency.

Slide 7 details AGCO's sales and margin performance. AGCO's operating margins improved nearly 170 basis points in the fourth quarter of 2013 compared to the prior year period. Europe/Africa/Middle East operating margins were up over 340 basis points in the fourth quarter of 2013 from the same period in 2012, due primarily to higher production and sales levels and improved sales mix. Our fourth quarter margins benefited from favorable cost comparisons to the Fendt assembly plant start-up costs incurred in the fourth quarter of 2012.

North American's operating margins were 8.2% in the fourth quarter of 2013, were approximately flat as compared to the fourth quarter of 2012. Recall that AGCO's fourth quarter North American margins are seasonally weaker due to much lower GSI volumes relative to the other quarters. In South American region, operating margins were lower in the fourth quarter of 2013 due to a weaker product mix and higher material and manufacturing costs. Full year operating margins in South America and North America improved by over 170 basis points due to sales growth and cost reduction benefits. Margins on the Asia/Pacific region were down due to increased market development expenses in China.

Slide 8 details GSI sales by region and product. GSI sales were up about 34% in the fourth quarter, and full year sales increased about 6% compared to the same period in 2012. Higher protein sales in China and improved grain storage sales in Brazil and the U.S. accounted for most of GSI's fourth quarter increase. We are forecasting GSI sales to be up between 10% to 15% for the full year of 2014 compared to '13, with most of the growth occurring outside the United States. Longer term, the global trends of population growth and changing diets are generating demand for additional grain storage and protein production capacity. The countercyclical nature of the protein production sector supports more stable earnings in GSI.

Slide 9 listed our depreciation and capital expenditure trends. Our CapEx has been elevated in the last few years to facilitate our plant productivity and capacity projects, as well as new product introductions, which support our growth and margin ambitions. Looking ahead to 2014, we expect to maintain our capital expenditures at current levels in order to continue to work to meet Tier 4 emissions requirement, refresh and expand our product line and establish assembly capabilities in China.

Slide 10 addresses AGCO's free cash flow, which represents cash from operating activities less capital expenditures. We finished the year in a very good cash position, generating over $400 million of free cash flow in 2013. 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. In 2014, we plan to continue investing for growth and profitability improvement and additional investments in our plants and new products. After recovering the increased spending on this strategic investment, we're targeting another strong year of solid free cash flow for 2014.

AGCO's inventory position at the end of December 2013 was impacted by a buildup of engines and other finished goods to transition production in 2014 to Tier 4 final emission compliant products. We ended the year with approximately $170 million in engine and equipment inventory that will assist us in transitioning to the new equipment -- to the new emission standards in 2014.

Other working capital details are as follows. At the end of December 2013, our North American dealer month supply in a trailing 12 months basis was 5 to 6 months for tractors and hay equipment and about 2 months for combine. Losses on sales receivables associated with the receivable financing facilities, which is included in other expense net, were approximately $6.8 million during the fourth quarter of 2013 compared to $5.4 million in the same period of 2012.

Slide 11 highlights AGCO's plans for returning cash to our shareholders. We are committed to healthy returns for our investors and expect to make cash returns an important component of our long-term capital allocation plan. As we discussed at our December Analyst Meeting, we have significantly expanded our share repurchase program to $500 million, which should be completed over the next 18 months. In December, we executed a cash repatriation from our foreign subsidiaries to our U.S. holding company in order to facilitate the share repurchase program. In addition, we are also committed to responsibly growing our dividend as evidenced by the 10% increase in the quarterly payment announced last week.

Our 2014 outlook for major regional markets is captured on Slide 12. We're anticipating softer market conditions in all 3 regions. In North America, forecast for lower farm income are expected to result in softer demand from the professional farming sector. Improved economics for dairy and livestock producers should partially offset a slowdown in the row crop sales. Industry demand in Brazil is expected to remain active as favorable terms on government financing programs were renewed for 2014. The early end to the 2013 FINAME funding and the delay in opening the 2014 program created a funding gap of over 1 month. This gap in financing availability in early 2014, combined with lower foreign income projections, are expected to result in weaker industry demand in 2014 compared to 2013.

In Western Europe, we expect modest demand declines in the arable farming sector, partially offset by improved sales to dairy and livestock producers. Assuming more normal weather conditions, we're looking for some recovery in Northern Europe and the U.K. After several years of strong industry sales in Germany and France, we are expecting some softening of demand in those markets in 2014 compared to 2013.

Slide 13 highlights assumptions underlying our 2014 outlook. The 2014 forecast assumes price increases of approximately 2% on a consolidated basis, and at current exchange rates, we expect the currency translation to be relatively neutral. In 2014, expenditures on new product development and Tier 4 emissions requirements are expected to cause an increase in engineering expense of about $15 million. We also look for new products in our productivity and purchasing initiatives to drive improved gross margins next year despite flat sales.

For 2014, our SG&A expense will include expenses associated with flight [ph] and manufacturing start-up and market support costs amounting to about $10 million for our Chinese operations. We are targeting an effective tax rate of approximately 34% to 35% for 2014.

Slide 14 lists our views on selected 2014 financial goals. We are projecting 2014 sales relatively flat compared to 2013 with the impact of softer market conditions expected to be offset by pricing and modest market share gains. We expect to continue to improve gross margins from 2013 levels as the benefit of pricing and our cost-reduction projects are expected to be partially offset by a weaker product mix.

Based on these assumptions, we are targeting 2014 earnings per share of approximately $6 per share. We expect first quarter 2014 sales volumes to be down, primarily due to a slower start to the year, particularly in Brazil due to the delayed opening of the FINAME program and in Europe to allow for modest adjustments in dealer and company inventory levels. These impacts, along with a weaker sales mix, are expect to result in first quarter 2014 earnings per share in the range of $0.70 to $0.75 per share. We expect 2014 capital expenditures to be in the $400 million and $425 million range, and free cash flow to exceed $250 million after funding the elevated level of capital expenditures.

And with that, operator, we're ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Seth Weber with RBC Capital Markets.

Seth Weber - RBC Capital Markets, LLC, Research Division

I'm wondering if you could give us any more granularity to the change in the order book. Year-over-year, you said it was down in all regions. Can you put some color around that? And then my second question is the North American dealer comment, 5 to 6 months of tractors and hay. Can you give us how that compares to last year's number?

Andrew H. Beck

Sure, Seth. In terms of our order boards, our order boards are just modestly down in North America and down about 20% in Europe. In South America, they're down more substantially, but that's primarily due to this delay in the FINAME funding, which kind of caused everything to shut down there for -- in -- from the middle of December through almost the end of January. We're now seeing the FINAME program has started back up, and funding has begun, and our order board is refilling now. So we're expecting to see that ramp back up pretty rapidly over the next few weeks. Our GSI order board is relatively flat compared to a year ago. In terms of our dealer inventory levels, in North America, inventory levels are a little higher, I'd say, probably about a month higher. And in tractors, looking very good, and hay equipment down and down in combines. So overall, we're feeling like our dealer inventory levels in North America are in a manageable level.

Seth Weber - RBC Capital Markets, LLC, Research Division

Okay. And so as we're thinking about margins for 2014, do you think Europe margins should be up year-over-year and then North America down? Is that the right way to think about it even though GSI businesses is going to be strong this year?

Andrew H. Beck

I think yes. That's how we see it at this point.

Operator

Your next question comes from the line of Jamie Cook with Crédit Suisse.

Jamie L. Cook - Crédit Suisse AG, Research Division

I guess, Andy, if you could just -- I appreciate your color on the first quarter in terms of earnings. And at the Analyst Day, you sort of noted you expected some improvement in the back half of the year. You noted Brazil. You also talked about Europe and favorable weather helping. Is there any way you could give us a sense of how much better you think the second half is going to be relative to the first half? And then I guess just my second question is as it relates to the share repurchase that you guys had talked about, in the event that same -- the markets deteriorate more than you guys had anticipated, would you be more aggressive on the share repurchase versus the -- versus your original announcement that you would do it through, I think, June of 2015?

Andrew H. Beck

So Jamie, as it relates to the share repurchase, I think all we can say is that we're -- we've been buying shares, and we expect to continue to buy shares. And certainly, we think this is an opportunity with some of the developments in the market and our stock price. And so we're certainly trying to take advantage of this dip in the price. As it relates to our earnings flow for this year 2014, as we said, we expect to be lower in the first quarter and then things start to recover, probably a little flatter in the second and then offsetting with the second half being stronger, particularly both third and fourth quarters. So from that standpoint, we are looking to start out a little slower, but have our plans in place to see the margins start to improve, and that will drive the earnings up as well.

Operator

Your next question comes from the line of Andrew Kaplowitz with Barclays.

Andrew Kaplowitz - Barclays Capital, Research Division

So Martin or Andy, you didn't change your industry forecast for South America, even with the dislocation from FINAME. Do you think there's any risk to that forecast? And then maybe you can talk about -- do you have any concern about instability in Argentina, or is that still going to be a good market in 2014?

Martin H. Richenhagen

Well, I personally believe that Argentina has a lot of room for improvement because of the need to recover from restrictions farmers suffered from due to their, how would I call it, tax policies or custom policies. So therefore, I think Argentina should be okay. It's also a comparable small market, if you compare to Brazil. And in Brazil, we think we are pretty much on top of the situation, and we don't know much more than what we elaborated on.

Andrew Kaplowitz - Barclays Capital, Research Division

Okay. That's helpful. And then Martin, maybe shifting back to Europe. I mean, you did have a strong quarter in Europe from a revenue perspective and a margin perspective. I mean, we know it's an easier comparison versus 4Q '12. And then a lot of it was spend [ph] production efficiency. But did any of the markets actually perform a little better than you expected, or is it just -- is it more reflective of the order board that you talked about being down 20%, and that's how we should think about it?

Martin H. Richenhagen

Well, the situation of the various markets of Europe are different. So that means last year, we were facing more headwind in U.K. due to weather conditions, some in the Nordic countries of Europe, like France and Germany, they do pretty well. And so next year or this year 2014, as Andy mentioned, we think that maybe Germany and France will be more flattish, and we think that there a certain markets in Europe which might develop, which might pull a positive trend. And what you should not forget is that we also invested quite a bit of money in Russia, so that I think I probably would believe that Russia could help us to basically grow -- generate pretty stable sales in Europe.

Andrew Kaplowitz - Barclays Capital, Research Division

And Martin, we shouldn't read anything into your tone in your press release. It sounded -- seemed a little more cautious than what we're used to from you. Is that just me seeing things or...

Martin H. Richenhagen

No. But in a situation where the analyst thinks that the paradigm will shift completely and then competition is a little bit more conservative, I don't want to be overly optimistic. But what we committed ourselves to is to generate $6 earnings per share in 2014, which would be a much better performance than minus 8% or whatever some of our big competitors will tell you.

Operator

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

Robert Wertheimer - Vertical Research Partners, LLC

I wonder if you could address the competitive balance in Brazil. The shares are always or maybe a little bit volatile at the end of the year, but it was at the end of the year. And then just to flow from that, you've had a lot of success, I guess, with the expanded Fendt capacity. Has that impacted pricing or competitive balance in Europe?

Martin H. Richenhagen

I think, when it comes to the competitive landscape, nothing changed so far. So that means in Europe, we face the same competitors as every year with the same amount of competition. And our strategy is not to buy market share. We are not known for that. So that means we try to sell our technologies and services, and this is how we differentiate. So there's no concern that the increased capacity of Fendt would basically have an impact on Fendt prices. And then it has an impact on Fendt cost, so to say, and puts them into a much more competitive position. So when it comes to South America, no change. What we are planning to do in South America is we will bring more advanced technologies to the market because this is what we think customers are looking for right now. And this is not only in the area of big high horsepower tractors. We are in the process of localizing some of our European designs, but also in the area of combines.

Robert Wertheimer - Vertical Research Partners, LLC

That's helpful. And then just a follow up. In South America, you're not seeing, with the share moving around, irrational -- more than normal or irrational pricing? Any buying of share in that market?

Martin H. Richenhagen

In South America, we have 2 competitors, John Deere and Case New Holland, who are always very aggressive, and I think that is stupid. So -- but I believe the same is true also for North America. I think if markets go down, the attitude to react via discount or lower prices doesn't help them and doesn't help the industry and doesn't help us. [indiscernible] to my friends in [indiscernible].

Operator

Your next question comes from the line of Jerry Revich with Goldman Sachs.

Jerry Revich - Goldman Sachs Group Inc., Research Division

Andy, you typically build working capital in the first half of the year. Can you just talk about working capital reductions at the dealer and company inventory level that you're planning compared to typical seasonality just to calibrate us the extent to which you're underproducing compared to normal seasonality early on this year?

Andrew H. Beck

Sure. We -- I don't think we're too far off from where we want to be. Typically, we see working capital build of anywhere, $300 million, $400 million. We might be slightly below that this year as we think we have some opportunities, especially on the inventory side. We did end up with higher finished goods inventory than we had anticipated. Some of -- a lot of that was in South America, a little of that in Europe as well. And so I think there's an opportunity for us to bridge that gap. From the dealer standpoint, as I've said before, the dealer inventory adjustments that we're making is, I think, relatively modest. In Europe, perhaps there's a week or 2 more inventory that we expect our dealers to reduce here in the first part of the year, but it's not any major or drastic adjustments that we're looking at.

Jerry Revich - Goldman Sachs Group Inc., Research Division

Okay. And you outlined market share gains targets. Looks like a big chunk of that is GSI. I'm wondering if you could just flesh out for us, is that just the expanding the product capabilities in regions outside of North America? And also, any other major buckets of new product lines that you expect to contribute and...

Martin H. Richenhagen

We look at GSI as a separate business. So when you talk about market share increases for farm equipment, GSI would not be considered. We won't go [ph]…

Greg Peterson

I was just going to say that if you look at our expected revenue growth as, Jerry, you're probably thinking about just from a revenue growth standpoint, we do expect to grow strong -- more strongly within our GSI product line, and especially outside the U.S. Because we are forecasting sales increases of somewhere between 10% and 15% for GSI next year, and in the U.S., it's low single-digit growth and outside the U.S., it's obviously been more than that. So that is definitely part of our ability to outperform the markets next year is through those -- through that GSI sales growth. But we are also targeting some share gains just as we do every year across all the regions so...

Jerry Revich - Goldman Sachs Group Inc., Research Division

And Greg, just from that last point, no major product line concentrations or regions where you're really excited about the offering that you want to highlight now?

Greg Peterson

No. I think based on the investments we've been making in new products and our engineering expenses, we kind of look for similar modest gains in all the regions.

Martin H. Richenhagen

I'm looking for aggressive gains, but I'm not the CFO.

Operator

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

Stephen E. Volkmann - Jefferies LLC, Research Division

Just a couple of quick things, if I could. I guess I'm curious, just -- I'm going to push you a little bit on your pricing assumption, up 2%, if you're trying to gain share, and some of your competitors are being aggressive, and we think the markets could be down a little bit. How much sort of confidence do you have in that 2% pricing?

Andrew H. Beck

I think, well, it's early in the year, so we have to see how the market goes. Just to keep in mind that it would include the Tier 4 price increases that we know we'll be implementing in the market, and we know that the industry will be going alongside of us. We all have to cover those costs associated with the Tier 4 equipment. So the real question more comes in terms of what's going to happen in terms of general pricing. And again, the markets, I think, are going to be fairly solid. We're not talking about any major changes in these markets. And so our expectation is that normal pricing levels will be obtained here in 2014.

Stephen E. Volkmann - Jefferies LLC, Research Division

Okay, good. That's helpful with the Tier 4. The second quick follow-up, maybe, Martin, you mentioned that you thought -- I think it was you who said that the high horsepower stuff in North America would be down a little bit, offset a little bit by the -- this lower horsepower. Can you just put some numbers around that for us? How much do you think high horsepower professional farming equipment could be down, and how much do we get on the lighter stuff to offset that?

Martin H. Richenhagen

Yes. We actually -- we don't -- we did not communicate numbers, and it's just an idea, so I'm not in a position to share precise numbers with you. And I also don't think that it will be really substantial. So therefore, I think -- maybe, Greg, do you want to add something? Not really?

Greg Peterson

No.

Martin H. Richenhagen

So we don't want to answer your question, actually.

Operator

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

Michael Shlisky - JP Morgan Chase & Co, Research Division

It's Mike Shlisky filling in for Ann. I wanted to get some more color on your outlook for GSI in 2014. You mentioned all the better growth outside the U.S. Can you maybe break down where you might see the better foreign regions, and where -- which ones might be less good? And of course, also across livestock versus crops. I mean, I am hearing about farmers trying to hold off their crop in certain regions like in Argentina, for example. Can you maybe kind of break down a little further that sort of split?

Andrew H. Beck

Well, sure. In terms of growth, we're looking for pretty strong growth outside of the -- outside of North America in all of our GSI regions. The biggest growth we expect in Europe. As a result, we have some bigger projects that we expect to complete here in 2014, particularly in some Eastern European markets, so we're hopeful that that comes through. But we expect a very strong growth in all the markets. So no down situations in any of those regions. In terms of grain capacity and storage, I think what you're mentioning is important in all of the markets. As we see volatility in these commodity prices, customers do want to have more control over when they're selling their grain and want to add storage capacity and allow them to manage that situation and have more control over when they sell and at what price they sell. And so for that reason, we think that there'll be continued good growth in terms of grain storage, and these market conditions are not too negative as it relates to that. So we expect to see some good grain sales, as well as protein sales here in 2014.

Michael Shlisky - JP Morgan Chase & Co, Research Division

Great. And then quickly on FINAME, do you have a sense as to what the actual rate will be in 2014, or perhaps what is the rate that's underpinning your current outlook for the market?

Martin H. Richenhagen

Yes. We have the numbers, Greg.

Greg Peterson

Yes. So the rates moved up from 3.5% in 2013. So there is actually 2 different rates. There's 4.5% for the smaller farmers or what turns out to be most of the industry, and then the 6% rate is for the bigger farmers. So both of those rates are viewed to be very attractive with inflation kind of in the mid-single digits or upper-single digits potentially. Rates are still very attractive. The real question is around the total amount that's funded by the Brazilian Development Bank. So we're going to watch that very closely. We feel good about the first half of the year. And then as we get closer to the midyear, fiscal year end, we'll know more about the full year.

Andrew H. Beck

You have to recall that this is an election year in Brazil. And so I think that's favorable to the funding of the program and supporting the farmers because that's important to the -- for the election.

Martin H. Richenhagen

There are 2 points you have to have in mind. One is the access, so it's very easy for farmers to get access to those credits. It's not very bureaucratic. And then second, the rates compared to market rates between 12% and 15%. So that means they are really pretty favorable rates we see here.

Operator

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

Steven Fisher - UBS Investment Bank, Research Division

Can you just talk about your visibility to the second half of the year versus the first half? How far out do your order books go, and what has to happen to keep your plan to increase production in the second half of the year?

Andrew H. Beck

It is still very early. We do not have orders that would carry us into the second half, so our forecasts were just based on what our dealers are telling us, what we see in the market. But still early days and don't have a lot of solid visibility in the second half.

Steven Fisher - UBS Investment Bank, Research Division

Okay. So then what are the most important things you're going to be looking for? Is it improved commodity prices? Is it more of the share gains side of things?

Martin H. Richenhagen

Well, the most important factor for our industry is, as you know, farm income, and 2013 was a very good year. So farm income in North America was up substantially and also in most of the other markets, so -- which is a function of the input prices on one hand, and on the other hand, of course, the commodity prices. We think commodity prices will vary in the future, but less volatile than what we saw maybe 20 or 15 years ago. And we are looking into a rather strong market environment. And so therefore, when it comes to the investment activities of farmers, I think we will see quite some activity.

Steven Fisher - UBS Investment Bank, Research Division

Okay. And you mentioned the $170 million of Tier 4 inventory. I think, previously, you were expecting around $125 million. So I'm wondering if you could just help with the difference there. Is a sign of optimism or orders in hand or what's the difference there?

Martin H. Richenhagen

It's the -- basically, the idea behind is to buy as much ahead as possible. And so that's what we did. And the -- let's say, the trade secret, so to say, is where to put it, in which tractors and combines and so on, which we will not share.

Operator

And your final question comes from the line of Adam Uhlman with Cleveland Research.

Adam William Uhlman - Cleveland Research Company

If I could start with a clarification, what are the build rate assumptions for the first quarter that underpins your earnings forecast?

Andrew H. Beck

The what rate?

Martin H. Richenhagen

The build rates.

Andrew H. Beck

Of production? Production will be down 8% to 10% in the first quarter.

Adam William Uhlman - Cleveland Research Company

Okay. Got it. And then when we think about the Europe outlook for this year with the order board being down 20%, so what is the outlook that you have for the bigger markets like Germany of the sales declines that are expected to be offset by the U.K. and Northern Europe?

Andrew H. Beck

We expect those big markets to be just modestly down, so no major changes in any of the markets. So modestly down, Germany, France, offset by some improvement in the U.K. and some other -- the Northern European countries, particularly Finland.

Adam William Uhlman - Cleveland Research Company

And how much recovery do you have in Russian volumes?

Andrew H. Beck

I don't have that in front of me. I think we're expecting a pretty good increase in Russia this year.

Operator

I'd now like to turn the call back over to the presenters for any closing remarks.

Greg Peterson

Thanks, Victoria, and we'd just like to thank everyone for their participation today and encourage you to follow up with me later today if you have additional questions.

Martin H. Richenhagen

I would like to add 1 point here. This was another record year for AGCO and the first time where we reached $6 earnings per share.

Greg Peterson

Thank you.

Operator

Again, thank you for your participation. This concludes today's conference. You may now disconnect.

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Source: AGCO Management Discusses Q4 2013 Results - Earnings Call Transcript

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