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AGCO Corporation (NYSE:AGCO)

Q1 2012 Earnings Call

May 1, 2012 10:00 am ET

Executives

Greg Peterson – Director, Investor Relations

Martin H. Richenhagen – Chairman, President and Chief Executive Officer

Andrew H. Beck – Senior Vice President and Chief Financial Officer, Strategy & Integration & SISU Power Engines

Analysts

Christopher Edwards – Jefferies & Co.

Henry Kirn – UBS

Joe O'Dea –Vertical Research Partners

Michael David Shlisky – JPMorgan Securities LLC

Ashish Gupta – CLSA

Vance Edelson – Morgan Stanley

Andrew Obin – Bank of America/Merrill Lynch

Seth Weber – RBC Capital Markets

Jerry Revich – Goldman Sachs

Lawrence De Maria – William Blair & Company, LLC

Operator

Good morning. My name is Sarah and I will be your conference operator today. At this time I would like to welcome everyone to the 2012 Q1 Earnings Release and Conference Call. (Operator Instructions) Thank you, Mr. Greg Peterson; you may begin your conference.

Greg Peterson

Thanks, Sarah and good morning. Welcome to those of you joining us on the call and over the Internet for AGCO’s first quarter 2012 earnings conference call. We will refer to a slide presentation this morning, which we posted on our website at www.agcocorp.com.

The non-GAAP measures used in the slide presentation are reconciled to GAAP measures in the last section of our presentation. We will make forward-looking statements this morning, including statements that are not historical facts including projections of earnings per share, sales, free cash flow, market conditions, farmer income, harvests, weather, market share, margin improvements, production levels, new product development, factory productivity, investments and facilities in expanding markets, government financing programs, industry demand, impacts of foreign currency, general economic conditions, depreciation, emission requirements, pricing benefits, plant shutdowns, engineering expenses, start-up and market support costs, capital expenditures, and the impact of the GSI acquisition.

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, 2011. 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.

Now, 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. AGCO’s momentum continued in the first quarter of 2012 with the strongest first quarter in our history, we capitalize on improved demand in key Western European markets and continued market strengths in North America, while executing against our important margin improvement initiatives.

First quarter operating margins in our Europe/Africa/Middle East region increased to 11.3%. In North America, the economics for row crop farmers continued to be outstanding and the market demand for large equipment remains very strong. Including the benefit of the GSI acquisition, AGCO sales in North America grew by approximately 59% compared to the first quarter of 2011. Excluding the unfavorable impact of currency translation, North America operating margins expanded to 500 basis points in the first quarter of 2012 compared to the same period in 2011.

Slide 3 summarizes our results for the first quarter of 2012. Adjusted earnings per share for the first quarter of 2012 of $1.21 exceeded our guidance due to better than anticipated market conditions and better performance of operating margins. In the next few quarters, we plan to increase our investments in new product development and facilities and market expansion.

AGCO’s tractor and combine production volumes for 2011 and projected volumes for 2012 are illustrated on slide 4. AGCO’s first quarter 2012 production was up 12% compared to the first quarter of 2011. Strong order boards with increased production levels in our European and North American factories were offset by lower production volumes in South America. First quarter demand in South America was adversely impacted by the dry conditions in Southern Brazil and Argentina, and our production was reduced accordingly.

Our European production benefited from the move forward of Fendt production into the first quarter. The Fendt production schedule in 2012 is more heavily weighted to both the first and second quarters. We expect to have lower production at our plant in Germany during the third quarter to facilitate the transition of our brand new assembly facility in Marktoberdorf.

AGCO’s order board is up between 10% and 25% across all regions at the end of March 2012 compared to March 2011 levels. In 2012, we expect production volumes to be up for the remainder of the year, with higher production in Europe and North America. For the full year of 2012, we expect production to be up 10% to 12% from 2011 levels.

Slide 5 details industry unit volumes by region for the first quarter of 2012. Industry tractor sales in North America were up modestly compared to 2011 levels. In North America, industry sales of high horsepower and utility tractors both increased due to continued positive conditions for row crop farmers and the improvement in the dairy and livestock sectors.

The combined market was down significantly compared to the first quarter of 2011 due to the timing of industry production and due to very high levels of demand seen last year. We expect full-year industry combine demand to be down modestly compared to 2011. Industry unit retail sales of tractors in Western Europe were up approximately 1% in the first quarter of 2012. Strong growth in the key market of France, United Kingdom and Germany were partially offset by declines in Italy and Spain.

South American industry retail tractor volumes declined modestly during the first quarter of 2012 compared to the first quarter of 2011. Dry weather impacted the first harvest in Southern Brazil and Argentina and industry demand was negatively impacted.

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

Andrew H. Beck

Thank you, Martin, and good morning to everyone. AGCO’s regional net sales performance for the first quarter of 2012 is outlined on slide 6. Currency translation had a negative impact of about 4% on AGCO’s consolidated net sales in the first quarter of 2012. Acquisitions, primarily the GSI acquisition, added approximately 11% to net sales in the first quarter of 2012 compared to the first quarter of 2011.

Europe/Africa/Middle East segment reported a net sales increase of approximately 29% excluding the impact of currency translation during the first quarter of 2012 compared to the first quarter of 2011. Growth was highest in Germany, France and the United Kingdom and was partially offset by sales declines in some of the southern European market. The accelerated production in dealer shipments in Germany that Martin referenced earlier contributed to the increase. North American net sales increased approximately 59%, excluding currency translation impacts, during the first quarter of 2012 compared to the same period in 2011. Organic growth was approximately 27% after excluding acquisition impacts.

Sales improved significantly across all major product categories in the first quarter compared to the first quarter of 2011. AGCO’s first quarter net sales in South America grew 7% from comparable 2011 levels, excluding currency translation. Acquisitions generated nearly all of the growth. Organic sales were impacted by drought conditions in Southern Brazil and in Argentina.

Net sales in our Asia/Pacific segment increased approximately 24% in the first quarter of 2012 compared to 2011, excluding the impact of currency and the benefit of acquisitions. Sales growth across Asia produced most of the organic increase. Part sales were $304 million for first quarter of 2012, an increase of approximately 16% compared to the same period in 2011, excluding the impact of currency.

Slide 7 details AGCO’s sales and margin performance. Adjusted operating margins were about 140 basis points in the first quarter of 2012, better compared to the first quarter of 2011. The benefit of increased production volumes and pricing was partially offset by increased material cost and higher engineering and marketing expenses.

Operating margins in the first quarter of 2012 were highest in AGCO's Europe/Africa/Middle East region where they surpassed 11%. Margins improved nearly 300 basis points in the first quarter of 2012 compared to the same period in 2011 due to higher sales and production volumes combined with cost controls and a favorable mix associated with the accelerated Fendt production. In the first quarter of 2012, operating margins in North America, excluding acquisition impact, exceeded 7% due to higher sales and production, a favorable sales mix and cost control initiatives. including the benefit of GSI, North American operating margins reached 8.9%.

In South America region, operating margins were 5.8% in the first quarter of 2012; margins were lower compared to the first quarter 2011 due to expenses associated with acquisitions and increased engineering and marketing expenses associated with new product introductions.

GSI performed well in its first full quarter as part of AGCO. slide 8 details GSI’s sales by region and by product for the first quarter 2012. GSI’s sales grew over 10% in the first quarter of 2012 compared to the same period last year. Sales grew across all regions with the strongest growth in Asia. GSI contributed $0.09 of EPS in the first quarter and we are still expecting approximately 45% of accretion for the full year of 2012.

Slide 9 provides visibility into working capital management over the last few years. Every year, our first quarter operating plan includes a build of dealer and company inventory required for the spring selling season. The inventory build in the first quarter of 2012 was attributable to both the normal seasonality as well as to the ultra production schedules in Europe. Inventories are higher during the transition at our Valtra plant in Finland, where we are installing SAP and at the same point in Germany where we are building a new assembling facility.

At the end of March 2012, our North America dealer month supply on a trailing 12 months basis was lower for combines and hay equipment and higher for tractors than at the same time a year ago. Our dealer month supply in North America was as follows: Tractors were 6.5 month, three months for combine and 7.5 months for hay equipment. Other working capital details are as follows: Losses on sales of receivables associated with our receivable financing facilities, which is included in other expense net or approximately $5.2 million in the first quarter of 2012 compared to $3.6 million in the same period of 2011.

Slide 10 details of our depreciation and capital expenditure trends. In 2012, we expect to increase our capital expenditures to approximately $350 million as we continue to work to meet the Tier 4 emission requirements, refresh and expand our product line, upgrade our system capabilities, improve factory productivity, and complete the expansion at Fendt and establish assembling facilities in China.

Slide 11 addresses AGCO’s free cash flow, which represents cash dues in operating activities less capital expenditures. AGCO’s use of cash in the first quarter of 2012 was stronger than the first quarter of 2011 due to our higher inventory build for the selling season. We expect to generate strong cash flow again this year and plan to continue investing for future growth in the form of engineering expenses and additional investments in our plant and new products. Even after covering increased spending on those strategic investments, we are targeting free cash flow in over $200 million range during 2012.

Our regional market outlook for 2012 is captured on slide 12. Our forecast anticipates continued strong demand on a global basis. In North America, the solid financial position of row crop farmers and the expectation of farm income above historical averages is expected to support demand from the professional farming sector. We also look for improvement in the dairy and livestock sectors, which will help our hay equipment demand.

In South America, we expect elevated level of farm income in 2011 and the clarity around the government financing programs to keep demand at relatively high level. However, dry weather impacted the first harvest in Southern Brazil and in Argentina. We expect the dry conditions to result in a modest decline in industry demand compared to 2012.

Healthy income for grain and dairy farmers in 2012 is expected to keep Western European demand strong. We’re forecasting modest growth in key Western European market, offset by declines in Southern Europe. Better harvest in Russia and Eastern Europe in 2012 are expected to produce robust growth in these markets.

Slide 13 highlights the assumptions underlying our 2012 outlook. We are forecasting price increases of approximately 3.5% on a consolidated basis, offset by about 5% of negative currency impacts. In 2012, expenditures on new product development and Tier 4 emissions requirement are expected to cause an increase in engineering expense by approximately 15% or $40 million.

We also look for new products and our productivity and purchasing initiatives to drive improved gross margins. Our SG&A expense is expected to include expenses associated with site and manufacturing start-up and market support cost amounting to about $20 million for Fendt and $20 million to $25 million for our Chinese operations.

We project that GSI acquisition will be accretive to 2012 earnings per share by about $0.45 per share. The strengthening U.S. dollar is expected to negatively impact 2012 EPS by about $0.20 to $0.25 based on current exchange rates.

Slide 14 lists our view of selected 2012 financial goals. Our order boards remain strong and we are projecting 2012 sales in the $10.2 billion to $10.5 billion range. Forecasted pricing benefits, market share improvement and acquisition impacts are expected to be partially offset by the negative impact of currency translation.

Including significant planned investments in product development, market development and start-up costs associated with our manufacturing projects, we expect to continue to improve gross and operating margins from 2011 levels. we’ve increased our target for 2012 earnings per share to approximately $5.50. We expect increased capital expenditures to be in the $350 million range and our free cash flow to exceed $200 million after funding the expected increase in CapEx.

That concludes our prepared remarks. operator, we are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Stephen Volkmann with Jefferies.

Christopher Edwards – Jefferies & Co.

Good morning. It’s actually Chris Edwards this morning on for Steve.

Andrew H. Beck

Hi, good morning Chris.

Christopher Edwards – Jefferies & Co.

Good morning. A couple of quick questions. Of the China start-up expense that you expect for the full year, do you know how much of that was in Q1 and how much we should expect in Q2 and the second half?

Andrew H. Beck

Right, yes, so Chris, you’ll the expenses associated with our China plant and new marketing organization there kind of ramp up through the year, so we had about $4 million in the first quarter and then going forward in the second, third and fourth quarter somewhere between $5 million and $8 million a quarter for the rest of the year. So pretty close to $20 million to $25 million we have set at the beginning of the year.

Christopher Edwards – Jefferies & Co.

Okay, that’s sounds good. And then the other question I had was on the increase in the sales outlook, you are $200 million to $500 million for the year, I understand you improved your currency translation impact a little bit, but that only kind of accounts for $185 million or $200 million. Where is the rest of that coming from, is that share gains, or is there something else that we should be thinking about?

Andrew H. Beck

I think for the most part we expect the market to be where we expect at the beginning of the year, so we looked at our order boards for the balance of the year and have increased our projections on sales in some markets, particularly looking at Western Europe and North America where we see most of that growth. Also, we are still positive about what’s happening in markets like Central Europe and Eastern Europe and Africa as well where the markets are looking relatively strong this year.

Christopher Edwards – Jefferies & Co.

Okay. But you didn’t really change your overall kind of market outlook, so it’s just more – something on the margin?

Andrew H. Beck

No, what we’re seeing overall is the markets performing, as we said, I think what we are seeing is some movement in mix to our favor. Some of the markets like key markets for AGCO, like UK, Germany and France are performing better than some of the markets that aren’t as important to AGCO like Italy or Spain or markets like that. So I think overall the markets as a percentage change aren’t changing from where we thought, but some of the key markets for us are going to perform better.

Christopher Edwards – Jefferies & Co.

Got you, just the distribution. All right. Thank you very much.

Operator

Your next question comes from the line of Henry Kirn with UBS.

Henry Kirn – UBS

Hey, good morning guys.

Martin H. Richenhagen

Good morning, Henry.

Andrew H. Beck

Good morning.

Henry Kirn – UBS

I’m wondering if you could update progress on GSI and getting the products sold into new markets.

Andrew H. Beck

Well, Henry, we’re making good progress there as we put in our forecast; things are on plan so far. If anything so far what we’ve seen is a little softer results in North America, but offsetting by better results internationally. So to your question, we are seeing very good momentum in establishing GSI in international markets.

We’ve got a number of projects in place to establish better distribution and establish some manufacturing capabilities overseas as well. And so for the most part, we’re staying on plan and really seeing some good conditions, especially in the protein sector in China, where the growth there is very strong and we’re participating well in that market so far.

Henry Kirn – UBS

And then, I know it's not as big category for AGCO, but there is lots of industry chatter about North American combine, could you talk about how the inventories look and do you see any signs of a real cliff coming?

Andrew H. Beck

Henry, I think we said in our comments that we have about three months worth of inventories. So that’s really good shape for us, anecdotally as you said, we're not huge players in the combine market. So we don't have as much visibility as some of our competitors, but we're on plan for our sales for combines and don't expect to see any problems for us in 2012 related to combines in North America.

Henry Kirn – UBS

That's helpful, thanks a lot. Good quarter.

Martin H. Richenhagen

Thank you.

Operator

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

Joe O'Dea –Vertical Research Partners

Good morning. It's Joe O'Dea for Rob. First on Europe, could you just talk a little bit about share, I know the percent the high horsepower tractors had very solid share in 2011, but it looks like that may have moved up, but in U.K. and France, are there other things going on to move your share higher?

Martin H. Richenhagen

Well, actually I think that's the question of technology and demand for technology. my vision for the future is that markets like England, France and Spain will have a higher demand for high-tech tractors Fendt mainly in the high horsepower category and therefore I'm rather optimistic.

Joe O'Dea –Vertical Research Partners

Okay. and is anything accelerating ahead of plans going into this year or pretty much on course with respect to share and mix?

Martin H. Richenhagen

Everything as scheduled.

Joe O'Dea –Vertical Research Partners

All right. And then second question, just focusing on Western Europe, where do you think the market is relative to peak? And when you look at Eastern Europe, how much pull through of used equipment out of Western Europe is contributing to surge demand loss?

Martin H. Richenhagen

I think Western Europe is on a normal level, we have seen in the past, and levels we will also see in the future. And Eastern Europe is the area where one could imagine more additional growth and the main areas or the main regions are the countries of Central Europe and then Russia, Ukraine, Kazakhstan, Benelux.

Joe O'Dea –Vertical Research Partners

Okay, thank you.

Martin H. Richenhagen

Thanks.

Operator

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

Michael David Shlisky – JPMorgan Securities LLC

Hey guys. It’s Mike Shlisky filling in for Ann.

Martin H. Richenhagen

That’s not Ann.

Michael David Shlisky – JPMorgan Securities LLC

It’s definitely not Ann. I saw you guys had a pretty strong order boards in the first quarter, just wanted to know what have dealers and farmers told you about their orders, especially for tractors although later in the year, given the big increases in North America for the row crop planting. And do you expect any early delivery requests this year because of some early planting in certain parts of North America.

Martin H. Richenhagen

Yeah, we have some little upside potential here.

Andrew H. Beck

Yeah, I think that what we’re seeing is a good retail order board that matches our good order board that we have with our dealers, so that’s a positive sign. And also to your point, there is some pressure to get some of this out because of the early planting, but we’re hopefully going to be able to deliver and meet all our customer requirements.

Martin H. Richenhagen

Our Jackson Tractor and the brand new Jackson Tractor assembly factory will open in May, so that will help as well.

Michael David Shlisky – JPMorgan Securities LLC

Got it, got it, thanks. And then secondly, it looks like you had a pretty decent quarter at GSI. So can you may be just comment on GSI’s margins, how they came out versus your expectations and maybe if you could change any expectations for margins for that group during the rest of the year?

Andrew H. Beck

GSI, their margins for the first quarter were about 14% excluding the amortization of intangibles. What we expect on a full-year basis is north of 15% and that’s about in line with what we had expected at beginning of year. So no change on margins and they’re performing to our expectation so far.

Michael David Shlisky – JPMorgan Securities LLC

Great, and if I can just squeeze in one last one here about the Brazilian incentive programs that were extended, just want to make sure are those to the (inaudible) products for the same farmers or has they’ve been changed at all??

Andrew H. Beck

No, (inaudible) everything is for the same program, same customers, everything the same logistics has been extended till the end of 2013 and the interest rates have been lowered slightly by about 50 basis points from where they were.

Martin H. Richenhagen

Those are two good news, one is that the conditions improved and the second that we now have for the customers have kind of the visibility through the end of 2013.

Michael David Shlisky – JPMorgan Securities LLC

Great, excellent. Thanks so much, guys.

Operator

Your next question comes from the line of Ashish Gupta with CLSA.

Martin H. Richenhagen

Good morning, Ashish.

Ashish Gupta – CLSA

Hi, guys great quarter. Just a few questions, on the fourth quarter call you had mentioned that you’d look for 1Q to be flat year-over-year on an earnings basis and that your 2Q would be exceptionally strong, because of the downtime in Finland and in otherwise, just wondering if you were still – how much of the demand that we saw in 1Q, what are your expectations for 2Q now in the first half of the year, second half of the year relative to what you guys said in the last call?

Martin H. Richenhagen

We raised our guidance because we think that for the second quarter will be strong.

Ashish Gupta – CLSA

Okay.

Andrew H. Beck

Absolutely, yeah, we were a little cautious in our first quarter, because of some of the transitions we are working on and we are able to get more production out into our orders, hands a little ahead of schedule, which helped us in the first quarter, but second quarter, continues to look in line with what we had expected and really no change there.

Ashish Gupta – CLSA

And then just on GSI, I'm just wondering you had mentioned before that a lot of your dealers are eager to distribute GSI in your initial conversations, wondering one, how the progress is going there and if there’s still a lot of interests and in terms of the sort of $1 billion revenue target you had initially planned on, I know it's still pretty early, it’s only been about six months I guess since you guys had initially launched or looked at or announced the transaction, are you thinking that that $1 billion revenue target might be light now?

Martin H. Richenhagen

Well, I think from a first question, in terms of distribution, it’s still early, but we do have a lot of interest from dealers outside of North America to help us in distributing that product. We’re anxious to advance ourselves with that product and markets like Eastern Europe, Asia, Africa and we think that from share distribution we’ll be effective there and also in Brazil, which is a much more established market we think our strong network in some cases can help us. So we’re still moving forward with those discussions and activities as we continue to bring GSI and to AGCO on a more formal basis.

In terms of our sales forecast as you say it’s still very, very early, but there I guess I’d answer, it’s been there is no negative surprises so far only good positive surprises where we see opportunities to work together with GSI and we’ll stay with our $1 billion target, but we’re confident that we’ll achieve that.

Ashish Gupta – CLSA

Great. Thanks a lot guys. Have a great day.

Operator

Your next question comes from the line of Vance Edelson with Morgan Stanley.

Vance Edelson – Morgan Stanley

Hi, guys thanks for taking my questions, if we look at sales America the industry wide unit sales declined albeit half of high levels a year earlier and yet your own sales in the region where described as relatively flat and therefore relatively better even excluding M&A and FX, so that would suggest you’re raising prices or you took market share or maybe a combination of the two, could you just elaborate on that?

Andrew H. Beck

There was a little pricing there; I’d say if you just look purely on a volume basis, it was pretty flat with the prior year. So we perform relatively well in the first quarter on a volume basis.

Vance Edelson – Morgan Stanley

Okay, great. And then the CapEx in the quarter and the guide for the year, it’s a little higher than historical levels, is that 325 to 350 for 2012, is that a good run rate for the out years kind of model or could you describe if there is anything unique to 2012 in terms of the build out, is that really more of a 2012 event?

Martin H. Richenhagen

That’s a good number to be used.

Andrew H. Beck

I would agree with Martin. We have some significant projects that we’ll still be working through in 2013 and 2014, particularly our expansion into Asia and some other major projects associated with new products and expansions into Eastern Europe as well. And so we would expect those levels of capital would have probably to be likely to be stand at least through next year.

Vance Edelson – Morgan Stanley

Okay, got it. And then just one more question if I may, could you talk about whether operating [Audio Gap] good way to look at it?

Martin H. Richenhagen

You do have some seasonality between quarter, so as typical what you see is that our margins will look stronger in the second quarter, and then in the third quarter it dip back down that’s when we have a lot of our factory shutdown for a summer shutdown period. So we don’t have its high production there. So the margins come back down and then it come back to more of an average basis in Q4. So I would encourage you to look at into the seasonality of our margins, but most of your comments are right on.

Vance Edelson – Morgan Stanley

Okay, it makes sense. Thanks a lot.

Operator

Your next question comes from the line of Andrew Obin with Bank of America.

Andrew Obin – Bank of America/Merrill Lynch

Hi, yes, good morning guys.

Martin H. Richenhagen

Good morning, Andrew.

Andrew H. Beck

Good morning.

Andrew Obin – Bank of America/Merrill Lynch

Hi, how are you? Just first a question on your European guidance. Given the strength Combines up 24 in Q1, Tractors up a little bit and the strength of your order board, does your guidance for Europe imply weakness in the second half of the year?

Andrew H. Beck

No, it does not.

Martin H. Richenhagen

I think the comps get a little tougher, but now we’re not expecting any weakness in the market.

Andrew Obin – Bank of America/Merrill Lynch

Okay. On GSI, can you walk us through, you said, $0.45 of accretion for the year, $0.09 in Q1, how well that work out through the year, how should we model it?

Andrew H. Beck

For GSI, their best quarters are the second and third quarters of the year, and then in the fourth quarter, it’s actually, could be even slightly dilutive in the fourth quarter, that's their seasonally weak quarter.

Andrew Obin – Bank of America/Merrill Lynch

Got you. And just a final question on, European sales for your guys were very strong; obviously you have the strongest tractor brand in Europe. Did you see any pre-ordering ahead of your shutdowns at Fendt? Did you adjust your marketing to make sure you're fully capitalized on strong demand in the first half of the year, given that you will face a shutdown as you revamp the factory?

Martin H. Richenhagen

The answer is yes. So it’s all organized all our dealers know and so that's all in good phase.

Andrew Obin – Bank of America/Merrill Lynch

Terrific. Great quarter guys. Thanks a lot.

Martin H. Richenhagen

Thank you.

Operator

Your next question comes from the line of Seth Weber with RBC Capital Markets.

Seth Weber – RBC Capital Markets

Hey, thanks good morning.

Martin H. Richenhagen

Good morning, Seth.

Seth Weber – RBC Capital Markets

On the South American margins, they came in a little bit light from what we were thinking, is that primarily due to the production issue or are you seeing anything on the competitive pricing front there?

Martin H. Richenhagen

We have a couple of things going on, Seth. Andy talked a little bit, comments about the impact of acquisitions, and that actually had a pretty big, was a pretty big number. If you look at both the seasonality of the companies that we bought as well as some one-time costs that made up probably close to 150 basis points of negative impact to the quarter. And then as you throw in some engineering, additional engineering expense and some marketing and product development expenses that those kind of contributed to the decline year-over-year, but if you look at on the gross margin line, we are actually flat year-over-year, so some of these kind of one-time items that I’m calling out made a big difference and we do expect for the full year to have margins very similar to last year. So a little bit of light in the first quarter and then we expect to see it improved the rest of the year.

Seth Weber – RBC Capital Markets

Okay. That’s helpful. Thanks Greg. And then on the Europe business as you do expand production transition should we expect a margin impact there in the second half of the year?

Martin H. Richenhagen

What we expect is that we said we pulled some sales forward and expand over a normal flow of production and sales and we’ll see that in the third quarter where the sales for the Fendt product will be lower and that does affect our mix a little in the third quarter, so we’ll see some impact in the third quarter as a result.

Seth Weber – RBC Capital Markets

Okay, and then just lastly on the tractor inventories being up in North America, can you just frame that for us, the 6.5 versus what and your level of comfort there?

Andrew H. Beck

Yeah, it’s about somewhere between half a month and a month and to be honest some of that was intentional, we saw the market strong and if you look at our sales for the quarter our high horsepower tractor sales were up close to 30 or actually over 30%. So a lot of that was kind of getting ready for what we think will be a strong remainder of the year, and so we historically have brought, our tractor inventories in North America have historically been a little higher than industry average, since we were still sourcing from Europe. So as we begin the transition as Martin talked and ramped up for plant in Jackson, Minnesota you should expect to see our North American tractor inventories go down over time.

Seth Weber – RBC Capital Markets

Okay, thank you very much guys.

Martin H. Richenhagen

You bet.

Operator

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

Jerry Revich – Goldman Sachs

Good morning.

Martin H. Richenhagen

Good morning.

Jerry Revich – Goldman Sachs

Can you update us on the timing of the Argentina local capacity ramping and board approval process or where do we stand?

Martin H. Richenhagen

We actually have a strategy in place and we will meet with the President this month most probably, and we will come up with an official press release about what we plan to do.

Jerry Revich – Goldman Sachs

Okay. And in terms of, Andy, the performance in the quarter where pricing and material costs, can you just help us through that and just remind us if you’ve changed your material cost forecast as part of your guidance revision?

Andrew H. Beck

Yeah, Jerry, in terms of pricing, we’re still looking at about 3.5% pricing for the year and that’s about what we got in the first quarter. We saw then that gave us a benefit of – if you look at material cost increases, gave us a benefit of somewhere between 75 and 100 basis points positive in the quarter. We look for that positive benefit to continue for the rest of the year, obviously absent any major changes in key commodities like steel for us.

We also benefited in the quarter as we talked about from higher production levels and that was probably close to 50 basis points and then some of the acquisition benefits we talked about and some of the mix benefits especially in North America contributed positively as did FX. So we had a number of things that helped on the gross margin line and then you as you move down, we were penalized for the amortization, the additional amortization a share per GSI and then some additional long-term incentive pay that also caused a slight impact to our margins. so that kind of, is a summary of what the impacts were for our margins this quarter.

Jerry Revich – Goldman Sachs

Thanks, Greg. And can you say more about the prior question touched on this, in Europe, you’re looking for flat end market, your order books are looking a lot better than that, is that just a function of you want one more quarter under you belt, before you raised that end market outlook or are you concerned about this long trajectory of order growth?

Martin H. Richenhagen

No. I don't think we're concerned about the market from that sense, I think again, it’s there are certain markets that are doing better offsetting other markets that are doing worse. So overall, you don't see the improvement, but in some of our key markets, we are seeing a improved market condition and that's reflective in our outlook.

Jerry Revich – Goldman Sachs

Okay, thank you.

Operator

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

Greg Peterson

Good morning James.

Unidentified Analyst

Hi this is Andrew (inaudible) on behalf of Jamie Cook.

Martin H. Richenhagen

I forgot.

Unidentified Analyst

I know, I’m sorry about that. so I just had a quick question everyone is kind of give you guys a pretty good run down, of all the key questions, so I just want to see if you can delve a little bit more into South America. You kept that guidance the same, but commented on some of the drier conditions there. can you talk a little bit about why – if there is any more risk there to that industry outlook and like kind of what you guys are seeing at your level for AGCO, what we can expect throughout the year?

Andrew H. Beck

Sure. As you say appropriately we did expect – we did see some weaker conditions here in the first quarter as a result of the dry weather conditions. We’re hopeful that the balance of the year in South America has improved as farmers have their next production to be more successful and so that’s what we’re hopefully counting on also the areas in the Northern part of Brazil [corn as] affected by weather and are doing quite well. And then lastly this extension of the financing programs and the lowering of the rates, we would expect to help demand in the balance of the year as well.

Unidentified Analyst

Okay, that’s helpful. I don’t have anything else, so thanks a lot and great quarter.

Andrew H. Beck

Thank you.

Operator

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

Lawrence De Maria – William Blair & Company, LLC

Hi, good morning thank you.

Martin H. Richenhagen

Hi, Larry.

Lawrence De Maria – William Blair & Company, LLC

And related to the EAME segment, can you just break out maybe Eastern Europe and Russia for us. And then secondly it relates to segment, if I’m hearing you guys correctly second quarter margin should be similar to better than the first quarter, is that right? Or should we expect decline question from the high level?

Andrew H. Beck

First question on Europe, Africa, Middle East; Western Europe is roughly 85% of that, 10% Central and Eastern Europe and maybe a little over 10% Central and Eastern Europe and a little less than 5% is Africa and Middle East, so that gives you a breakdown. And your other question Larry is about?

Martin H. Richenhagen

Margins.

Andrew H. Beck

Margins for the second quarter, should be higher than what we see in the first quarter.

Lawrence De Maria – William Blair & Company, LLC

Okay, got you. So all the segments presumably or especially Europe.

Martin H. Richenhagen

No. More when you’re looking at North America and South America.

Lawrence De Maria – William Blair & Company, LLC

Okay, and then slides down for EAME?

Martin H. Richenhagen

Flattish for Europe.

Lawrence De Maria – William Blair & Company, LLC

Okay, that’s helpful, thanks. And then just secondly, for GSI $0.09 accretion looks to be inline, what you guys said previously about 20% (inaudible) in the first quarter? But as far as synergies go, you guys didn’t factor in much and didn’t change the guidance. Have you guys found or assessed any further synergies inside any buckets of improvement or factory shutdown or things like that that can help?

Andrew H. Beck

No, we haven’t changed our business plan associated with GSI. We have found opportunities to help them on the sales side. We found opportunities to co-locate some of their operations into our operations. So you can call those synergies. They’re not cost cutting, where we’re closing anything. These are where we’re going to optimally grow the business and that’s where we’re focused on with GSI.

Martin H. Richenhagen

There are no shutdowns or head count reductions planned.

Lawrence De Maria – William Blair & Company, LLC

Okay, very good, thank you.

Operator

There are no further questions. Presenters, do you have any closing remarks?

Andrew H. Beck

Yes, thanks Sarah. I just would like to thank everybody for their participation today and I would encourage you to follow-up with me later if you have additional questions. Thanks and take care.

Operator

Thank you ladies and gentlemen for participating in today’s call. You may now disconnect.

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