AGCO Corporation (AGCO) Q4 2007 Earnings Report, Transcript and Summary

Good morning. My name is Kimberly, and I will be your conference operator today. At this time I would like to welcome everyone to the AGCO Corporation 2007 Fourth Quarter Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to Mr. Richenhagen, President and CEO.

Hi. This is Greg Peterson, I'll start off Kimberly, and I would tell to wish everyone good morning, and thank you for joining us for AGCO's fourth quarter 2007 earnings conference call. During this conference call we will refer to a slide presentation. The slide presentation, earnings press release, and our financial statements are posted on our website at agcocorp.com in the Investors and Media section The non-GAAP measures used in the slide presentation are reconciled to GAAP measures in the appendix to the slides. On the call with me this morning are; Mr. Martin Richenhagen, our Chairman, President, and Chief Executive Officer; and Andy Beck, our Senior Vice President and Chief Financial Officer. Before we get started this morning, let me remind you that during the course of this conference call, we will make forward-looking statements, including some related to future sales, earnings, production levels, supplier constraints, farm income, working capital improvement, cash flow, and strategic initiatives. We wish to caution you that these statements are predictions and that actual results 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 31st, 2006. These documents discuss important factors that could cause 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. I will now turn the call over to Martin.

Good morning, everybody. I think I am delight of the breath taking performance of AGCO Corporation I have lost my voice this morning. I am sorry for that. Thank you, Greg. Good morning again. Please turn your attention to slide 3, where I'll begin my remarks. You can see from the slide that we had a strong finish to the year. We've posted a record quarterly sales, record earnings and record cash flow. Our sales increased approximately 33% compared to the fourth quarter of 2006, and our adjusted earnings per share in the fourth quarter were up 100% compared to the fourth quarter last year. We used our well positioned plans to leverage very healthy market conditions and produced strong results in the quarter. Our Europe, Africa, Middle East segment continues to outpace market growth and improve it's profitability. In Europe Massey Ferguson, Valtra and Fendt all performed well in 2007, with Fendt and Valtra both showing the best sales and margin improvement. The recovery of Brazil's farm machinery industry continued in the fourth quarter and was the key to the 59% growth we saw in our South American sales excluding currency translation. In North America our record farm income produced an increase in our sales of nearly 30%. Our profitability showed improvement in both the fourth quarter and the full year of 2007. Volume growth improved sales mix and ongoing cost improvements all contributed to expansion in our operating margins for the fourth quarter and for full year compared to the same period in 2006. In the fourth quarter AGCO's supply chain continued to feel the stress produced by the strong global demand for industrial and farm equipment, and we see some of that also this year I guess. We didn't experience any extreme issues as we finished 2007, but we are working with our existing suppliers to prepare them for expected demand levels and they also working to qualify new suppliers to mitigate further supply constraints. On slide 4, you can see our production schedules for 2006 and 2007. Tractor and combine production levels were up 27% in the fourth quarter of 2007 compared to the fourth quarter of 2006. Production was up to support the strong growth in global demand. In both Europe and South America our production matched retail demand during 2007. Production for the North American region was below retail demand, and we saw further improvement in our dealer inventories at year end. We finished 2007 with production of tractors and combines of approximately 20% compared to 2006 levels. Our account 2008 forecast calls for production of tractor and combines to increase 5% to 8% compared to 2007 levels, in order to satisfy the forecasted increase in the global market demand. Slide 5 details industry retail farm equipment volumes by region for the full year of 2007. Industry tractor sales in North America were 1% compared to 2006 levels. We continue to see declines in tractors under 40 horsepower and sales growth in all categories above 40 horsepower. The highest growth rates secured in the over 100 horsepower segment. The combine market has grown over 13% in the full year of 2007 compared to 2006, and AGCO's total unit tractor sales were down in the full year of 2007 due to the market weakness in compact tractors. However, AGCO unit sales of tractors over 100 horsepower were high-end 2007 compared to 2006. AGCO had strong growth in combine and hay products sales during the full year of 2007. For 2008 we expect a record level of U.S. farm income in 2007, and continued high commodity prices in 2008 to produce continued growth in the North American market. Industry tractor volumes were up approximately 4% in Europe during the full year of 2007 versus last year. Strong market conditions in Central and Eastern Europe, the UK, France and Scandinavia upsetting weaker market in Spain and Italy. Our forecast for 2008 calls for market conditions in Europe to remain healthy as continued strong growth in Central and Eastern Europe offset some softness in Western Europe. South American industry tractor volumes increased significantly in 2007. Brazil's industry tractor volumes were up 53%, and Argentina's tractor sales increased 34% compared to the full year of 2006. Combine sales more than double in Brazil and also showed improvement in Argentina. In 2008 we expect the market in both Brazil and Argentina to remain strong and contribute to an increase in South America industry demand compared to 2007 robust levels. Globally the markets are very healthy, and our order books remains ahead of where we stood at this time last year. I will now turn the call over to Andy Beck, who will provide you more details on our results.

Thank you, Martin. Slide 6 details AGCO's regional net sales for the fourth quarter and full year of 2007. The bar graph shows our regional sales performance excluding the impact of currency translation. For the fourth quarter of 2007, translation had a positive impact of approximately 12%. Year-to-date translation for the full year of 2007 and had a positive impact of approximately 9%. During the fourth quarter, the Europe, Africa, Middle East segment had sales growth of approximately 13%, excluding the impact of currency translation compared to the fourth quarter of 2006. The growth in our EAME segment in the fourth quarter was led by France, Germany, the UK, Spain, and Eastern Europe. North American sales increased approximately 28%, compared to the fourth quarter of 2006 excluding currency. We were encouraged by the progress made by our dealer inventories and with our strong sales growth. Increased sales of high horsepower tractors, bailers and hay equipment were responsible for the increase in the fourth quarter. 2007 full year sales in North America increased approximately 15% excluding currency. Fourth quarter sales in South America improved approximately 59% from last year, excluding currency translation. In Brazil, we saw a significant pickup in sales to row crop farmers and continued strength in the sugarcane sector. Sales in Argentina increased approximately 65% excluding currency where higher commodity prices have improved market demand. Sales in our Asia Pacific segment increased approximately 6% in the fourth quarter compared to 2006 excluding currency. For the full year sales were up 3% compared to 2006. Part sales in the fourth quarter of 2007 were $226.5 million up 15% compared to the same period in 2006 after removing the impact of currency. Growth was strongest in Europe and North America. For the full year of 2007 part sales were $883.6 million compared to $752.8 million in 2006. Slide 7 highlights our sales and margin performance. Operating margins for the fourth quarter and full year of 2007 were up from 2006 levels due to sales growth, improved product mix, and cost control initiatives partially offset by currency impacts primarily in North America. Our EAME markets, which reached 10.4% in the fourth quarter finish the year up 165 basis points compared to 2006 full year operating margins. We were able to accomplish the margin improvement while we increased research and development expense nearly 50% in Europe, Africa, Middle East during the quarter. We saw a strong margin improvement in our Vlatra and Fendt brands, which both have been experiencing growth in the high horsepower's tractor segment. Strong volume growth in our South America business produced operating margins of 9.3% for the full year of 2007 an improvement of approximately 240 basis points compared to the full year of 2006. In the fourth quarter our margins felt pressure from two sources. First, currency impact associated with sales of equipment, manufactured in Brazil, and exported to other countries in South America. And second acquisition impacts from our SFIL acquisition. Operating margins in North America while improved in the fourth quarter continue to be pressured by the appreciation of the Brazilian Riyal and the Euro on the Brazilian and French tractors sold in North America. Net income in the fourth quarter of 2007 also benefited from a reduced tax rate primarily related to improved results in North America and Europe. We expect our 2008 effective tax rate to be in the mid 30% range. Turning to the next slide, working capital continues to be an important focus for us as we concentrate on improving the returns on our assets. Slide 8, reflects the progress we've made and reducing our investment in inventories and receivables. We finished 2007 with our working capital to sales ratio at 8.4%. Our business volumes grew considerablely in 2007 sales for the full year were up over $1.4 billion compared to 2006, and we look for more growth in 2008. However, as a result of our focus working capital management that began in 2006, inventory levels ended 2007 approximately flat with last year when you exclude currency impacts. In North America our dealer inventory month supply has improved for tractors, combines, and hay equipments. At the end of December 2007 our dealer month supply on a trailing 12 months basis were as follows; approximately five months for tractors, four months for combine, and five and half months for hay equipment. Other working capital details are as follows; outstanding funding under our accounts receivable securitization programs was approximately $446.3 million at the end of 2007 compared to $429.6 million at the end of 2006. Wholesale interest bearing receivables transferred to AGCO finance our retail finance joint venture in North America as of the end of December 31, 2007, were approximately $73.3 million. Losses on sales receivable primarily under our securitization facilitates, which is included in other expense net or $10.6 million and $36.1 million for the fourth quarter and full year of 2007 respectively these amount compared to $9.6 million and $29.9 million for the same period in 2006. Slide 9 addresses AGCO's free cash flow, which represents cash flow from operations less capital expenditures. Free cash flow for the full year of 2007 improved to $363 million. In December we shared our plan with you to invest more in 2008 for future growth. We expect to increase research and development expense, new product related capital expenditures, as well as system development costs. We are projecting that 2008 will be another year of strong free cash flow even after covering our increased investments, and receiving a smaller benefit from our working capital initiatives. Slide 10 shows the improvements we have made to our capital in our net debt-to-capital ratios have improved over the last two years our net debt-to-capital ratio was approximately 5% at year end 2007 compared to approximately 31% at the end of 2005. Total debt was $697 million at the end of the fourth quarter. We're pleased with the progress we've made on our balance sheet and overall leverage, first importantly, we believe we're in good position to find our strategic investment requirements in the future. Interest expense net for the fourth quarter of 2007 was $6.5 million versus $14 million in the fourth quarter of 2006. In the full year of 2007 interest expense was $24.1 million compared to $55.2 million with the same period in 2006. The interest savings were generated by debt refinancing, lower debt levels, and increased interest income earned in 2007 compared to 2006. Slide 12 quantifies the impacts of our 2007 and 2008 initiatives. In 2008 we'll be making significant investments in our future in the form of increased engineering expenses to support a growing list of new product programs, cost associated with our European system initiative, and spending associated with developing new markets and improving our distribution. We'll be relying on sales and margin growth the pay for these investments while generating an improvement in earnings in 2008 compared to 2007. Our initiative spending is focused on long-term growth and profitability improvements for the company. Slide 12 list our view of our selected 2008 financial goals. We are projecting 2008 sales to increase 11% to 13% driven by pricing, strengthening markets in North and South America and Eastern Europe, market share improvement, and the impact of currency. Our 2008 results are very important to us however we're also focused on AGCO'S long-term profitability. We are targeting 2008 EPS of $2.75 with a goal to reach $3 per share while making very significant investments in our long-term initiatives. We expect increased capital expenditures to be in our $190 million to $200 million in our free cash flow to remain strong in the $175 million to $200 million range. For the first quarter of 2008 sales growth has expected to be in the 15% to 20% range, and while we are projecting full year 2008 EPS growth in the 10% to 20% range, we expect first quarter 2008 EPS growth in the 40% to 50% range. That concludes our comments. Operator, we are now ready to open the call for questions. Question And Answer

[Operator Instructions] Your first question comes from the line of Jamie Cook of Credit Suisse.

Hi, good morning.

Good morning.

Congratulations on a nice quarter. My question I guess has to do with the guidance for 2008, at your December analyst meeting you sort of suggested that EPS should be up 25% off of the base in 2007. And the base came in higher and you are keeping the EPS number the same. So should I view your guidance is an actual... should I view this as your... as basically you're are lowering guidance because I would have assumed we should have taken the higher base in growing EPS 25% off of that?

No. You should see it as a kind of conservative guidance and the reason for that is that previous management was talking about the $3 EPS for many, many years and unfortunately there were a good reasons why they never could make it. And this actually then wasn't that well received by you guys, and therefore I and my team we personally decided to be more on the conservative side, and we actually want to make sure that 2008, we will reach the $3 plus maybe, but we want to be conservative and want to make sure that you don't get carried away.

Let me ask another question, If I use your... I think you said in your prepared comments that your tax rate will be in the mid-30s. I am taking your interest expense down. If you seen other expenses sort of flat with 08. I mean that implies that your margins at the mid-point of guidance would be down to flattish depending on how you play with the model I guess why wouldn't your margins be going up. Are there any mix issues or anything else that I should be aware of when I am thinking about 08 versus 07?

No, I believe that the way we have our model rolling up and our expectations as we will see some margin improvements at the gross margin line. Some of that will be offset a little on the engineering and other investments that we talked about. The $50 million of additional R&D and system project investments, as well as the distribution expenses that we have, but we are certainly anticipating that our operating margins will be improved in 2008 over 2007. So not sure where the disconnect is, but we are expecting volume growth, as well as the margin improvement as well. The margin improvement is held back a little again by currency or we even have a higher number in 2008 then 2007.

And then just last what are assuming for... and how should we think about North America potentially achieving profitability in 08?

I think as we said in December we are making lots of improvements in our North American operation, but they constantly get pushback, back down by the impact of currency. We are going to expect that situation to again occur in 2008, where we don't expect to see significant improvement in the earnings in North America all because of currency you know, currency is going to impact us probably in the $30 million to $35 million, if you look at where the exchange rates are today, and the fair amount of that is in North America, and so as a result we are making improvements in the base operations of the company in North America, but are struggling to offset the currency, but we'll try to keep it flat to maybe a little better, just continue to reiterate that currency that although it impacts our North American operation they are offset primarily in our Europe, Africa, and Middle East business where we are getting the benefit of currency translation on the stronger Euro versus the Dollar on our European profits, as well as we are starting to see more and more of our product that's exported from our U.S. plants into Europe, and they are enjoying better margins on those products, so they are particularly bailers and some combine.

Thank you. I'll get back in queue.

Your next question comes from the line of Ann Duignan of Bear Stearns.

Hi. Good morning, guys.

Good morning, Ann.

I just wondering to step back again and talk about the outlook, I think you said that you are looking for EPS growth of about 40% in Q1 is that correct?

40 to 50, yes.

40 to 50. Now given that you've guided for full year 10 to 20 let's take the mid-point 15 that implies that somewhere in the back half of the year you're expecting earnings to be done somewhere between 20% and 25% for both Q3 and Q4. In our world just looking at the fundamentals in your industry that seems a little bit ridiculous, what would have to happen Martin for your earnings to drop so quickly and so negatively in the back half of the year?

Well let me handle that because there are you have to think back at what happened in 2007 a little to give you some perspective. First of all when the... those percentages are high, but they on the lowest quarters we have in terms of EPS first quarter is seasonally low sales and earnings quarter so. But, think back in first quarter 2007 we talked about the Fendt business ramping up productions slowly of its 900 series new product introduction, and we also had some issues with our engine supplier in the first quarter. So we did not have kind of a normal amount of sales in Fendt in the first quarter. In 2008 we expect to see that be normal spread of sales and look forward for the year. So if you recall in 2007 we had a kind of a normal... a lower than normal sales level in the first quarter, and then we caught it back up primarily in the third quarter and had a very strong third quarter as we got that production through and met our customer's demand. And so I think what you'll see in 2008 is a shifting back to more normal spread, so the first quarter is going to look better as a result of that and the third quarter is going to look worse.

Yes, but then 20% or 25% because of Fendt not in my mathematical model it's possible. Can we talk a little bit about the stimulus bill, bushes [ph] stimulus package. If that were to take effect with accelerated depreciation and a higher limit on Section 179, could you guys take up production to meet stronger demand in back half of the year in the U.S. or are you at capacity limitations right now?

We do not have capacity restrictions.

Okay. So if we did get a stimulus plans and we've saw a demand pick up in the U.S. as we did in 2004 when accelerated depreciation was expiring last time, you will be able to take up your production schedules?

Yes. I know the assumption that also I was... that we wouldn't face problems on the supply chain.

Okay. So your outlook is not constrained by your capacity?

No.

Okay. Thank you, I'll get back in line.

Your next question comes from the line of Joel Tiss of Lehman Brothers.

Well, congrats.

Good morning.

I wonder if you could just talk a little bit about in the fourth quarter and this may not be fair, but looking at, at what the year did and said and C&H also. It seems like the pull through into your profitability wasn't as strong as we saw in some of those other guys. Is that, can you give us a little color there. Is that due to mix more international or anything in there you can help us with?

Well I think the only think that I would point out Joel is that the currency did impact us pretty significantly. We indicated in our comments that in South America we had some impact to some lower margins on some of the products that we sell. We produced in Brazil, but sell into the other South American markets. Those sales are typically... our pricing is typically dollar based and so we usually can catch back up, but we didn't see an impact in the fourth quarter, and so our estimate is that margins were impacted by about seven-tenths of the percentage point in the fourth quarter. Obviously, again offset by the currency translation benefit of the higher sales. So that would be the main things other than that we did have some issues with supplier delays and inefficiencies, but I would not say that those were very significant, but it did cost us some minor amounts. But other than that I would say it was a fairly normal quarter with performance that we're very pleased with.

Okay. Can you also zero in on Brazil for a second because it seems that like C&H just forecast this for Brazil to be up more than 50% in 08 and for deal?

Ifyou want to talk about run DN and C&H, please call them.

Okay, okay. I'm just saying that there's a big divergence between what those two guys are looking for and I want --

Yes,it's not something we want to discuss with you.

Okay. And can you talk little bit about what the focus of the new product introductions are they are on the small side or the larger side and geographically, can you help us with that too? Thank you.

Well on new products, Joel?

Maybe...

New products it's across the board, we've got some of the longer term new products or some new products that we don't even have now right now sugarcane, harvester, forge harvester in Europe where R&D expense is for some high horsepower tractors that will be introducing at our Bouvet facility this year that we are very excited about. We also have some R&D particularly in the harvesting section of Europe relating to some new combine offering. So it's really across the board, it refreshing our product lines, adapting them to the emissions requirement, as well as some of the newer products that I touched on just now. In terms of the Brazilian industry you know, they had a market that was almost at their peak levels this year, so I would be extremely surprised if the market increased 50% that would be well above any market that they have ever seen in that market, so I think that our forecast is supportable.

Okay. Thank you very much.

Your next question comes from the line of Terry Darling of Goldman Sachs.

Thanks. Good morning. Andy wondering if you can quantify for us what the FX impact on operating income in 2007 was you had mention that the 9% of the revenue line, and then what your guidance is assuming for 2008?

Okay. For 2007 again on the margins it impacted us about a half of percentage point, but in terms of our overall operating income or EPS it was slightly positive because of the translation benefit. So we picked up probably $0.03, $0.04 a share as a result of currency in 2007. In 2008 we expect again to have margins impacted by about 0.5%, but from an earnings standpoint to be fairly neutral maybe at least right now our model suggest that it will be loosing $0.03, $0.04 a share as a result of currency.

Okay. And then I'm wondering on your discussions around supply chain stress if you can characterize for us what you think that level of stress would be in 08 versus 07 is it the same is it alleviating, could it get worse, take us through your views on that?

Well actually we faced some problems with various suppliers all over the world so to say I think first of all we could fix some of those problems we also identified some other sources in order to be less depending from some suppliers that didn't perform that well, and therefore I think we'll be in a position to fix it during the year certainly at the beginning of the year it's a little bit difficult because you still have some overlap from last year, but I'm optimistic overall. And then we see certain signs from other industries not our industry that their business is maybe a little flatter than previous year. So the Ag industries maybe doing better than some of the other industries will do in 2008.

So it sounds like on balance somewhere between similar to less stress in 08 versus 07, is that fair?

Yes, I think, it would be.... I hope it's lower than last year.

Okay. And lastly can you talk a little bit about what you're seeing and expecting in terms of pricing in the business.

Yes, in terms of pricing the forecast is about 1.5% to 2% for 2008.

And where we were in 07 similar?

Thatsimilar about a point and a half.

Okay. Given all the new products given everyone's plant capacity loads were higher why we would not see more price in 08 than 07?

Well the reason is that some of the market is still very competitive. So that means there are some very aggressive players in the market big ones and small ones. So therefore I think we most probably it's not realistic to expect more. We take a leading position so in some of the markets where we have a strong position we certainly ask for more than 1% or 2%, but that doesn't mean that we finally can make it.

Thanks very much.

You're welcome.

Your next question comes from the line of Andrew Obin of Merrill Lynch.

Good morning. Just a question on South American margin. If you could separate the impact of currency and as SFIL impact was that would be very useful?

Currency was about a point and a half and the SFIL impact was a little under half a percent, half a point.

And going forward, you noted that you were lagging pricing when you are exporting stuff out of Brazil, I assume is primarily to Argentina right?

It's Argentina, but also other markets.

Chile.

Chile, Peru, those kind of markets.

When do you expect to catch up on pricing of those regions?

Well it's a matter of the marketplace. So we'd like to catch up very quickly, but there as Martin said it's a highly competitive in those markets as well. There are products being now introduced in those markets that are not Brazilian source and so it's probably a little more difficult, but overtime we expect to be over to get that those margins back up and get the prices back up. We again we'll take a leading position and it's something to do that, but it will be determined by the market.

And as I look at 08 in South America. How much was an impact on margins or pricing, however, you want to quantify it, do you expect from dealers entry into the market?

Don't expect anything.

Okay, so, but what should I do as I model it out for 08. What should I do with this one and a half percentage point drag from Brazilian currency?

Well we are hoping that our operating margins in South America will be relatively flat 08, versus 07, so the impact of currency we are going to offset with improved productivity and other costs performance.

But It's relatively flat given your production forecasts?

Correct.

Okay. Thank you very much.

Your next question comes from the line of Mark Koznarek of Cleveland Research.

Hi, good morning. Can you guys hear me?

Yes. Good morning.

Good morning. I want to ask again about the outlook just putting it in pretty basic terms in December you were looking for the 25% increase and off of the expected results for 07. That would have been $0.55 of increase and now we are looking at $0.20 to $0.45. And Martin you said earlier that it's a conservative forecast, but I don't suspect that it was aggressive forecast a month and a half ago. I would presume that you are pretty conservative management team, so has there been any softening in anywhere of any markets across your marketing environment that you can point to that would lead you to reduce the outlook like this?

Legally, no.

Well we didn't reduce the outlook, I mean we have a bottoms up budget that we do, and that was communicated to you what those results were certainly we did a little better in the fourth quarter than we had communicated to you some of that was in taxes some of that was in the higher sales levels that we are able to achieve, but we did not think anything we had significantly changed to where we should add that to the base as you suggest, but certainly don't believe that we are reducing our outlook, we're working against our plan, and hoped as Martin suggested to outperformance, but we are sticking with the information and the guidance that we suggested to you about six weeks ago.

All about consistency.

So is there... I mean what is there anything worse in terms of foreign exchange or internal spending or any issues like that, that would be a take away of $0.10 to $0.20?

No I don't think any of our assumptions have changed that dramatically, no.

Okay. And then the follow-up question on capital allocation with the leverage in the balance sheet now so low and your outlook for free cash flow pretty robust next year what do you think about disposition of that free cash flow with regard to the possibility of dividend or share repurchase?

We now discuss that in the up coming Board meeting, and we work on several scenarios and we will let you know after that meeting.

When you said Board meeting?

Inmarch.

Okay. Thank you.

Our next question comes to the line of Andy Casey of Wachovia Securities.

Good morning, everybody.

Good morning.

A question and this is kind of short-term and I apologize for that, but I'm trying to understand Q4 to Q1 sequential change given your guidance if I can give some prelude to it. Your Q1 is up 40% to 50% year-over-year that implies about 54% decrease at the mid-point in Q1 08 from Q4 07 versus about 38% decrease a year earlier, and that's despite expected better Fendt performance lower tax rate likely still positive CapEx benefit. Why would the sequential decline be higher this Q1 versus Q1 07, is there a regional mix shift or something internal that I should consider?

Nothing comes to mind except for the fact that we did have a relatively weak fourth quarter of 2006, and so I do believe that might be a part of things we're picking up in the first quarter of 2007. Other than that when we look at our first quarter we do forecast and get some hit on currency primarily in the North American market that probably more awaited to the first quarter because the currency were year-over-year, so that might be another reason why you're seeing a little lower results then you might expect. But, other than that we're looking a positive improvement in our result in 2008 versus 2007. The mix can change a little, we are obviously looking at when we do these forecast how we're going to and what our production is for those products what our demand is and rolling those out, but you can have differences in mix between quarters that can impact that kind of analysis you're doing.

Okay. Thanks for that. And then in the first half of 08 should we expect over production versus retail for the North American market given what seems to be significant demand increases there?

Well for on a seasonal basis we always over produce retail in the first half. So for the full year I think we would expect to have some, you know, produce under retail again, but in the first you're building your dealer inventories and then they get sold through throughout the second half. So that's the normal situation I would say that the pattern is going to be very similar to 2007.

Strategically we just implemented a built to order logistical approach to our business, so that means we normally want to under produce or to say compare or let say to reduce our inventories further.

Okay, okay. Thank you very much.

Your next question comes from the line of Robert Wortheimer of Morgan Stanley

Hi, good morning everyone. I had two questions, I want the follow-up on pricing. And the first is our raw materials were trending where you thought they would be when you issued your preliminary thoughts on 1.5% to 2% pricing or are they higher?

I guess they are about the same we are seeing some pressure particularly on steel and copper right now, but we have some of those prices looked in for the year, and so don't think it will impact us that dramatically, so I would say that it's pretty consistent.

Okay. And the second question is I know you don't want talk about your competitors, Martin you reference to the competitive pricing environment, one of your competitors had some weaker gross margin in 4Q, and how is that weaker pricing, are you seeing any change in the pricing environment in... let's say December to January?

Unfortunately it's a... unfortunately not yet, maybe you need to push the guys a little.

Thank you. I will stop there and get back in line. Thanks.

At this time there are no further questions. Do you have any closing comments?

Yes. We just like to thank everyone for the participation today, and we encourage you to get back with us later if you have some additional detailed questions. Thanks, and have a great day.

Ladies and gentlemen, this concludes today's conference. You may now disconnect.