AGCO Corporation (AGCO) Q1 2014 Earnings Report, Transcript and Summary

Good morning. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the AGCO first quarter earnings release call. [Operator Instructions] Thank you. Greg Peterson, Head of Investor Relations, you may begin your conference.

Thanks, Tiffany, and good morning. Welcome to those of you joining us for AGCO's first quarter 2014 earnings conference call. We will refer to a slide presentation this morning, which is 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 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 timing 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, 2013, and subsequent form 10-Qs. These documents discuss important factors that could cause the actual results to differ materially from those contained in our forward-looking statements. A replay of this call will be available on our 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.

Thank you, Greg, and good morning to everyone joining us on the call. Slide 3 summarizes our results for the first quarter of 2014. AGCO started the year in a positive way. Our end markets were challenging, particularly in South America, yet our first quarter sales were approximately flat compared to the first quarter of 2013, after excluding currency impacts. We are focusing our efforts on increasing productivity and reducing material costs throughout our operations to offset these market headwinds. As we discussed last quarter, our focus continues to be on margin improvement. We made good progress in Europe, where factory productivity was much improved and our purchasing initiatives also contributed to EAME's 140 basis point margin expansion. Weaker demand in Brazil hurt our South American margins, and our North American margins were impacted by lower production and a weaker product mix. Earnings per share for the first -- for the quarter were $1.03, keeping us on track for our full year earnings target. Our first quarter was also highlighted by aggressive share repurchases. We executed accelerated share repurchase agreements amounting to $290 million. And through March 31, we have lowered outstanding shares by about 4.2 million. Slide 4 details industry unit volumes by region for the first quarter of 2014. Lower commodity prices compared to those in early 2013 have favorably impacted the economics for dairy and livestock producers in North America. Consequently, industry sales grew in the lower horsepower categories, which are typically sold to dairy and livestock sectors. Sales of high-horsepower tractors declined in the first quarter 2014 compared to the first quarter of 2013. The combine market remains strong following high levels of income for world crop producers last year, but declined in first quarter of 2014. Industry unit retail sales of tractors in Western -- in Europe were down modestly in the first quarter of 2014. Market results by country remained mixed, with declines in France and Finland being partially offset by improved demand in the United Kingdom and growth in Germany compared to the first quarter 2013 sales. South American industry retail tractor volumes decreased significantly during the first quarter of 2014 compared to the same period in 2013. The decline was most pronounced in Brazil, where the funding for the government financing program was exhausted in early December and the new program for 2014 was not activated until late January. Industry sales in Brazil were also negatively impacted by dry weather conditions and weaker demand from sugar producers. AGCO's tractor and combine production volumes are illustrated on Slide 5. First quarter 2014 production was down about 9% compared to the first quarter of 2013. Production was down across all the regions, with the largest declines in South America. We intend to under produce retail sales in the second quarter to lower inventories in Europe and South America. We expect production volumes to be down 10% to 15% in the second quarter on a year-over-year basis. And for the full year, we are planning for a decrease of approximately 5% compared to 2013, with declines in higher horsepower equipment being partially offset by increases in lower horsepower machines. I will now turn the call over to Andy, who will provide you more information on our first quarter results.

Thank you, Martin, and good morning. I will start with a look at AGCO's regional net sales performance for the first quarter of 2014, which are outlined on Slide 6. Currency translation negatively impacted consolidated sales by approximately 2.1% in the first quarter of 2014, compared to the same period in 2013. The Europe/Africa/Middle East segment reported an increase in net sales of approximately 1%, excluding the positive impact of currency translation during the first quarter of 2014 compared to the first quarter of 2013. Sales growth was strongest in Germany and Scandinavia. These improved results were mostly offset by declines in France and Eastern Europe. North America sales grew approximately 5%, excluding the unfavorable impact of currency translation during the first quarter of 2014, compared to the high level experienced in the first quarter of 2013. Sales increases in lower horsepower tractors, hay tools and combines, were partially offset by declines in sprayers. AGCO's first quarter 2014 net sales in South America were down 9% compared to strong levels in the first quarter of 2013, excluding negative currency translation impacts. Net sales in our Asia Pacific segment decreased approximately 17% in the first quarter of 2014 compared to 2013, excluding the impact of currency. Parts sales were $317 million for the first quarter of 2014, an increase of approximately 14% compared to the same period in 2013, excluding the impact of currency translation. Excluding currency, parts sales increased double digits across all regions. Slide 7 details AGCO's sales and margin performance. Operating margins declined about 70 basis points in the first quarter of 2014 compared to the prior-year period. Europe/Africa/Middle East operating margins increased about 140 basis points in the first quarter of 2014 from the same period in 2013. Gross margins were relatively flat compared to the prior year, with pricing offsetting modest material cost pressures, as well as the negative impact of lower production and product mix. North America operating margins were 8.6% in the first quarter of 2014, which were lower compared to the first quarter of 2013. Lower production levels and a weaker product mix contributed to the margin compression. In South American region, operating margins were down about 250 basis points in the first quarter of 2014 due to lower sales and production levels and increased engineering expenditures. Margins in the Asia Pacific region were down due to increased market development expenses in China. Slide 8 details GSI's sales by region and by product. GSI sales were up about 10% in the first quarter compared to the same period in 2013. The largest increase occurred with grain storage sales in Europe and in Brazil. We are forecasting GSI sales to be up approximately 10% for the full year of 2014 compared to 2013, with most of the growth occurring outside the U.S. Longer term, the global trends of population growth and changing diets are generating demand for additional grain storage and protein production capacity. Slide 9 looks at our depreciation and capital expenditure trends. Our CapEx has been elevated 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. During 2014, we expect to further increase our capital expenditures in order to continue to work to meet the Tier 4 emissions requirements, refresh and expand our product line, and establish assembly capabilities in China. Slide 10 addresses AGCO's free cash flow, which represents cash used in operating activities less capital expenditures. Our seasonal requirements for working capital are greater in the first half of the year, and thereby resulted in negative free cash flow in both the first quarter of 2013, as well as 2014. AGCO's inventory position at the end of March was higher than targeted in Brazil and Western Europe. Brazil was impacted by low order levels during the FINAME financing interruption. Our South American order bank has improved from January 2014 levels, but remains below March 2013 levels. The increase in our European inventories related to engine prebuild for Tier 4 implementation in 2013, as well as the softer order volumes in some markets. As Martin mentioned earlier, we intend to under produce retail sales in the second quarter to address our inventory levels. At the end of March 2014, our North America dealer month supply on a trailing 12-month basis was 6 to 7 months range for tractors, and about 5 months for combines. Losses on sales receivables associated with our receivable financing facilities, which is included in other expense net, were approximately $7.5 million in the first quarter of 2014 compared to $5.6 million in the same period of 2013. Slide 11 highlights AGCO's plans for returning cash to our stockholders. As we discussed last quarter, we have significantly expanded our share repurchase program to $500 million, which should be completed by mid-2015. During the first quarter of 2014, we entered into 2 accelerated share repurchase agreements totaling $290 million. Through the end of March, we received approximately 4.2 million shares, which lowered our weighted average share count by about $2.5 million -- 2.5 million shares for the first quarter. The lower share count positively impacted our EPS by approximately $0.03. We are also committed to responsibly grow our dividend, as evidenced by the 10% increase in the quarterly payment announced during the first quarter. Our 2014 outlook for the 3 major regional markets is captured on Slide 12. We are anticipating softer market conditions in all 3 regions. In North America, forecasts 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 the slowdown in the row crop sales. We have lowered our South American industry forecast to reflect FINAME funding interruptions, a weaker sugar sector and lower demand in Argentina. 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, as well as in the U.K. After several years of strong industry sales in France, we're expecting some softening of demand in that market in 2014 compared to 2013. Slide 13 highlights the 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 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 site and manufacturing startup, and market support costs amounting to about $10 million for our Chinese operations. We are also targeting an effective tax rate of approximately 34% to 35% for 2014. Slide 14 lists our view of selected 2014 financial goals. We are projecting 2014 sales to be relatively flat compared to 2013, with the impact of softer market conditions expected to be offset by pricing and 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 anticipated 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 second quarter 2014 sales volumes to be down to allow for adjustments in dealer and company inventory levels. These impacts, along with a weaker sales mix, are expected to result in second quarter 2014 earnings per share in a range of $1.65 to $1.70. We expect 2014 capital expenditures to be in the $400 million to $425 million range, and free cash flow to exceed $250 million after funding the elevated level of capital expenditures. With that, operator, we are ready to take questions.

[Operator Instructions] Your first question comes from the line of Jamie Cook with Crédit Suisse. Andrew Buscaglia - Crédit Suisse AG, Research Division: This is actually Andrew on behalf of Jamie. So just looking at your EAME region, that obviously surprised, I think. You saw some pretty good benefits there from cost reduction and productivity. Can you just characterize how much that -- relative to the quarters going forward, how much that impacted? Was it better than you guys expected in the quarter and then do you expect similar benefits in Q2 through Q4?

Sure. What's happened in Europe in the first quarter is that we did accelerate some additional production and we're able to get some additional sales in the first quarter, which helped our results overall. You can see that the margins were much improved over the year before. One of the reasons for that is that our productivity in our Fendt plant was much better. If you recall, a year ago, we were still working through some of the kinks in our new assembly facility, in our new systems there. And we're pleased to report that the plant is operating very well at this time. And so for those reasons, we did have a good margin quarter. As you look going forward, we would expect the margins to continue to improve throughout the year and we're looking at, at least a 100 basis point improvement in our overall margins in EAME for the year. Andrew Buscaglia - Crédit Suisse AG, Research Division: Okay, that's great. And then just on -- can you just comment quickly on visibility in the back half in your order book?

Yes. Our order book still remains below where we were a year ago. And so our visibility is pretty consistent with what we had at the end of the end of the year. We've got, in North America, reasonable visibility into the third quarter. And our other regions, I would say, our visibilities ends about the midyear. And so the second half of the year, we're still dependent on looking at -- talking to our dealers and looking at market conditions to judge how we'll do in the second half.

Your next question comes from the line of Vishal Shah with Deutsche Bank.

This is Susie Min for Vishal Shah. So my question is on Asia. I know you're expecting the industry to be slightly up in 2014. But Q1 was obviously much weaker than expected, which negatively impacted margins. Can you talk about what you're seeing? And I know you mentioned increased market development costs as part of the margin issue, but maybe you could talk about overall industry as well.

Well, you know the main markets in Asia are China and India. And India has a stable market, biggest tractor market in the world but very low-horsepower tractors between, let's say, 40 to 75, 80 horsepower. India is doing fine, but we only participate in that market through our licensee. And those numbers are not consolidated in our balance sheet. When it comes to China, we are just in the startup phase. So that means the only area where we really participate in the market is in combine harvesters through our acquisition. And for the rest of the market, the growth of China really doesn't matter so much. Overall, what you can see is that there is -- there are a lot of discussions about allowing more urbanization, so which means that labor will become an issue in rural China, which, of course, will force the mechanization. So that means overall, we -- I think, we took the right decision to invest in China. The basic or the biggest investment is in a state-of-the-art tractor factory for tractors up to 125 horsepower, and they are mainly exported in existing markets. So that means what we will do in the next step, we will, of course, try to participate more in the Chinese market with, I think, better quality and brand new technologies.

Okay. And I have another question. Your results in Brazil or South America seemed a little weaker than expected. We know it's part of the FINAME program being a late start, but recent data would also suggest you're making progress and gaining market share in tractors and combines. So just trying to see if you could provide a little bit more color there? Do you just chalk it up to Argentina now being weak and FINAME was just much -- the impact was much weaker than expected to result?

Well, in those major markets, we are in election year. So -- and that, of course, creates a certain unsecurity. So it's very difficult to read the market. We believe that in both markets, Argentina and Brazil, governments will try to support farming maybe more than they have done at the beginning of the year. In Brazil, what speaks basically or what is a certain advantage for Brazilian farmers is that most of the commodities are sold in dollars and the real is rather low, so that should normally create some extra margin. But overall, Brazil is very difficult, very slow right now and still suffering from the lack of the NDS-sponsored FINAME finance system, which is basically that the state bank has financed the interest rates for farmers. The main problem is that the workers [ph], they work very, very slow. So that means they made now funds available, but the approval process is much slower than in previous years, almost like in Washington.

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

So one thing -- I mean, it was a good quarter, one thing that was confusing to me that I just don't know what the bridge is, is you helpfully gave your currency neutral sales in South America down 9%. I think you gave the industry volumes down 20% odd. It didn't seem like ANFAVEA was showing that much share gains. So I didn't know if the bridge between the down 9% -- I'm sorry, down 23% and the down 9% was mix, where you're getting the high-horsepower stuff or pricing or just random volatility and we should expect you to normalize to the industry or how to bridge that?

Yes. Rob, it was kind of like a combination of a number of things. So part of it, as you say, was mix. Our GSI business actually grew in that region, so that offset some of the tractor decline. And the numbers that we report are industry tractors sales, so that's why some of the confusion. We also saw growth in implements and in parts. So we did have some offsetting products that did make, I guess, the read across to the industry a little difficult.

Okay. So that's actually interesting. So maybe both those impacts were bigger than I thought. And so you don't expect any major overhang from channel inventory or to normalize that gap, you think it's already sort of been there in the numbers, let's say?

Well, we still have some inventory reduction to do as we go forward. But we have that baked into the forecast that we have for you for the second quarter and for the full year.

Okay. Good. And then could I just briefly ask about the currency impact on Brazil margin? I know you make a lot of stuff locally, I just didn't know if there is a currency impact, if we already saw it in the quarter or not.

Yes. The currency impact in Brazil is, you've got the -- when the real weakens like it does, you get a negative translation impact. And in earlier times, we would've told you that we are getting a positive impact from -- than exporting the tractors out of Brazil into other markets. What's happened recently is now we're importing more components in -- from mainly China, India, markets like that. And so we're -- and those are typically dollar based. And so our transactional impacts are much more neutral now. So where -- a weaker real is negative for us on a translation basis and somewhat neutral now on a transactional basis.

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

I wanted to start with a question on your guidance. And you maintain your guidance, which you had first introduced in December, and as I look at what's changed most between now and then, it seems like South America has gotten quite a bit weaker. So where are you seeing more improvement, either in North America or Europe, that will offset that weakness versus your initial expectations?

Andy will go a little bit more into detail, but I want to simplify it. So everything we see from the market is basically baked in our forecast in the numbers you see. So the idea behind is that we have enough inside potential to optimize our business processes in the factories, in purchasing in order to get to the $6. So which means that we want to show that we can perform better even with a little bit of headwind from some of the markets. Andy?

Right. So that's a good lead-in, Martin, because you're right that we have pulled down our expectation from South American market. I'd say everything else is pretty much the same. And the offsets to maintain the $6 target are in some operating expense reductions that we have initiated, a little more on the margin improvements. As Martin pointed out, we're pushing harder on those in order to offset this. And then, I think, with being a little more aggressive on share repurchases than we originally anticipated, we'll get a little more out of the share repurchase impact on our EPS as well. And so those were the key areas that are enabling us to maintain our target.

Okay. That's helpful. You mentioned share repurchase, so let me ask you about cash. And if I look at your balance sheet, you guys now have a little bit less than $200 million of cash on the balance sheet. I know you used a lot of cash in the quarter and that's typical in the first part of the year, as you build some inventory. But how comfortable are you now with where you stand with your cash balance? If we do see a more severe downturn in the global ag markets than what we're expecting right now?

Well, I think, our balance sheet is still very strong. We have a strong liquidity position. We have a lot of availability under our revolving credit lines, and these share repurchases and things like that are well-timed with our ability to generate cash. And so as we have been more aggressive with the ASRs that we've put in place, but -- and most of the working capital usage is done in this first quarter. So this should pretty much be the worst position that you'll see. And as we generate cash throughout the rest of the year, the balance sheet will recover from where it is today. Even at worse inventory -- industry position, I'm still confident that we can manage our balance sheet, manage our working capital, and this business should continue to generate cash. So I'm not concerned about that.

Okay. And if I could ask you just one more question about GSI in North America. I know you talked about growth largely coming in, in South America and Europe this year. How is that business trending in North America? Can you kind of update us on where you are?

Yes. So the biggest change for us in our forecast for GSI was in the protein production in the U.S. The grain storage is about where we expected it. We had the PED virus that's impacting the swine producers. And so their income levels were down and not we're seeing the orders like we expected there. We also -- the other piece in terms of GSI, with the political unrest in the Ukraine, we are a little more cautious about some orders that we saw in our pipeline there. So the combination of the lower protein sales in the U.S. and also some grain sales in Eastern Europe is -- caused us to soften our outlook for GSI a little bit.

Your next question comes from the line of Michael Cox with Piper Jaffray.

My first question is a follow-up on the Eastern Europe comments. Obviously, a very fluid situation over there. I was just wondering if you could talk about what you're seeing from an equipment order and financing standpoint beyond just the GSI orders you had just referenced.

Nothing unusual. So I think so far everything has in pretty stable conditions.

Okay. And then my second question. As I look at the Q1 results and then -- and look at -- and then take into consideration your second quarter guidance, it implies a fairly healthy recovery in the back half. And you just -- you talked about some cost takeouts along with the share count, but I was wondering if you could maybe give a little bit more detail on the cost component, just so -- and to provide a little more detail as to what gives you the confidence in this recovery in the back half?

When it comes to cost reductions, we basically work on a portfolio, on a broad portfolio of various strategic initiatives that we're on already for quite a while. And we, basically, will benefit from those. We think in 2014, the most important ones are in the area of purchasing. In the area of platform solutions, we think it's a big advantage to be a multi-brand company because of the heritage and the brand image and brand identification in various countries of the world. But at the same time, we think that we can become much more efficient in engineering and manufacturing by putting more product on very intelligent platform solutions. And we hired, some years ago, a leader in the automotive industry to help us in that area. He's an engineer from VW, who we think are experts in platform solutions with the many brands they have. Another very important initiative is in the area of harvesting, where we are in the process of basically reengineering a full range of state-of-the-art combines for the future.

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

Wondering if you can talk about the under production in Europe, in particular, in the second quarter versus retail? I mean, it sounds like you expect some improvement in the region if weather ends up being okay. So I guess I'm just wondering what's behind the inventory caution there in Europe?

Well, actually, I want to make a statement regarding the weather. I know that my guys like to talk about it, but I don't like it at all. Because when you look into details, weather varies in the various regions of the world. And what is not so good for one country, might be very good for another one. So weather is not really a major factor, which does impact our business. It did a little bit last year because we had a late spring or cold winter in some parts of Europe, but this is actually not an issue this year at all. And with this, I hand over to Andy Beck.

With some more details. Yes, we're looking for our sales in Europe x currency and x pricing to be down between, I'd say, 7% to 10% in the second quarter. As we pointed out in our comments, we have -- it's a really more of a flip-flop between first quarter and second quarter. So we'll pretty much be in line with where we thought we'd be by midyear. But some of the extra production that we had in the first quarter, we're -- we'll be under in the second quarter. And that's the main issue there.

Okay. And then you mentioned about 100 basis points of European margin growth this year. Should we assume all your other markets are going to be down modestly year-over-year, with perhaps the sort of least impact year -- or least negative impact year-over-year in North America?

The 100 basis points, that's only the first quarter.

Yes. So -- but no, your assumption is right in terms of the other regions. Some modest decline in margin is what we expect at this point.

Your next question comes from line of Ryan Connors of Janney Montgomery.

I had a couple of bigger-picture questions. First off, in terms of dealership trends. It seems like dealer consolidation and brand purity have been kind of very hot topics lately in the industry, especially some of your peers, it seems, getting pretty aggressive on both of those fronts. I wonder if you could comment on that, whether you're seeing that or any impact of that in the marketplace and what your own -- how it's impacting your own dealer strategy and/or the share shifts in the industry?

Well, you have to look at that pretty much by geography. We don't have a problem in Asia, because most of the dealers we just signed up and it's a brand-new distribution network. We have a similar, very stable exclusive distribution in Eastern Europe. In Western Europe, most of our dealers are exclusive as well. In South America, we have basically 2 separate exclusive distribution networks for the 2 brands, Valtra and Massey Ferguson. And the main consolidation we went through very quietly without major issues was managed here in North America. Our colleague, Bob Crain, did a great job in basically restructuring distribution. And in the meantime, our most important partners in distribution are Caterpillar dealers. So we are -- basically, after we took over the Challenger brand and the ag business of Caterpillar, we kept the distribution channel open. And when you look into our top 10 dealers today, they're basically all Caterpillar dealers. They invest in distribution, in new outlets, but they also acquired certain traditional AGCO dealers. And this is still a work in process, and you will see more in the future. So that means we did, most probably, a better job keeping the whole situation under the radar screen while some of our competitors faced big problems. You certainly heard about Titan, the CNH distribution network, which is really underwater right now, and some others. So that means we are very happy that we have a very strong, rock-solid distribution system, in the meantime, in the U.S. And those are less than half the dealers we had when I joined the company.

Okay. That's helpful. And then, I guess, kind of the real big picture, the $1 billion question, I wanted to get your latest take, Martin, just on the cycle. And I guess, today, proves that the markets focused quite of ways out because you put up a great quarter here and you reaffirmed your guidance, and yet the reaction to the stock is still pretty muted. So people are focused on 2015. Based on your formidable experience in the industry, where do you see this going in terms of just directionally, what '15 could look like, assuming commodity prices stay relatively stable with where we are today, is the market stable, is it up, is it down? What's your big picture view?

Yes. One is, I'm not so much -- I don't believe so much into cycles anymore, because during the last many, many years, we didn't see major ups and downs in that market as we could see maybe 20 years ago. We are just, I think, at the beginning of a big paradigm shift. And a lot of people don't understand it so much. So when we or if we would like to feed the growing birth population as we do today, which is not sufficient because feed -- food security has to improve, also here in the U.S., by the way, then we need to double food production by 2050. To double. So this is a huge undertaking, and it's possible with the help of modern technologies. And we are part of the solution, so to say. So therefore, when it comes to our -- first of all, when it comes to our customer base, I think that farm income for the many, many years to come will be rather strong and farmers will be in a position to also invest in the future. And what we see right now, I would describe as a slight dip, which is caused in many markets by political instability. So France is, in fact, an antibusiness environment that French farmers, basically, tend to be a little bit more conservative and hold orders back to be on the safe side. And this is what we see in Argentina and this is also partially what we see in other countries of South America. So overall, I'm very confident that investing in farming and farm-related activities is a very intelligent strategy.

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

Andy, just relative to your comments on the last call, it looks like inventories are a bit higher than you're expecting, I'm not sure if that's at the dealer level as well. And I guess...

It's not at the dealer level, it's a homemade problem and we are not satisfied with this. We reacted too late in some of our factories and some of our markets.

So typical of, like, the prior years, you expect the inventories to just kind of work itself out through the year then?

Yes. We actually -- we were never excellent in inventories, also not in the previous years. We didn't talk so much about it. But this year, we are even -- we start very, very [indiscernible], to say. But we will fix it, you can be sure. Andy would like to promise you that we will be below previous year, end of this year.

Perfect. Martin, just continuing on, can you update us on -- I think, the sales target for GSI was $1 billion for 2015. I think, I remember it being organically driven. Is that -- I know these things are fluid, can you just update us on how you're thinking about that?

Well, once, the target was $1 billion by 2016, and I still think that we will be there.

Okay. And then just you brought up your investment in world-class combines technology. I'm just wondering if you could kind of describe for us how you're thinking about an M&A solution for combines still or -- and kind of when you think about bringing a combine -- this new technology to market?

Well, this will be -- the market launch will be around 2018. So it comes in, in steps. And we don't want to talk too much about it because we want to not to alert the competition. Maybe we did it already this morning, but we normally don't believe that we are great in this area. So they will be surprised.

And just M&A, in general. You guys are pretty happy with the way things are right now or do you see anything else out there?

Nothing. So if you have a great idea, you can call me.

Your next question comes from the line of Ross Gilardi with Bank of America Merrill Lynch.

Just got a couple of questions. First on the share repurchase, I mean, you bought back a lot of stock in the quarter. You've only got another $200 million or so left over, and I think you said it's through March '15 or mid-'15. I forget the precise timing. But can you talk about your willingness to step up your share repurchase? Obviously, some of that is dependent on tax considerations in Europe and so forth.

Well, yes, the ASRs that we've entered into did get us off to a fast start. The ASR -- underlying purchases within that ASR should carry -- have us in the market purchasing shares through probably August. And so after August, we will, I would say, continue to be in the market, purchasing shares throughout the rest of the year. I can't project where that'll put us, but I would say we're -- at the rate we're going, we're going to finish before mid-2015, but that's what we said last time.

But I guess, what I'm really asking is just beyond this $500 million authorization, your willingness to increase beyond that?

Yes. No...

Maybe we will look into that. But right now, we want to first implement the first $500 million, which is big for AGCO. We did a little more than half of it, so that means we have still more room to go and then we will talk about the future.

Okay. And then could you just talk a little bit more about your inventory position? I mean, you under produced retail in Q2. I mean, Martin, you were forthcoming in saying that the issues are more on AGCO's side. What would be an absolute level of inventory on your balance sheet that you'd be comfortable with going into the second half of the year relative to that $2.4 billion that you finished with in the first quarter? So it looks like you've got production flat year-on-year on the second half?

Yes. We're over our target level, what we had effectively in our budget by, like, by about $100 million or so. So that's what we're looking to get out. Some of the inventory was increases were planned, there was the tier 4 inventory buildup of the engines to transition us. We also strategically added more parts inventory to improve our service levels to our customers here in the spring season. So there were some planned increases for inventory that we accelerated in order to perform in the market. And then some of it is, as Martin said, we are dissatisfied with where we are. And so that's the part that we'll, hopefully, make some progress in the second quarter, but it'll take us throughout the rest of the year. And as we said, our target is to get our inventories back below the amount we had at the end of last year.

So you said $100 million, so if we see about $2.3 billion of inventory on the books by the end of the second quarter, would that -- is that roughly where you would want to be?

Yes. I don't have the numbers in front of me to see where -- the inventory is probably going to be fairly level. It should come down a little in the second quarter, and then most of the reduction comes in the second half.

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

Just a couple of quick follow-up questions. The slowdown that you're seeing in Eastern Europe, is that causing any -- is that having any brushback on used equipment levels in Western Europe? I know in prior periods, we've seen, when there's some dislocation in Eastern Europe, Western Europe used inventories starts to stack up a little bit?

The simple answer is no.

Okay. With respect GSI, I think that we had talked about China being a pretty big growth opportunity for you. And I think that, that was included in some of your outlook for this year. Is that -- is there anything going on in China for GSI that's plus or minus relative to your outlook change?

I think, in China, we are pretty much on schedule. So that means you could -- if you look at it, some of the slowdown we see in certain areas here in the U.S. is compensated by export activities of GSI.

Okay. And then lastly, in the slowdown in the Latin America market in Brazil, the challenges there, is there anything that's -- is the pricing environment getting any more challenging? Is anybody doing anything irrational in that market?

No, we don't see that.

I would now like to turn the conference back over to our presenters.

Thanks, Tiffany. We'd like to thank everyone for your participation today and I'd encourage you to follow up with me later if you have additional questions. Thanks, and have a great day.

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