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AGCO Corp. (AG)

Q2 FY08 Earnings Call

July 29, 2008, 10:00 AM ET


Greg Peterson - Director of IR

Martin H. Richenhagen - Chairman, President and CEO

Andrew H. Beck - Sr. VP - CFO


Ann Duignan - JPMorgan

Terry Darling - Goldman Sachs

Jamie Cook - Credit Suisse

Andrew Casey - Wachovia Securities

Andrew Obin - Merrill Lynch

Mark Koznarek - Cleveland Research Company

Charlie Rentschler - Wall Street Access

Barry Bannister - Stifel Nicolaus



Good morning. My name is Jacob, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the AGCO Corp. 2008 Second Quarter Earnings 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 period. [Operator Instructions]. As a reminder ladies and gentlemen, this conference is being recorded today, Tuesday, July 29, 2008.

Thank you and I would now like to turn the call over to Mr. Greg Peterson. Mr. Peterson, you may begin your conference.

Greg Peterson - Director of Investor Relations

Thank you, Jacob, and good morning. We appreciate all of you joining us for ACGO's second quarter 2008 earnings conference call.

On the call this morning, we will refer to a slide presentation. The slide presentation, earnings press release and our financial statements are posted on our website at 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 Martin Richenhagen, our Chairman, President and Chief Executive Officer, and Andy Beck, our Senior Vice President and Chief Financial Officer.

During the course of this conference call, we will make forward-looking statements, including some related to future sales, earnings, production levels, supplier and production constraints, inflation, foreign income, working capital improvement, cash flow, margins, effective tax rate, capital expenditures and strategic initiatives.

We wish to caution you that these statements are predictions, and that actual events or 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 31, 2007, and Form 10-Q for the quarter ended March 31, 2008.

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.

I will now turn the call over to Martin.

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

Thank you, Greg and good morning everybody. Please turn your attention to slide three, where I'll begin my remarks.

You can see from the slide that we have continued our momentum through the second quarter of 2008, which resulted in record quarterly sales, earnings and cash flow. Our sales increased approximately 40% compared to the second quarter of 2007 and our drafted earnings per share were up 100%, compared to the second quarter of last year. We saw exceptionally healthy market conditions during the first half of the year, and our customers continued to respond favorable to our full line of technology based products and our strong dealer networks.

Our Europe, Africa, Middle East segment reported impressive sales growth and margin expansion during the second quarter. Expectations of good harvest and elevated grain prices kept demand robust across Europe in the first six months of 2008. Expanded acreage and better farm economics in Brazil have generated market demand for tractors ahead of the prior peak levels.

Improved operating results in our North American segment contributed nearly $0.15 to our second quarter earnings per share growth. Healthy markets and ongoing enhancements to our distribution channel are driving higher volumes at our North American plants at more operating leverage which is offsetting currency headwinds. In our East Asia Pacific segment, improved wheat crops in Australia and New Zealand resulted in sales growth of approximately 51% on a constant currency basis in the second quarter of 2008 compared to the same period in 2007.

Strong demand for our high horsepower tractor and combines helped our sales mix and growth consolidated operating margins 140 basis points higher in the second quarter of 2008, compared to the same period last year. I was also pleased with our cash flow production in the second quarter despite the healthy sales growth we saw in second quarter we were able to hold the line on working capital and produce improved free cash flow.

For the first six months of 2008 AGCO sales grew over 37% and our earnings per share grew to $1.97 compared to $0.93 for the first half of 2007.

Slide four, illustrates our production schedules for 2007 and 2008. Tractor and combine production levels were up 19% in the second quarter of 2008 compared to the second quarter of 2007. Production was up to support the increased demand across the globe. Our current 2008 forecast cost for unit production of tractors and combines to increase 16% to 18% compared to 2007 levels in order to satisfy the forecast, it increased in the market demand.

The strong market conditions help us, at or near capacity in some internal assembly and production operations, and we are making investments in some of our facilities to expand capacity.

The elevated demand for industrial and farm equipment continued to put stress on AGCO's supply chain. As we told you last quarter, we are working with our existing suppliers to prepare them for expected demand levels, and we are also working to qualify new suppliers to mitigate future supply constraints.

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