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26-07-2012 20:47:00

Agco Sees U.S. Drought Helping Sales in Europe, South America

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By Bob Tita

Agco Corp.'s (AGCO) expects the U.S. drought to improve demand for Agco's farm tractors and combines in South America and Europe, where farmers are expected to fetch higher prices for their crops.

Georgia-based Agco, which reported a 53% increase in second-quarter profit Thursday, derives 70% of its sales from Europe and South America. It's the market leader in tractors in France and Brazil. Agco, whose brands include Massey Ferguson, Fendt and Challenger, is a distant third in the U.S. farm machinery market, behind market leader Deere & Co. (DE) and CNH Global N.V. (CNH).

As the U.S. drought drives up global prices for farm commodities, farmers overseas who are not affected should have higher cash receipts from farming, which typically drives higher sales of farm machinery.

"Most of Agco's customers benefit very much from the much higher commodity prices. So they will generate excellent profits this year," Agco Chairman and Chief Executive Martin Richenhagen during a conference call Thursday with analysts. "So far, what we hear from Europe and what we hear in South America is pretty positive."

Agco's exposure to the North American equipment market, however, isn't insignificant. The region accounts for about one-quarter of Agco's sales. The company last year acquired grain storage-bin manufacturer GSI Holdings Corp. in a bid to boost Agco's revenue in North America. About 70% of GSI's sales come from North America. For the first six months of 2012, GSI accounted for about 8% of Agco's net sales and 11.9% of the company's per-share profit.

"We're seeing some softness in the North America market, but we have been able to offset that with better-than-expected results in our international sales, so we've been very pleased," said Chief Financial Officer Andy Beck about GSI.

Agco acknowledged that the drought is adding a measure of uncertainty to its business. The company narrowed its 2012 sales forecast to between $10.1 billion and $10.3 billion from $10.2 billion to $10.5 billion in May. But the company raised its profit outlook to $5.50 to $5.75 a share from an earlier estimate of about $5.50 a share to reflect its improved margins and expanded profits, particularly in North America. Agco's operating margin for the second quarter rose to 9.8% from 8.47% a year earlier.

The company's sales in North America rose 86% to $734 million, while profit from the region soared to $95.7 million from $20 million. Sales in Europe, the Middle East and Africa, which account for the largest share of Agco's revenue, increased 0.5% to $1.4 billion. Income was nearly flat at $170 million. Sales in South America were down 10% at $448.5 million, but income rose 10% to $41.7 million.

Overall for the quarter ended June 30, Agco reported a profit of $204.9 million, or $2.08 a share, up from $133.7 million, or $1.36 a share, a year ago.

Sales rose 14% to $2.69 billion. Analysts surveyed by Thomson Reuters recently expected earnings of $1.80 a share on revenue of $2.82 billion.

Agco stock was recently up 4.3% at $42.75 a share.

--Victoria Stilwell contributed to this article

-Write to Bob Tita at robert.tita@dowjones.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

(END) Dow Jones Newswires

July 26, 2012 14:47 ET (18:47 GMT)

Copyright (c) 2012 Dow Jones & Company, Inc.

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