Vol. 12, Issue 7

News, Information & Analysis for the Ag Equipment Marketer November 15, 2005 Titan Machinery Adds Four Stores, Takes Over Another Bankrupt Iowa Dealer

Titan Machinery, Fargo, N.D., already 22 Stores and Counting . . . that all of Anderson’s 45 employees one of the largest Cast IH and New In an interview in the October- will be retained and the stores will Holland dealer organizations with 18 November issue of Farm Equipment, remain operating under the Vern stores, added 4 more to its network David Meyer, chairman and CEO of Anderson Equipment name in the with the acquisition of Vern Anderson Titan Machinery, indicated that the same four locations. Equipment. Anderson operated Case firm’s “business plan calls for 3 or 4 Some tasks, like management IH dealerships in Le Mars, Kingsley, acquisitions a year.”The purchase of information and marketing, will be Anthon and Cherokee, Iowa. the Anderson stores give Titan 5 new conducted from Titan’s At the same time, Case IH named stores in 2005, all in Iowa. headquarters, but the primary daily Titan as the operating agent of their Earlier in the year,Titan acquired duties in operating the Vern Anderson bankrupt dealership, Walterman Smith International in Waverly.They Equipment sites will remain locally Implement in Dike, Iowa.Walterman, now operate 22 Case IH and New set, Meyer explained. Doug Vondrak one of eastern Iowa’s larger farm Holland dealerships in North Dakota, will continue as general manager of equipment dealers was shut down in , and Iowa. the Anderson stores. late October. Court documents show The original Anderson dealership Could Be 23 Stores . . . tha the dealership was forced into was founded in 1948 in Kingsley. Shortly after Titan announced the Chapter 7 bankruptcy by Case IH and Vern Anderson bought the store out- CNH Capital, which claims misappro- Vern Anderson acquisition, CNH right in 1979, then added locations named Titan as their operating agent priation of funds and unpaid debt in 1985, ’93 and ’95. It is expected totaling $22 million. of Walterman Implement in Dike, Continued on page 2

UBS: Expect Equipment Sales to Slip 5-10% in ’06 “For 2006, we now expect farm Results of the UBS one-question, strong government support programs equipment sales to fall 5%-10%, com- e-mail survey to 200 ag equipment and multiple years of weak demand. pared to our prior forecast of flat. dealers indicated that most see sales Year to date,row-crop tractor sales in Although we expect improving slipping in ’06. The dealers were the U.S. are 1.3% above the same peri- farmer balance sheets and still elevat- asked “What is your projection for od last year. ed levels of farm income to mitigate farm machinery sales for the full year Offsetting Factors? the declines, we believe the combina- 2006, versus the full year 2005?” tion of currently depressed farm com- Based on 47 responses, 57% of Despite the apparent negative fac- modity prices, elevated fuel prices and dealers expect a decline in farm tors pointing to reduced spending on rising interest rates will drive farm machinery sales in 2006 vs. only 15% ag equipment next year, some of these machinery sales lower in 2006,” says that expect an increase.The remaining appear to be offsetting as shown in UBS analyst, David Bleustein. 28% expect a flat 2006 agricultural the UBS research. ♦ According to the ag industry ana- equipment market. “We expect elevated fuel prices lyst, checks with farm equipment deal- Looking at the remainder of ’05, to reduce demand for farm ers indicate a negative tone and many Bleustein says he continues to expect machinery in 2006.” cite higher input costs (fuel, fertiliz- about a 0%-5% growth in farm Based on USDA data, the estimat- er), lower farm commodity prices and machinery sales, driven by strong ed cost of energy in a normal year is uncertainty over government support farmer balance sheets, low interest roughly 10% of a farmer's direct cost programs as negative factors. rates, elevated levels of farm income, of corn production before including Continued on page 2

The contents of this report represent our interpretation and analysis of information generally available to the public or released by responsible individuals in the subject companies, but is not guaranteed as to accuracy or completeness. It does not contain material provided to us in confidence by our clients. Individual companies reported on and analyzed by Lessiter Publications Inc., may be clients of this and other Lessiter Publications Inc. services. This information is not furnished in connection with a sale or offer to sell securities or in connection with the solicitation of an offer to buy securities. Titan Machinery...Continued from page 1 Iowa. Case IH and CNH Capital say bankruptcy have been contacted for a missing from the Combine Roll pro- they terminated their relationship review of their individual situations. gram. Under the arrangement, a farmer with Walterman Implement because The new management’s intent is to buying a new combine turns the they are owed nearly $22 million. retain qualified employees who com- machine in at the end of the year for CNH auditors are combing plement the operation. another one the following year.A sec- Walterman’s books looking for the “We are pleased to be working ond producer get the 1-year-old com- money and documents they say with Titan Machinery to provide solu- bine, exchanging it later for another Walterman Implement owes.They are tions for our customers. You should 1-year-old machine. The process con- also trying to determine if any money know that Titan Machinery, one of tinues from farmer to farm, each get- was misappropriated.A court-appoint- Case IH’s largest Midwest dealerships, ting similarly aged combines annually. ed trustee has been assigned to con- offers a full line of new and used farm According to the filings in the tinue Walterman operations during equipment. With 22 locations in the bankruptcy case, employees of the investigation. Midwest, including one in nearby Walterman Implement sought con- Larry Adams,director of Regional Waverly, Iowa, Titan Machinery was tracts for the 2006 harvest and col- Sales for Case IH, together with Meyer the largest Case IH volume equipment lected deposits. The money is sup- and Peter Christenson of Titan dealer in 2004.” posed to be held in escrow by CNH Machinery, announced that Titan will Meyer explains that Titan has Capital. But those deposits, which operate the Walterman facility during agreed to operate the dealership in range from $15,000 to $22,000, were bankruptcy proceedings. Dike throughout the bankruptcy pro- never deposited with CNH Capital or According to Adams, “CNH ceedings. Pending the ruling of the any other financial institution. acknowledges the difficult times that bankruptcy court, Titan plans to “The dealership has been spend- Walterman Implement has created for acquire the dealership at an appropri- ing the money collected from farm- the dealership’s customers and ate time, though Case IH would not ers for unknown purposes.The bank employees. However, in order to take confirm if the operating agreement accounts, to the best knowledge, infor- care of those customers and employ- with Titan will become permanent. mation and belief of the undersigned, ees, we have received permission of CNH Capital assumes all losses or contain little funds, if any,” wrote the bankruptcy court to operate the gains of the business while in bank- James Longe, a special asset manager dealership under supervision of the ruptcy and will pay $25,000 a month for CNH Capital. court-appointed trustee. to the bankruptcy estate. Court documents also show sev- “We are pleased to announce Walterman Implement is owned eral pieces of equipment were double Titan Machinery, Inc., as our agent in by Leon Walterman. CNH Capital, the financed by Walterman Implement. operating the dealership.The dealer- financial arm for Case IH, forced the CNH Capital alleges the dealership ship will provide a full range of offer- business into Chapter 7 claiming mis- sold pieces of equipment to farmers, ings, including equipment purchasing, appropriation of funds and unpaid then submitted paperwork to both financing, parts and repair services. debt totaling $22 million. Walterman CNH Capital and Agricredit “Many of the former dealership has denied any wrongdoing. Acceptances, in effect receiving pay- employees displaced by that dealer’s CNH Capital claims money is ment twice for the same machine.

Farm Equipment Industry Notes & Newsmakers Russ Green, executive vice president of sales and business appointed E.W. "Swede" Muehlhausen as president of development at CLAAS North America, Omaha, Neb., McCormick International USA in Pella, Iowa. Muehlhausen has been named general manager of CLAAS Omaha, Inc. officially assumed this role on October 24, 2005, and is and CLAAS of America, Inc. Green will continue to be responsible for all aspects of McCormick USA business in based out of the company's Omaha office and retain his the . title of executive vice president of sales and business devel- Leon's Manufacturing, Yorkton, Saskatchewan, and opment. CLAAS also has announced that Theo Freye, Minot, N.D., has been awarded the AE50 award by the president of CLAAS North America, has been named a American Society of Agricultural Engineers (ASAE) director at CLAAS KGaA, which is responsible for world- for its ASL (Accurate Self Leveling) front-end loader. wide marketing and strategy. Freye will continue to be Agco Corp., Duluth, Ga., has elected Gerald L. based out of the company's Omaha office and retains his Shaheen, group president of Caterpillar, Inc., Peoria, Ill., to current title as president of CLAAS North America. the Agco Board of Directors.With this additional director, McCormick Tractors International, Ltd., has the Agco board consists of 11 external directors.

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2 Ag Industry Watch/November/2005 UBS...Continued from page 1 the indirect impact on fertilizer prices. Other Forecast Notes . . . Standard & Poor’s (S&P) also Given the sustained higher levels of Economist Pat Westhoff, Univ. of anticipates favorable conditions for ag energy prices, the additional expense Missouri Food & Agricultural equipment for the next 12 months. could lead to some crowding out of Policy and Research Institute According to the U.S. Department of farmer capital spending in 2006. (FAPRI), says that agriculture's out- Agriculture, farm income — the pri- ♦ “Farm balance sheets remain look is still favorable, suffering only mary driver of tractor, harvester and healthy, which is supportive of when using 2004 as the baseline fig- combine sales — will likely remain at demand.” ure. In nominal terms, he says, net a high level in 2005. Farm balance sheets (as measured farm income in 2005 is still on track S&P attributes this showing to by debt-to-asset ratios) have remained to be the second-highest total ever. strong crop yields, increased interna- at healthy levels since the early 1990s, However, USDA estimates, and tional demand and higher govern- hovering around the 15% level. The Westhoff agrees that farm income is ment payments. USDA is forecasting continued likely to be several billion dollars less Given the leading nature of farm improvement in the 2005 farm debt- than that seen in 2004. Average milk income, and that yearly unit sales of to-asset ratio to 13.4%, from 13.8% in and hog prices are lower this year, tractors and combines have declined 2004. Improving farmer balance while cattle and poultry remain the 4.6% on average since 1997, Anthony sheets support continued farm same. USDA and FAPRI both expect Fiore, S&P's diversified machinery machinery purchases. lower 2006 prices for cattle, hogs, analyst, anticipates that favorable con- ♦ “Farm income down, but still poultry and milk, in part because of ditions will continue over the next close to record levels.” supply response to recent strong 12 months for farm equipment man- The USDA forecasts 2005 net prices and return. ufacturers. farm income of $71.8 billion, down 13% from 2004 forecast net income of $82.5 billion, but still well above (up 37%) the 1995-2004 average of U.S. DEALERSHIP COUNT BY BRAND $52.4 billion and the second highest (December 2004) ever, if realized. For 2005, the USDA 2,000 forecasts cash receipts from crops of 1,917 $116.0 billion, 2% lower than estimat- ed for 2004, but 13% above the aver- 1,500 1,578 age from 1995 to 2004. In addition, Bleustein reports that 1,000 1,157 the USDA forecasts direct government 1,075 1,030 payments to farmers of $21.4 billion in 2005, 61% above 2004 levels of 500 $13.3 billion, and 52% above the aver- age from 1995 to 2004, largely the result of weaker commodity prices. 0 New Holland Case IH John Deere Agco Kubota Total Locations FARM MACHINERY TICKER (AS OF 11/10/2005) 11/10/05 10/11/05 1-Year 1-Year P/E Avg. Market Mfr. Symbol Price Price High Low Ratio Volume Cap.

AGCO AG $15.81 $17.23 $22.69 $14.60 10.27 1.35M 1.43 B Alamo ALG $21.26 $19.38 $29.23 $18.04 16.11 9,300 207.22 M Art’s Way ARTW $4.80 $5.36 $11.50 $4.45 7.06 3,400 9.42 M Caterpillar* CAT $54.69 $55.56 $59.88 $41.31 15.11 4.92 M 37.20 B CNH CNH $16.75 $19.16 $22.38 $16.50 24.28 76,600 2.24 B Deere DE $64.29 $59.57 $74.73 $56.99 10.19 1.92 M 15.51 B Gehl* GEHL $24.27 $26.47 $34.53 $13.67 15.95 157,100 291.29 M Kubota KUB $39.60 $34.62 $42.04 $22.58 9.75 10,400 10.43 B

*Caterpillar implemented a 2-for-1 stock split on July 13, 2005. *Gehl implemented a 3-for-2 stock split effective on August 10, 2005.

Ag Industry Watch/November/2005 3 Agco-Challenger Program Aiming for 20% Market Share If partners Agco and Caterpillar, greatly improved the profitability of equipment also offer the CVT,it offers through their Challenger program, these dealers’ parts-and-service opera- a shifting transmission, while the meet their 3 to 5-year goal of a 20% tions, which are the essence of farm- Challenger is shift-less, something share of the $13 billion farm U.S. machinery distribution that often “unique to Challenger.” equipment market, this will add nearly ‘gives away’ whole goods to expand ✔ Within the next few months,Agco 50% to Agco’s top-line, which was the population of machinery in its uni- is expected to introduce a large (500 $5.4 billion in 2004. verse,”says Rentschler. HP) articulated rubber-tired tractor To determine the progress of the “We would reckon that taking on “unique to Challenger” that will give program, Charlie Rentschler, director sprayer maintenance has required the Cat dealers access to about two-thirds of Industrials Research for New York dealers with whom we met to take of the high horsepower market that is City-based Foresight Research on 25-50% more mechanics and has not inclined to buy track-tractors. Solutions, spent 6 days in late summer been a reason by itself for some of Agco Manufacturing meeting with the farm-machinery them to move from losses to profits in principals of 5 Caterpillar dealers the past 12-18 months. Foresight’s visit to Agco’s, Minn., whose territories covered 9 contigu- “In our mind,” Rentschler adds, manufacturing facility reinforced its ous states from Ohio to the Dakotas. “‘the shot-in-the-arm’ sprayer service view that the third largest ag equip- Together, these dealers account for these dealerships will help carry ment maker is pointed in the right for an estimated 50% of Challenger’s them through until Agco is able to direction. North America’s revenues. His provide the full complement of Employing 1,000 people, the research also included a visit to Agco’s ‘unique to Challenger’ machines in plant was originally home to Ag- Jackson, Minn., factory where they the next 2-3 years.” Rentschler esti- Chem, the sprayer company that Agco produce track-tractors, to be the flag- mates that Agco has roughly 35% of purchased in 1998. It has since moved ship product for Challenger. the U.S. sprayer market. production of its other chemical Following his foray through the The Foresight analyst also notes applicator companies, as well as the Corn Belt, Rentschler says “Agco is that 3 of the 5 dealers have also Challenger track-tractor, to the facility. rising to the challenge of Challenger.” agreed to take on sales and service of “We learned that inventory cur- Challenger is the 3-year old Agco’s Spra-Coupe chemical applica- rently is turning 10 times per year, arrangement between Agco and tor, a smaller, lower-priced version of impressive, we think, given the poten- Caterpillar in which Agco provides a the Ag-Chem line. tial for material availability issues,”says Rentschler.“Our guess is that Jackson’s full line of private-branded products ‘Unique to Challenger’ — tractors, combines, hay tools and shipments this year will run in the other implements — for sale through Products range of $800-900 million or about Cat dealers looking to diversify In addition to the increased profit 15% of Agco’s total expected sales of beyond construction equipment. opportunities, Cat dealers tied to the $6 billion. This easily makes it the Rentschler found the Cat dealers Challenger program also express gen- company’s largest U.S. plant, and prob- are optimistic about the possibility of uine excitement about the new Agco ably second biggest in the world capturing a 10-20% market share in equipment coming down the pipe. behind the Fendt tractor operation in their territories during the next few These new products, according to the Marktoberdorf, Germany.” years.Though, he notes, these dealers Foresight analyst, will help differenti- The Jackson facility is expected did express concern about Agco sell- ate the Challenger line from that to build 1,100 Challenger track-trac- ing Challenger equipment through its offered by other dealers. tors with Caterpillar engines and Massey-Ferguson channels. “It’s understandable because of transmissions this year.“We were Despite this, Rentschler found their heritage,” says Rentscher,“Cat pleased to learn that there is ample that the Cat dealer’s confidence is dealers want to sell things that can’t capacity in existing facilities as assem- high and attributable to two factors: be bought anywhere else, albeit at a bly is only running one shift per day ✔ The expanded profitability of their premium price.” and welding is working just 1-1/2 service business. ✔ Starting this year, the new 500 and turns per day,”says Rentschler. ✔ The introduction of new “unique 600 model wheel-tractors will feature “There is plenty of land available to Challenger”equipment. Sisu diesel engines, made by Agco’s if Agco decides to indigenize produc- Valtra division, and CVTs (continuous- tion of 2-WD tractors in the U.S. and Parts and Service ly variable transmissions), made by locate that activity in Minnesota.” Rentschler points out that in the Agco’s Fendt division. According to Rentschler also reports that the past year all of the Cat dealers inter- Rentschler, these are considered by Cat dealers offer high praise for the viewed have signed on to handle the many industry experts to be “possibly responsiveness of Agco’s parts opera- parts and service for Agco’s Ag-Chem the best engines and transmissions tion in Batavia, Ill. “This is clearly a sprayers, the top-selling chemical made on the planet for a farm tractor. positive for Agco. While the compa- applicator in the U.S. These are no longer ‘Massey-Fergusons ny’s annual report noted that parts “The opportunity to handle the painted gold’ with Perkins motors and represented 13% of 2004 sales, we after-market for these high-mainte- GIMA transmissions,”he says. estimate that spares account for half nance machines, without a doubt, has ✔ While the latest Massey-Ferguson of its operating income,”he says.

4 Ag Industry Watch/November/2005 Despite Record 3rd Quarter Sales, Gehl Stock Tumbles On the heels of its record-setting 3rd advantage of the opportunity.” from their September peaks, they con- quarter sales and earning results, the On July 25, 2005, the Company's tinue to remain high by historical value of Gehl Co.'s stock fell by nearly board of directors approved a three- standards and the company expects 25%.While the reasons for the fall off for-two stock split, in the form of a that they will continue to impact its remain unclear, Baird analyst Robert 50% stock dividend. On August 24, future costs. Gehl continues to moni- McCarthy calls the pullback “over- 2005, the Company distributed one tor the impact of the hurricanes on done” and has upgraded the stock to share of Gehl common stock for its business, but does not currently “outperform” expectations. McCarthy every two shares of common stock expect that they will have a signifi- is also recommending that investors held by Gehl shareholders of record cant impact on 2005 earnings. “take advantage of the October 24 sig- as of the close of business on Aug. 10, For the first 9 months of 2005, nificant share price decline.” 2005. Immediately following the stock Gehl reported net sales of $369.6 mil- In the past year, the company’s split, the number of shares outstand- lion, compared to $267.7 million for stock has ranged from a high of ing was 10,253,398. the comparable period of 2004, an $34.53 per share to a low of $13.67. On Sept. 26, 2005, the company increase of $101.9 million, or 38%. Net As of mid-November, the stock price completed a public offering of income of $15.6 million in the first 9 has risen to the $24 range. 2,395,000 shares of its common stock months of 2005 compares to net Gehl Co., headquartered in West at a price to the public of $28.12.The income of $10.5 million for the first 9 Bend,Wis., reported record third quar- offering included 1,748,125 primary months of 2004. ter net sales of $112.3 million, an shares sold by Gehl and 646,875 sec- Net income for the first 9 increase of $24.8 million, or 28%, from ondary shares sold by one selling months of 2005 was negatively 2004 third quarter net sales of $87.5 shareholder, Neuson Finance GmbH. impacted by a one-time after tax war- million. Net income for the quarter was They received approximately $46 ranty charge taken in the second $5.1 million, or $.47 per share, com- million in net proceeds from the sale quarter of $1.5 million associated pared to net income of $3.6 million, of shares in the offering, after deduct- with purchased components that the or $.38 per share, earned in the third ing underwriting discounts, commis- company incorporated into one of quarter of 2004, an increase of 39%. sions and expenses.The net proceeds its product lines.The company antic- During the reporting period, received from the offering were used ipates recovering a substantial por- Gehl’s construction equipment sales to repay debt outstanding under its tion of its costs associated with the rose 39% while agricultural equip- credit facility. Immediately following warranty charge from its suppliers ment segment sales increased 7%. "We the offering, the number of outstand- and expects to record the recoveries had forecast third quarter segment ing shares was 12,001,523. in subsequent periods. sales growth of 41% and 22%, respec- Following the Gulf Coast hurri- The Baird analyst also notes that tively," says McCarthy. canes, Gehl experienced modest Gehl has also continued to outper- The analyst also points to the fact increases in demand for product, in form the industry via new product that Gehl “missed” third-quarter net particular track loaders and compact launches, leveraging its distribution income forecast by only $772,000, or equipment attachments.At the same capabilities with product line expan- $0.07 per share. “We do not believe time, transportation costs and supply sion, and cross-selling compact con- the shortfall relative to our estimate chain disruptions had a mildly struction machines through Gehl and warrants a $70 million reduction in adverse impact. Mustang dealers and through its agri- market capitalization and would take While energy costs have declined cultural equipment dealers.

Russia’s Amtel Acquires Dutch Ag Tire Maker The take-over of tire manufacturer for tractor tires,” says Jan Willem van The Dutch concern’s CEO, Robert Vredestein by Russian rubber giant Eerden, who heads Vredestein’s agri- Oudshoorn, also relishes the prospect Amtel has created a $1 billion global cultural sales operation.“But now we of growing retail sales of agricultural tire business and sparked expansion have the opportunity to move pro- tires in Russia, a market that is esti- plans for the Dutch company’s agri- duction of some agricultural tire lines mated to use 1.8 to 1.9 million units a cultural operations that will see it to one of the four factories operated year,as well as in neighboring Ukraine. chasing tractor OEM supply contracts by Amtel in Russia and Ukraine.” “We will have access to lower for the first time. This would free up capacity at cost manufacturing, an established dis- Vredestein is already Europe’s Vredestein’s headquarters plant at tribution network and a huge market,” biggest supplier of cross-ply and radial Enschede for increased output of he points out. “Some of our agricul- implement tires to leading farm equip- Traxion standard- and low-profile radi- tural tires are now on sale in Russia as ment manufacturers. Including al tractor tires. According to van a high-tech alternative to domestic replacement tractor tires, sales are Eerden, Vredestein is in discussions products and I believe the market for worth approximately $54 million. with two major tractor manufacturers such tires will grow as Russian farm- “Previously, we’ve not had the in Europe about supplying Traxion ers use more western tractors, com- capacity to cope with OEM contracts tires as factory-installed options. bines and other machinery.”

Ag Industry Watch/November/2005 5 CNH Equipment Sales Dip 1% for 3rd Quarter CNH equipment sales of $2.8 billion the second quarter of '04.” consolidated along products, not were down roughly 1% from the third At the same time, Foresight brands,” says Rentschler.“We contin- quarter of 2004, as a 5% decline in Research Solutions analyst Charlie ue to believe that the way this story agricultural equipment sales was par- Rentschler continues to take CNH to plays out is Fiat buys the 9% minority tially offset by a 9% increase in con- task for its performance. He says, shares at a small premium.” struction equipment sales. “Profitability continues to be unaccept- CNH also raised its outlook for “CNH beat our high on the street able. Although CNH was able to raise its the year to the upper end of its previ- forecast,” says Merrill Lynch analyst, prices to cover cost increases,gross mar- ous forecast of a 10-15% increase in Andrew Obin.“However, revenue and gin through 9 months was just 15.8% net income, and adjusted its industry operating income of the manufactur- vs.15.6% in the year-earlier period. outlook for the year. The expectations ing operations were below our expec- “However, their balance sheet for North American ag equipment tations and the upside vs. our estimate remains strong. We remain skeptical sales are markedly lower while South came from lower tax rate as well as about the recently announced reor- America and Western Europe are higher equity income from finance ganization into four ‘silos’— Case Ag, somewhat better. and equipment operations. Case CE, New Holland Ag and New The company noted that while “Still, we note that CNH was able Holland CE — under four presi- component shortages have improved to increase its EBIT from manufactur- dents,’two of whom have no experi- from earlier this year, steel costs ing operations despite a decline in ence in their industry and a third who increased more than forecast.At the reported revenues, which is a clear has 3 years in the business. same time the company appears to positive. In particular, ag equipment “We see this as adding cost (the be able to offset higher material operations reported the first increase company disagrees) and rolling-back costs and other cost increases with in year-over-year operating profit since the clock, now that manufacturing is better pricing.

Agco Shares Tumble 12% After It Cuts Profit Outlook The value of the common stock of ‘guidance’ for 2006, they did suggest ened due to dry weather and uncer- Agco Corp., Duluth, Ga., fell by 12.2% that growth in ’06 would be about tainty related to European Common after the firm slashed its earnings out- flat,”says Charlie Rentschler,analyst for Agricultural Policy (CAP) reform. look for all of 2005 and disclosed it Foresight Research Solutions. In South America, Agco expects would cut production of farm vehi- “However, we believe earnings significantly weaker industry demand cles in North America during the 2005 improvement will stem from improved over the balance of the year, citing fourth quarter due to falling demand. margins in each reporting segment, drought conditions and lower farm Agco said it will reduce assembly lower interest expense, cost reductions profits (lower commodity prices and of farm machinery vehicles at its and new product launches.” the continued strengthening of the North American manufacturing facili- Rentschler also notes that Agco is Real.) Agco management commented ties as dry weather has had an adverse still targeting free cash flow of $100 that presently, it assumes the agricul- impact on the company. million for the full year 2005, which tural equipment market could be flat The quarter was also weak due means the company expects to in 2006. to further deterioration in its other reduce inventories by over $200 mil- “We will concentrate on improv- major markets, including South lion in the fourth quarter. ing our balance sheet and cash posi- America and Western Europe, as well He also points to the gains made tion at year-end,” said Martin as a 20-25% increase in the exchange by the Challenger line of equipment. Richenhagen. Agco CEO. “We also rate for the Brazilian Real. “Challenger revenues were up 10% in expect to complete the year with The company said that during the the quarter to about $65 million; man- improved results in all of our regions 2005 third quarter it earned an adjust- agement still expects 2005 sales to be with the exception of South America. ed $27.7 million on sales of $1.23 bil- 20-25% above last year,”he says. We believe these results will demon- lion. One year earlier the company In their analysis, UBS reports that strate that our initiatives to improve said its profit was an adjusted $36.5 management expects full year North productivity and our market position million on a turnover of $1.21 billion. American industry demand of higher are effective.” Since the year started, the firm horsepower equipment to be above Shortly after announcing the has earned an adjusted $109.4 million 2004 levels, despite the drought con- third-quarter results, the Agco CEO vs. an adjusted profit of $111.8 mil- ditions that have impacted demand. purchased an undisclosed amount of lion one year ago. Revenue during the In Western Europe,Agco expects Agco common shares with $500,000 third quarter rose to $4.06 billion industry demand over the balance of of his own money.According to pub- from $3.73 billion one year ago. 2005 to be below last year’s levels, not- lished reports, Richenhagen said the “Though AGCO would not give ing that industry demand has weak- purchase was a “bargain.”

6 Ag Industry Watch/November/2005 OCT. U.S. UNIT RETAIL SALES Total Tractor Sept. Oct. Oct. Percent YTD YTD Percent Equipment 2005 Field 2005 2004 Change 2005 2004 Change Sales Slip Slightly Inventory in October Farm Wheel With the benchmark year of 2004 Tractors-2WD serving as the measuring stick, trac- Under 40 HP 9,288 9,203 +0.9 111,809 119,439 –6.4 57,399 tor sales for ’05 continue to hold their own.Through the first 10 months of 40-100 HP 6,901 6,761 +2.1 65,112 60,120 +8.3 31,600 this year, total tractor sales slipped only 1.3% compared with the same 100 HP Plus 2,315 2,718 –14.8 16,864 17,054 –1.1 7,594 period of ’04, a year some have called a “generational”year for ag equipment Total-2WD 18,504 18,682 –1.0 193,785 196,613 –1.4 96,593 purchases. Compared with October Total-4WD 544 678 –19.8 3,218 3,045 +5.7 1,139 ’04, total tractor sales for this October came in only 1.6% shy. Total Tractors 19,048 19,360 –1.6 197,003199,658 –1.3 97,732 By horsepower, sales of tractors between 40-100 HP jumped 8.3% on SP Combines 540 1,093 –49.8 5,625 5,764 –2.4 1,743 a year-to-year basis, while sales of those under 40 HP slipped 6.4%.The sale of tractors in the 100 HP and over class fell only slightly (–1.1%). OCT. CANADIAN UNIT RETAIL SALES Sept. Compared to the same period of Oct. Oct. Percent YTD YTD Percent Equipment 2005 Field ’04, October ’05 sales of tractors in 2005 2004 Change 2005 2004 Change the under 40 HP (+0.9%) and 40-100 Inventory HP (+2.1%) held their own. Larger Farm Wheel tractors (100 HP and over) took the Tractors-2WD biggest hit as sales for this category dipped by nearly 15%. Under 40 HP 953 954 –0.1 6,914 6,211 +11.3 4,051 At the same time, sales of both 2- 40-100 HP 1,091 1,155 –5.5 5,553 5,354 +3.7 3,357 WD and 4-WD tractors for October took a hit when compared with the 100 HP Plus 577 592 –2.5 3,140 2,951 +6.4 1,765 same month of ’04, falling 1.0% and 19.8% respectively. On a year-to-year Total-2WD 2,621 2,701 –3.0 15,607 14,516 +7.5 9,173 basis, sales of 2-WD machines slipped by 1.4%, while 4-WD tractors were Total-4WD 81 101 –19.8 520 597 –12.9 255 up by 5.7%. Total Tractors 2,702 2,802 –3.6 16,127 15,113 +6.7 9,428 Meanwhile, combine sales fell off dramtically (nearly 50%) during the SP Combines 169 194 –12.9 1,346 1,346 0.0 481 month compared to last October. “September U.S. row-crop tractor and combine inventories appear gen- 2005 erally consistent with historical inven- U.S. UNIT RETAIL SALES OF 5 year average tory levels on a days-sales basis,”says 2-4 WHEEL DRIVE TRACTORS & COMBINES Robert McCarty,analyst for Baird.“U.S. 30,000 4-WD inventories appear relatively 28,000 tighter at 106 days sales, which were 26,000 down considerably from last September's 138 days and the 129- 24,000 day average over the last 5 years.” 22,000 Agco and Deere have already 20,000 announced cutbacks on fourth quar- ter production schedules in antici- 18,000 pation of weaker demand, according 16,000 to the Baird analyst. “CNH 14,000 announced that it under-produced retail demand by 12% in the third 12,000 quarter. The proactive inventory 10,000 management strategies should help 8,000 keep dealer inventories at manage- 6,000 able levels over the next few JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC months,”says McCarthy. —Assn.of Equipment Manufacturers Ag Industry Watch/November/2005 7 Agco’s Fendt Tractor Line Posts 8% Sales Growth Agco’s prestige tractor line, Fendt, Agco’s Beauvais tractor plant in The U.S. now accounts for 3% of continued its growth trend during the France continues to grow for installa- total Fendt shipments, as sales last last year with a record output of tion in selected Massey Ferguson, year rose to 300 units from the 200 to almost 11,350 tractors, a sales growth Challenger and Agco models. 220 level shipped over the past 4 of more than 8% from about $846 to In addition, Fendt continues to years. Merschroth and Collar admit, $917 million and increased exports pursue OEM sales. Caterpillar, for one, however, that progress in North that now account for more than 66% is exploring Vario’s potential in con- America remains unsatisfactory. of units shipped. struction and industrial vehicles. “Distribution is the main problem. “Some of the company’s income “It would seem to make a great We’re trying to expand the network, comes from sales of harvest machin- transmission for mid-size wheeled but it’s proving more difficult than ery and Challenger track tractors in loaders doing repeated shuttle work expected,”said Collar.“Some Cat deal- Germany, but 90% is generated by when you want rapid but smooth ers selling our Challenger line have Fendt tractors,”according to Hermann taken on Fendt as their top brand and Merschroth, Fendt vice president.“We are making good progress. expect another positive result in 2005 “But we’re up against some big with sales worth around $964 million “Distribution (in America) players in this market and the bene- from a slight increase in tractor ship- is the main problem. fits of a stepless transmission are per- ments of 11,400 units.” We’re trying to expand haps not always so obvious in the Agco’s German operation has the network, but it’s farming areas where Challenger deal- steadily increased sales of its premi- proving more difficult ers are most active.” um-priced tractors over the past 10 Increasing R&D spending sup- years from just 7,800 units in 1995. than expected...” ports Merschroth’s claim that Fendt Its strongest market shares are in high- plans to stay at the forefront of tractor er horsepower categories where the technology; investment in this area stepless transmission concept intro- acceleration,”says Gary Collar, senior has grown from $21.6 million in 2002 duced with the Vario transmission 10 vice president for Agco’s Europe, and 2003 to $26.5 million in 2004 and years ago is now widely accepted. Africa & Middle East region. is scheduled at $31.3 million this year. Some 70% of Fendt tractors are now As far as tractor sales are con- Fendt revealed its future product equipped with Vario drive. cerned, Fendt’s European market plans at the annual press conference in Production capacity for these remains far and away its biggest out- Munich where it unveiled the Fendt 936 transmissions is due to be increased let, accounting for a third of its out- Vario.At 360 HP this is the company’s as part of this year’s $39.7 million cap- put. French farmers buy more than most powerful tractor to date and the ital investment program, up from $23 anyone else outside Germany, repre- first with a top speed of 37 mph, twin to $24 million over the previous 3 senting 20% of sales, while Spain and circuit disc brakes and independent years, as demand for the unit from Italy are the next biggest at 7%. wishbone front axle suspension.

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