Oct 25, 2011
Executives
Greg Peterson - Director of Investor Relations Martin Richenhagen - Chairman, President and Chief Executive Officer Andrew Beck - Senior Vice President and Chief Financial Officer
Analysts
Jamie Cook - Credit Suisse Henry Kirn - UBS Ann Duignan - JPMorgan Stephen Volkmann - Jefferies & Company Timothy Thein - Citigroup Andrew Obin - Bank of America Merrill Lynch Seth Weber - RBC Capital Markets Joel Tiss - Buckingham Research Lawrence De Maria - William Blair & Company
Operator
Good morning. My name is Brandy, and I'll be your conference operator today.
At this time I would like to welcome everyone to the AGCO Corporation’s 2011 Third Quarter Earnings Conference Call. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, 2011, October 25.
Thank you. I would now like to introduce Mr.
Richenhagen. Sir, you may begin your conference.
Martin Richenhagen
Actually it’s not Mr. Richenhagen, it’s Greg Peterson as usual.
Good morning, everybody.
Greg Peterson
Good morning. Thanks, Brandy, thanks, Martin.
I’d like to welcome all of you who are joining us on the call and over the internet for our third quarter 2011 earnings conference call. We will refer to a slide presentation this morning, which is posted on our website at www.agcocorp.com.
All of the non-GAAP measures used in this slide presentation are reconciled to the GAAP measures in the last section of the presentation. We will make some forward-looking statements this morning, including those related to projections of earnings per share, sales, market conditions, margin improvements, commodity prices, farmer income and sentiment, industry demands, the impacts of currency translation, plant and product investments, production volumes, free cash flow, depreciation, emission requirements, product line expansion, general economic conditions, pricing benefits, capital expenditures, and the impact of the GSI acquisition including projections regarding integration, synergies, retention of key customers, demand for protein production infrastructure and grain storage, and cash generation.
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, 2010.
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 as you have heard already is 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.
Martin Richenhagen
Thank you, Greg, and good morning to everyone. The year 2011 is turning out to be a good year in the global farm equipment industry.
Farmers are progressing with their harvests and commodity prices remain at attractive levels. AGCO took advantage of these positive conditions and delivered another quarter of strong sales growth and margin expansion in the third quarter of 2011, compared to the same period last year.
AGCO’s operating margins improved nearly 300 basis points in the first nine months of 2011, compared to the first nine months of 2010. Our Europe, Africa, Middle-East business delivered exceptional performance in the third quarter.
With industry demand below peak levels in Western Europe, our EAME region produced record third quarter sales on a constant currency basis and improved operating margins by over 350 basis points compared to the third quarter of 2010. In North America we capitalized in healthy industry conditions, grew sales, and for the first nine months of 2011 expanded operating margins by over 250 basis points compared to the same period in 2010.
Slide three summarizes our results for the third quarter and first nine months of 2011. AGCO reported adjusted earnings per share for the third quarter of $0.87, up 32% compared to a year ago.
In addition, our strong operating performance translated into improved cash flow. For the first nine months of 2011, AGCO’s free cash flow improved more than $150 million.
AGCO’s tractor and combine production volumes for 2010 and 2011 are illustrated on slide four. AGCO, third quarter 2011 tractor and combine production was flat compared to the same period in 2010.
Lower production volumes in South America were offset by increased production levels in our European and North American factories. AGCO order board for the North American and EAME markets at the end of September 2011 is double the level at the end of September 2010.
South American order boards remain strong but were down from very high levels at the end of third quarter of 2010. We expect production volumes to be up 8% to 9% in the fourth quarter of 2011 versus the comparable period in 2010.
For the full year of 2011 we expect production to be up approximately 9% from 2010 levels. Slide five details industry volumes, unit volumes so to say, by region for the first nine months of 2011.
Industry tractor sales in North America were up modestly compared to 2010 levels. In North America, industry sales of utility tractors increased due to improvement in the dairy and livestock sectors.
Sales of high horsepower tractors remained elevated and were up slightly from the strong levels in the first nine months of 2010. As expected, combine industry retail sales were lower in the third quarter and are now down 4% for the first nine months of 2011 from the high levels experienced last year.
Industry tractor units retail sales in Western Europe were up approximately 12% in the first nine months of 2011 compared to the weak levels experienced in the same period last year. Higher commodity prices and improvement in the dairy and livestock sectors contributed to the growth.
Industry growth was strongest in Germany, France, Scandinavia and Finland. South American industry retail sector volumes decreased during the first nine months of 2011 compared to strong levels in the first nine months of 2010.
Declines in Argentina and Brazil were mostly offset by growth in smaller South American markets. Industry retail sales in Brazil are still on pace to be the second largest in their history.
Organic growth and margin improvement continues to be AGCO’s primary focus. We will, however, continue to be opportunistic in terms of acquisition that adds to our product offerings or improve our geographic reach.
I will finish my remarks this morning with a few comments about our recently announced agreement to acquire GSI. This acquisition is consistent with our long-term strategy of providing productive solutions for the professional farming sector.
With a business model similar to AGCO’s manufacturing, dealer distribution and Ag market focus, GSI will be a good fit to integrate into AGCO’s operations. GSI is a strong, profitable, very well managed Ag equipment company that serves AGCO’s retail customers.
The combined distribution network of our two companies allows for greater access to customers in all major markets for both AGCO and GSI. The transaction will also help AGCO’s performance both in North America and in developing markets.
AGCO will be able to improve GSI’s operations in the areas of purchasing, manufacturing and international market expansion. We are also excited about GSI’s growth potential in the developing markets of Brazil, Asia and the CIS.
Improving income levels, changing diets and population growth in these regions are expected to drive the need for more protein production, infrastructure and more grain storage. In addition, GSI’s track record of strong profitability and cash generation improved AGCO’s overall capacity for investments to support the long-term growth of our business.
I will now turn the call over to Andy Beck, who will provide you more information on our third quarter results.
Andrew Beck
Thank you, Martin, and good morning. AGCO’s regional net sales performance for the third quarter and first nine months of 2011 is outlined on slide seven.
Currency translation had a positive impact of about 7% on AGCO’s consolidated net sales in the third quarter of 2011. Acquisitions added approximately 4% to sales in the third quarter of 2011 compared to the third quarter of 2010.
Europe, Africa, Middle East segment reported a net sales increase of approximately 38% excluding the impact of currency translation during the third quarter of 2011, compared to the third quarter of 2010. Sales increased in nearly every major market across Europe in the third quarter of 2011.
The most significant improvements occurred in Germany, France and Scandinavia. In the first three quarters of 2010 we managed through weaker market conditions in Western Europe.
The Western European market demand began its recovery in the second half of 2010 which will result in tougher comparables for the fourth quarter of 2011. North American net sales increased approximately 10%, excluding currency translation impacts during the third quarter of 2011, compared to the same period in 2010.
Sales of combines and high horsepower tractors showed significant improvement in the third quarter of 2011 compared to the third quarter of 2010. AGCO’s third quarter 2011 net sales in South America were flat from comparable 2010 levels, excluding currency translation impacts.
Trade disruptions in Argentina and lighter demand in Brazil for small tractors resulted sales declines in those markets for AGCO during the third quarter of 2011 compared to the same period in 2010. Strong growth in the smaller South American markets offset the declines in Brazil and Argentina.
Net sales in our rest of the world segment increased to approximately 15% in the third quarter of 2011 compared to 2010, excluding the impact of currency translation. Sales growth in Russia and Australia produced most of the increase.
Part sales were $347 million and $982 million for the third quarter and first nine months of 2011, an increase of approximately 22% for the quarter and 24% for the first nine months of 2011 compared to the same period in 2010, excluding the impact of currency. Slide eight details AGCO’s sales and margin performance.
Adjusted operating margins were up about 80 basis points in the third quarter of 2011 compared to the third quarter of 2010. The benefit of increased production volumes, pricing and leverage over operating expenses was partially offset by increased material cost and higher engineering and marketing expenses.
As Martin mentioned earlier, third quarter 2011 operating margins in AGCO’s Europe, Africa, Middle East region were up over 350 basis points on a year-over-year basis. Margins were improved in the third quarter of 2011 compared to the same period of 2010 due to higher sales and production volumes, better pricing and a richer mix of products.
In South America region, operating margins declined in the third quarter of 2011 compared to 2010. A weaker geographic mix, lower levels of production, increased material cost and higher operating expenses contributed to the decline.
In the third quarter of 2011 operating margins improved in North America due to higher sales and production along with cost control initiatives as you can see on the next slide. Slide nine shows the improvement in North America profitability in more detail.
Margins in this region have been one of our main focus areas over the last few years. You can see from the graph on this slide that we have made significant progress.
For the first nine months of 2011, margins improved nearly 500 basis points on lower sales compared to the same period in 2008. We introduced profitable new products, reorganized our sales organization, lowered our logistics cost and improved the efficiency of our factories.
In the third quarter of 2011, operating margins increased about 55 basis points compared to the third quarter of 2010 due to higher levels of production and improved pricing, partially offset by higher levels of engineering expense and increased material costs. Slide ten addresses AGCO’s free cash flow which represents cash provided by operating activity less capital expenditure.
Our balance sheet and liquidity position at the end of the third quarter remains very strong. AGCO’s free cash flow for the first nine months of 2011 of $83 million improved about $150 million from last year and covered $100 million increase in capital expenditure.
We plan to continue investing for future growth in the form of engineering expense and additional investments in our plants and new products. Even after covering the increased spending on these strategic investments, we are targeting positive free cash flow for 2011.
At the end of September 2011, our North America dealer month supply on a trailing 12 months basis was as follows: Tractors for 5 months, 4 months for combines, 6 months for hay equipment. Other working capital details are as follows: Losses on sales of receivables, which is included in both interest expense net and other expense net, were approximately $6.9 million and $15.6 million for the third quarter and first nine months of 2011, compared to $3.9 million and $11.5 million for the same periods of 2010.
During the third quarter of 2011 we retired the remaining $100 million of our 1.75% convertible notes. Slide 11, highlights our depreciation and capital expenditure trends.
In 2011 we expect to increase our capital expenditures as we work to meet Tier 4 final emissions requirements, refresh and expand our product line, upgrade our German manufacturing facilities and make investments in Russia. Through the first nine months of 2011 our capital investments totaled $187 million and will remain at high levels through the rest of the year.
Our outlook for 2011 for our regional markets is captured on slide 12. We expect that the trends experienced in the first nine months to continue for the balance of the year.
Modest growth is expected in North America as the healthy financial position of row crop farmers and the projection of farm income above historical averages is expected to support strong demand in the professional farming sector. We expect the South American markets to remain elevated but it’ll be down 5% to 10% compared to the record demand of 2010.
Higher prices for grain and dairy farmers in Western Europe and improved farmer sentiment are expected to generate market growth of about 10% to 15% compared to the weak levels in 2010. Slide 13, lists our view of selected 2011 financial goals.
We are projecting 2011 sales to range from $8.7 billion to $8.8 billion. Forecasted pricing benefits, market share improvements, the positive impact of currency and acquisition impacts are all expected to contribute to the growth, including significant investments in product development and market development we expect 2011 earnings to be improved from 2010 levels.
We are raising our target for 2011 earnings per share to approximately $4.30 per share, excluding any one time transaction costs related to the acquisition of GSI. We expect increased capital expenditure to be in the $250 million to $300 million range, and our free cash flow to remain positive and exceed $150 million after the funding the expected increase in capital expenditures.
Operator, that concludes our prepared remarks, we’re now ready to take questions.
Operator
(Operator Instructions) And your first question comes from the line of Jamie Cook with Credit Suisse.
Jamie Cook - Credit Suisse
Hi, good morning and congratulations. A couple of questions.
Not to split hairs but you did slightly lower your forecast in the U.S. and Western Europe.
So just questioning is that a function of supplier not being able to ramp production or is there something going on in the market. And then, Martin, my second question to you relates to Tier 4 and how you are going to manage that in 2012?
Deere has been talking a lot about disruptions to manufacturing, the inability to pass through price on Tier 4, on small and medium sized tractors. I am just trying to get a sense to how you will handle that in 2012 and is that a potential headwind we should start to think about?
Andrew Beck
Jamie, in terms of the market changes we are just nine months into the year and can see how the industry is shaping up. The industry for Western Europe is 12% for the first nine months of the year and as we said in our comments that the fourth quarter of 2010, the market did start to recover.
So we just believe that we will be somewhere in that 10% to 15% range for the full year now, but it really didn’t affect our own sales forecast for the year. So we are still on track to meet the unit production and unit sales that we had forecasted.
In terms of--
Jamie Cook - Credit Suisse
But I thought that you mentioned Germany, France and Scandinavia are strong. What are you sort of seeing in the -- and I understand they are important countries -- what are seeing in other countries in Europe?
Seeing in the other countries I guess besides those three you mentioned.
Martin Richenhagen
Pretty much on budget, on plan. So no variance, no big variance.
So when we mentioned Germany and some of the other countries they were above our expectations.
Jamie Cook - Credit Suisse
Okay.
Martin Richenhagen
When it comes to suppliers, no major issue right now. We don’t expect headwind for 2012 because we are in a very close relationship with most of our suppliers so they know what we plan, and so they know the volumes we are expecting.
Tier 4, I don’t expect headwind, everybody will have to price for it and we will do the same and as you might remember, we did pretty well as the industry as such when we were adding steel price extras. And so I think the industry will be and has to be aligned in the area of Tier 4 because it’s a much -- that the cost does increase and we have to pass it over to customers partially.
Jamie Cook - Credit Suisse
But if the industry leader isn’t going to pass-through the full price increase in one year and they will do it over two years or three years. I mean will your response be to price ahead of them?
Martin Richenhagen
I look at that by market, so I think everybody who is leading in the market has to take a leading position also in the area of pricing. And we have our strategy and we will implement whatever competition is doing.
Operator
Your next question comes from the line of Henry Kirn with UBS.
Henry Kirn - UBS
Could you go through some of the puts and takes of the European margins as we go through the balance of the year into 2012? What could push things up and down from where we stand today?
Martin Richenhagen
Actually, to be perfectly honest, not a lot. So that means the year is almost over, we know what orders we have in house, we just need to deliver.
We have the components in house. Labor cost is very much known so I am not expecting any variance.
Henry Kirn - UBS
And with the accelerated depreciation incentives in the fourth quarter, is that opportunity to gain share in North America, if you guys have a little more inventory than some of your competitors and are you seeing any meaningful demand there.
Martin Richenhagen
Fortunately we don’t have much higher inventory so that means everybody is working on controlling the inventories much better than in the past in our industry. But I think this could help the market in total and whether we can benefit more from it than others, I don’t know.
Henry Kirn - UBS
Are you actually seeing accelerated depreciation as a bigger catalyst this year as opposed to other years?
Martin Richenhagen
Not really.
Henry Kirn - UBS
Okay. Thanks a lot.
Martin Richenhagen
It’s difficult to know. You know we don’t ask every customer why do you invest and why do you invest now, things like that.
So might know it more or less after the effect.
Operator
Your next question comes from the line of Ann Duignan with JPMorgan.
Ann Duignan - JPMorgan
Martin, could you just talk a little bit about Europe and Germany in particular. Normally, when we have the Agritechnica show we see a little bit of a slowdown in sales as farmers wait to see all the new products at the trade show and then we see a pickup in sales afterwards.
Would you anticipate that happening again, because you don’t have any new products that’s going to launch at the show? And then also what do your order boards look like over there right now and where are you on the capacity expansion plans?
Just a little bit more detail on Europe and Germany in particular.
Martin Richenhagen
Yeah, actually overall we didn’t see the market slowing down a lot. But we are expecting some positive impact from the show which is mainly also due to the pretty strong performance of AGCO.
This year we will win a gold medal, Fendt will win a gold medal. There are only two gold medals this year, one for us, one for Krone.
And then we will get two silver medals on top of that, and the reason is the many new product introductions we did this year and we also plan to do next year. So that means our technology leadership somewhat pays out very well and so we are expecting some maybe positive impact coming from this.
As far as capacity improvements are concerned, we will have the [fenderhead] project completed next summer. So the transition will be done during the summer shutdown and then from August on we are, let’s say we are in a position to benefit from the capacity improvement.
And I think not only you but we will organize ourselves in a way that you all have a chance to see the new factory.
Ann Duignan - JPMorgan
Good. We look forward to that.
And on GSI, I thought you said at the beginning that you were going to go through the GSI transaction in great detail and discuss closing of the deal, integration, synergies etcetera. Did I miss something or can you give us a little bit more...?
Martin Richenhagen
I went through it in great detail. As detailed as we can be.
But my remarks are in the document. Actually there’s all the assumptions which we talked about seemed to be very realistic and we are in pretty good mood.
So in the meantime I have been to Brazil, I have been to China. I will go to Europe soon, so that means everything we hear from farmers about this acquisition is extremely positive and exciting.
Even from the industry, people, let's say react and they are very -- it’s look like as if GSI is highly respected also from their competitors. I think finally this will turn out to be a very good deal.
Ann Duignan - JPMorgan
Okay. I will turn it over to the next.
Thank you.
Martin Richenhagen
This was my little marketing section, Ann.
Ann Duignan - JPMorgan
I know I was looking for a little bit more analytical. Thank you.
Operator
Your next question comes from the line of Steve Volkmann with Jefferies.
Stephen Volkmann - Jefferies & Company
Hi, good morning. Andy, on your slide four here where you talk about tractor and combine production.
As we looked at that one last quarter I think we expected third quarter production to be up quite a bit year-over-year and it turned out to be fairly flat. Are you guys having any, kind of near term supplier issues or what would account for sort of pushing that out into the fourth quarter?
Andrew Beck
I think there were just some, mainly some mix changes. We have had some minor issues with suppliers from here and there but really hadn’t effected deliveries of equipment at this point.
But we are working through those on a daily basis. So I believe it was just some change in timing between some of the South America production that was a little lower than what we had expected.
Martin Richenhagen
Stephen, overall supply base this year is in pretty good shape. And I also think it’s partially structural improvement.
So some they put in some capacity, some planning did improve and where we had problems in the past we also went for dual sourcing and developed different sources. So overall I think we are doing much better than in previous years.
Stephen Volkmann - Jefferies & Company
Okay. Thanks.
And just a quick follow up I guess on your North American EBIT margin. Certainly year-to-date you’re making good progress.
But I actually thought things might get a little better in the third quarter which could just be my irrational exuberance but I wonder--
Martin Richenhagen
I think it is.
Stephen Volkmann - Jefferies & Company
Was there anything in the third quarter North American production that came in a little lighter than we thought? I know because you actually trimmed your year-over-year margin growth forecast for the full year as well.
Andrew Beck
Actually we performed quite well on the gross margin line for North America. What pulled the margins down was some additional operating expenses primarily in engineering was ramped up, as well as some marketing and product introduction expenses that were a little higher then where we were last year.
So that as a percentage in net sales were higher which pulled the overall operating margins down. So we were very pleased with our gross margin which were pretty much inline with where we were in the second quarter, and that’s pretty good because third quarter’s typically the margins come back down a little.
Stephen Volkmann - Jefferies & Company
Right. Okay.
And based on your earlier commentary, Andy, I guess that we should expect that to continue those spending items to continue going forward?
Andrew Beck
They should. We’ll continue to see higher operating expenses and some, not getting much leverage over -- it will actually be -- we will probably not get leverage over operating expenses in the fourth quarter as well.
We have ramped up engineering expenses as it relates to Tier 4 compliance and new product introduction. As well as some of the -- we call them market expansion and market introduction of new product expenses that are occurring in Eastern Europe.
Some in Asia and in South America as well.
Greg Peterson
Steve, the normal seasonality that you see both in Western Europe and in North America is due primarily to the higher volumes you will see again or we expect you to see again in the fourth quarter. So you should expect margins to improve in both of those markets in the fourth quarter from the third quarter.
Stephen Volkmann - Jefferies & Company
That’s helpful. And final one, Martin, if I could, certain other companies are kind of giving broad-brush strokes about what they think 2012 might look like.
Is there anything in that regard you would like to give us?
Martin Richenhagen
Yes. I can say in the tradition of AGCO, which is that we just start our planning process for 2012.
The planning will be completed at end of November and when we come to Wall Street in December we will talk about 2012. But unfortunately not today.
This is the same procedure as last year, I would call it. Sorry, Steve.
Stephen Volkmann - Jefferies & Company
Fair enough. You can't blame me for trying.
Martin Richenhagen
That’s okay. That’s your job.
Operator
Your next question comes from the line of (Rob Weirtimer with Vertical Research).
Unidentified Analyst
Hi, good morning, everybody. So two questions.
One on Europe. You have had a couple of people, I guess lower in the non-related, semi-related industry truck outlook for next year.
Are you seeing any flow through whatsoever from the macro uncertainty? Any difficulties in financing?
Martin Richenhagen
Not really. Let's say the truck industry is a very special segment.
They also were -- they are directly related to supply and demand and basically also consumer goods. So I heard about that because I know some of the truck guys very well.
The truck business is very different globally because it’s extremely strong in South America. It’s strong in North America and it’s slowed theoretically a little bit because people talk about it.
Whether it will really happen is uncertain yet. We do not see any major impact from the overall situation in Europe yet.
But we of course carefully watch what's going on. The fundamentals for our industry are still very very strong, so therefore I personally think that we might not see impact and in the meantime all the initiative the European governments are talking about might finally come also to a conclusion and they might come up with a pretty comprehensive action plan.
That’s how I see it and that will also then help to basically get consumer confidence back.
Operator
Your next question comes from the line of Tim Thein with Citigroup.
Timothy Thein - Citigroup
Thank you and congrats on the strong results. I just want to come back to the earlier comments on the -- you mentioned the order boards begin double the level of a year ago and I believe you said North America and Europe.
I was hoping you could may be give a little bit more color in terms of what you are seeing by product type, even if you just kind of group that amongst tractors, combines as well as your sprayers and planters.
Martin Richenhagen
Typically, I don’t do that because also we don’t want to be too transparent for our friends from competition.
Timothy Thein - Citigroup
Okay.
Andrew Beck
But overall the high horsepower markets are strong in most of the markets. I think that’s a key trend for you to keep in mind and then obviously the major markets North America, Europe, our order boards are up, pretty much across the board.
Timothy Thein - Citigroup
Okay. Got you.
Just to come back on the -- for the fourth quarter from a modeling perspective. Should we assume that the fourth quarter shares outstanding will reflect the full, I guess it’s roughly 4 million shares issued with the notes conversion.
Andrew Beck
Yes. Those are in them.
They were actually, depending on where the share price is, were in those already as part of the diluted share count. So there shouldn’t be a change there from what you see in the third quarter.
Operator
Your next question comes from the line of Andrew Obin with Bank of America Merrill Lynch.
Andrew Obin - Bank of America Merrill Lynch
You guys have had very strong execution this year. But as I look at your operating leverage for the past four quarters, it sort of has been steadily declining into the third quarter and I appreciate the increased investments that you guys have been making throughout the year.
And just a follow up on Andy’s comments, going to Q4, what should we think about operating leverage and I know we referred to them, I look at incremental margins. Where would incrementals margins be relative to the rest of the year going to the fourth quarter for the company?
Andrew Beck
Well, when we look at our margins we are looking at margin improvement in the fourth quarter of -- over on the gross margin side over a 100 basis points in the fourth quarter, and again operating margin improvement. There will be some decline in terms of operating margin improvement over what the improvement is on the gross margin side.
So we give a little back, but operating margins to be about 100 basis points in the fourth quarter overall. You can run the incrementals for that information.
Andrew Obin - Bank of America Merrill Lynch
No, no. And just a follow up question on Europe.
Just to dig a little bit. When you guys talk to farmers and as you look at this market which you obviously know extremely well, are you seeing any yellow flags in terms of financing availability to farmers from large French banks, large Dutch banks, or anything you’re seeing on residual values, or anything you’re seeing in Eastern Europe that would make us worried?\
Andrew Beck
No. Nothing.
Andrew, nothing that we have seen. Obviously on equipment financing as we experienced even back in 2009, there was sufficient financing in the market in Western Europe to finance farm equipment.
We have our own AGCO Finance captive JV financing which will be -- continue to be fully available to our customers. When you go to Eastern Europe and Russia that is more of a complex situation but so far we have financed alternatives for our customers that remain available.
Andrew Obin - Bank of America Merrill Lynch
And farmers seem to be able to access credit as far as you can tell, still right now.
Andrew Beck
Yes, absolutely.
Operator
Your next question comes from the line of Seth Weber with RBC Capital Markets.
Seth Weber - RBC Capital Markets
I guess just following up on Andrew’s question, are you seeing any build up of used equipment inventories in Europe at this point?
Martin Richenhagen
No.
Andrew Beck
No significant changes at this point in used. That is for North America and Europe.
Martin Richenhagen
And the fact that Eastern Europe is doing better also helps because this was a kind of difficult situation may be during the last two years.
Seth Weber - RBC Capital Markets
Right. Okay.
And I guess in South America the decline in margin in that region. Is it possible to talk about how much of that is related to price completion versus volume versus some of these, I guess there have been some hiccups there with -- you mentioned some disruptions in Argentina or what have you.
Is it possible just to sort of talk about what you think, you know as you normalize South American margins should look like?
Andrew Beck
Right. Well, the three major reasons why our margins over a year ago, you pointed out most of them.
The pricing did not cover the material cost inflation that we are seeing in the market so that was probably about 150 basis points of the decline. Then lower production and a weaker mix of products has well impacted us.
As we pointed out the sales in Brazil were down slightly but our sales in other South American markets are up and our margins are better in Brazil. So we are getting a weaker mix there.
And then lastly we have increased our expenditures and operating expense and we assume higher marketing expenses in the quarter which resulted in lower leverage on the operating cost. So those were the main items for our decline.
When you look at fourth quarter margins, we are forecasting that our margins are relatively flat from where we are in the third quarter and which will make them up from where we were a year ago.
Operator
Your next question comes from the line of Joel Tiss with Buckingham Research.
Joel Tiss - Buckingham Research
Just two quick questions. The share count at the end of the quarter, not the average for the quarter?
Andrew Beck
Share count for the quarter?
Joel Tiss - Buckingham Research
At the end, what was it on the last week or the last day as opposed to the average for the whole quarter?
Andrew Beck
Joel, I don’t have that in front of me. We will have to get that back, I will get back to you Joel.
Joel Tiss - Buckingham Research
Okay. And can you give us a sense of what kind of rates are out there for the debt that you have to borrow for the acquisition?
Just sort of a range to help us get into the ballpark.
Andrew Beck
Our bank credit facility that we are working with, that’s been underwritten by Rabobank, has a grid to it but the basic terms will be LIBOR plus a 150 basis points when we start out.
Operator
Your next question comes from the line of Larry De Maria with William Blair.
Lawrence De Maria - William Blair & Company
Question, can you guys just discuss the timing of the close of GSI? Do you need more regulatory approval outside the U.S.?
And may be touch on the or elaborate on the distribution synergies I think you referenced in the prepared comments, specifically in North America.
Andrew Beck
Sure, Larry. In terms of closing as you point out we are still waiting on regulatory approval and certain countries it’s hard to say exactly when we will get those.
So we do expect to still close sometime in the fourth quarter this year but I can't give you specific date at this point. In terms of distribution synergy, most of the ones that we are highlighting we believe are likely to be outside the U.S.
So markets like Brazil where we have a very strong distribution network and a very active group in some of these developing markets in Central West portion of Brazil, we believe can help us grow. Particularly the grain storage side of the GSI business.
And then we think we can work together in markets like the CIS and in Asia to jointly market our products. And so in North America, they have a very strong established distribution network and obviously we have a very focused distribution network as well that we are improving and we are positive about.
There may be some opportunities to cross-sell but I think they are much more likely in foreign international markets rather than U.S.
Lawrence De Maria - William Blair & Company
Okay. Thanks.
And then you guys talked about credit obviously being pretty available. We are seeing, or hearing of some reports of more challenging credit in Eastern Europe, but if credit does dry up more considerably or dries up at all, how do you think about the impact to Western Europe.
Obviously last time it was pretty adversely impacted and it sounds like you guys don’t think it would be as bad this time around. Could you just elaborate on that as well please?
Thanks.
Martin Richenhagen
The problem we faced in 2009 was not related to the availability of credit. It was more so that farmers due to all the bad news which were discussed in the media, did hold back investments and so there were really no fundamental problems to do business.
It was all more emotional. And this is how I see it also right now, so I don’t expect any negative impact from lack of retail finance.
Andrew Beck
Also, Larry, I believe that used inventories and overall inventories are, dealer inventories are in better shape than when they were in 2008, end of 2008. So I think that’s a positive sign as well.
Lawrence De Maria - William Blair & Company
Okay. Thanks.
And then finally if I could ask one more, I think Martin you were quoted as saying you might buy a sugarcane harvester in Brazil? Any news on that, that you could talk about?
Martin Richenhagen
No. There’s nothing we can talk about now.
Operator
Your next question comes from the line of (Joe Polorant) with Merlin Securities.
Unidentified Analyst
Good morning. My question is about Brazil because the Real has just weakened pretty considerably here short term.
So I know there is a translation effect, are there other effects, may be some positive ones on export or how do you see that? Because it’s kind of a sudden change.
Greg Peterson
Yeah, we do benefit. As Andy was talked about earlier we do export some of the production from Brazil to the U.S.
in some cases but also to some of the other South American countries like Chile and Peru and in better times Argentina. And in times when the Real does weaken, since those export sales out of Brazil are often times denominated in dollars, we do see margin improvement for those export sales.
So that is the benefit that down the line we look to receive as -- if and when that you see the Real continue to weaken.
Unidentified Analyst
Okay. So all else being equal, whatever you lose on the sales in FX you feel it’s just better for the business to have a -- I mean when the Real was really strong that that was not a great effect on the business.
Greg Peterson
Right. Actually, the farmers in Brazil benefit more from a weaker Real since they export a very large percentage of their crop.
It’s easier for them and their pricing is more competitive on a global basis when the Real isn’t as strong. So net-net we probably prefer to see a weaker Real then where we are today.
Unidentified Analyst
Okay. If I could ask just one more.
You mentioned a few times how the high horsepower market is strong. Now I am just confused, I am sure everyone else know this.
So are those -- is that equipment Tier 4 equipment or the equivalent that’s in the high horsepower? Or is this a pre-buy in front of 2012 to some degree?
Martin Richenhagen
There’s no pre-buy. So that’s our...
Andrew Beck
For 2000, the emissions requirements were the Tier 4 interim, for horse powers over about 175 horsepower kicked in at the beginning of 2011. But what you have is a lot of -- including us and competitors, introducing the Tier 4 interim compliant products throughout 2011.
So they all weren’t in the market at the beginning of the year. Customer, companies including us were using available credits and other means to continue to sell the Tier 3 products throughout the year.
So it’s blending in into our sales mix. During this 2011 you will see for high horsepower a much stronger Tier 4 mix in 2012.
Unidentified Analyst
All right. Just you can tell why I am asking because obviously there is a price increment on the Tier 4 compliant equipment.
So if tier 3 is available to some of those who want to pay that?
Martin Richenhagen
Well, there is no Tier 3 available anymore from AGCO.
Unidentified Analyst
Not anymore. Right.
That was earlier this year.
Martin Richenhagen
Yeah.
Operator
Ladies and gentleman we have reached the end of the allotted time for questions and answers. I will now turn the call back over to the presenters for any concluding remarks.
Greg Peterson
Thanks. We appreciate everyone’s participation today and we continue to appreciate your interest in AGCO and encourage you to follow up with me later today if you have additional questions.
Thank you.
Operator
This does conclude today's conference call, you may now disconnect.