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Agco lowers sales hopes - but cost cuts reassure investors

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Agco highlighted progress in cutting costs, in a drive which has cut factory hours by 21%, as the farm machinery maker stood by its full-year profits forecast, despite bracing investors for a bigger-than-expected drop in sales.

The maker of Massey Ferguson and Fendt machinery revised to 19-21% its forecast for its drop in sales in 2015, down from the 15-17% drop initially expected.

Much of the fall in sales estimates was attributable to currency effects. Exchange rates were seen as reducing sales by 11 percentage points, compared with the 8 percentage points previously forecast.

Martin Richenhagen, the Agco chief executive, also flagged difficulties of operating in a market in which low crop prices have prompted growers significantly to tighten their purse strings.

'Challenging farm economics'

"Challenging farm economics are expected to negatively impact industry demand across the developed agricultural equipment markets in 2015," said Agco chief executive Martin Richenhagen.

"The increased grain stocks and preliminary crop production forecasts continue to pressure soft commodity prices and farm income across the key agricultural markets."

The group was particularly gloomy over the European ag machinery sector, revising to 15%, from 10%, its forecast for the drop in industry sales this year.

The comments followed a January-to-March quarter in which sales fell by 27% to $1.70bn, below the $1.75bn which investors had expected.

Unfavourable currency effects made up 15.3 percentage points of the decline, as the stronger dollar lowered the value in greenback terms of contributions from Agco's foreign operations.

'Meaningful cuts'

The group's earnings fell by 70% to $29.9m.

However, at the equivalent of $0.34 per share, and $0.43 per share excluding one-off factors, the result was ahead of market expectations of $0.28 per share.

Agco also stood by its estimate for full-year earnings per share of about $3.00, despite the weaker revenue outlook, citing the boost to its margins from "substantial progress" in measures to cut costs.

"We reduced production hours by approximately 21% compared to the first quarter of 2014," while inventories as of the end of last month were down $175m year on year, on a constant currency basis, Mr Richenhagen said.

"In addition, we significantly reduced the size of our workforce to achieve meaningful cuts in our operating expenses."

Regional breakdown

By region, Agco highlighted a drop in large tractor trade in North America in the quarter, as weaker crop prices curtailed growers' appetite for fresh equipment, while in Brazil, weakness in the sugar sector undermined industry sales.

In Western Europe, "difficult economics for the dairy producers and lower grain prices kept market demand soft", the group said, flagging particular setbacks in Finnish, German and UK markets.

"We expect these shorter-term trends to continue resulting in lower demand in all major farm equipment markets in 2015," the group said.

Nonetheless, with the group standing by its full-year earnings forecast, its shares rose 1.7% to $49.26 in afternoon deals in New York.


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