CNH Industrial NV (CNHI) 2002 Q2 法說會逐字稿

Good day everyone, and welcome to CNH second quarter results conference call. Hosting today's call will be Mr. Michel Lecomte, CNH's President and Chief Financial Officer and Mr.

, Senior Director Investor Relations. At this time, I would like to turn the call over to Mr.

. Thank you, sir. You may begin.

Thank you, Lisa. Welcome everyone to CNH's second quarter 2002 results Web cast confernce call.

We are pleased to have Michel Lecomte, our Chief Financial Officer and

, our Treasurer, joining us today for this call.

In a few moments, Michel will offer management's comments on our results. Then we will be available to answer your questions.

But first, I must say that in recognition of regulation FD, we have provided public earnings guidance in this morning's press release, which will be elaborated on in today's conference call. After this call, earnings guidance will not be updated until CNH releases another public press release on the subject.

Also, we may be making some forward-looking statements during the course of today's presentation, and in answering your questions. Please refer to this morning's press release and the company's form 20-F for 2001, as filed with the U.S. Securities and Exchange Commission for a discussion of the important risk factors and uncertainties in the company's businesses that are subject to change and could cause actual results to differ materially from our expectations today.

Finally, this conference call and Web cast and their contents are the property of CNH Global N.V., and are not to be recorded or rebroadcast without our express written permission.

Now Michel would like to provide some comments on the results. Michel?

Good morning, everyone. Hello again. Since you have seen whole our press release and as we have added more detail to the footnote as you have asked, I would

the highlights briefly. In the second quarter

industries sales gains were recorded in Europe at 9%, Latin America at 10% and both better than expected. Industry unit sales of combines worldwide were up 6%

as

. Worldwide tractor sales fell 2% compared to 2001, less of a drop than expected. Two reasons for the tractor decline were the drop in high horse power and four-wheel drive tractor sales in North America, down 15%, and the rest of the world market sales down 21.

On a worldwide basis, our market share was essentially unchanged in the quarter. Of a sales staff of 2002, North American industry sales of

tractors were slightly better than expected, increasing by about 2%. That doesn't give the full picture

under 40

tractor sales were up more than expected at 7%. While other

tractors sales were down 4%. Product

were for the high horsepower and the four-wheel drive segments. In the first half tractor sales in Western Europe returned to more normal levels, up 7% with particular strength in France, Spain and the United Kingdom.

Now the concerns over foot and mouth disease have the

. Latin America was up 16% and the rest of the world markets were down

. Worldwide industry sales of agriculture equipment for the first half were down 1%. Turning to construction equipment, worldwide industry sales declined 7% from the second quarter of 2001, slightly better than expected. North America was down

as expected, Western Europe was down 9, also as expected, and Latin America up 6%, better than what we expected. And the rest of the world sales were up 17%, significantly better than expected. For the quarter, worldwide industry sales for

orders declined by 15%, significantly more than expected.

of orders declined by

as expected and heavy construction sales were flat, significantly better than expected.

As you know, the decline in North America industry sales was led by a 26% drop in

orders. And

orders were down 16% and heavy equipment down 8. The decline in Western Europe was led by

drop in

orders, worse than what we expected. And a 9% decline in

equipment as expected.

orders were down 3,

better than expected, and the gross in Latin America last quarter was

by heavy equipment up 8% and

up 6%, overall better than what we expected. In the second quarter, our construction equipment market share in Western Europe was essentially unchanged compared to 2001. In the Americas, our share declined slightly. In total, our worldwide market share declined slightly in the quarter. Now, in spite of these mixed results for the industry sales of equipment for the quarter were $2.6 billion at

from $2.5 billion last year including $27 million in good news

already coming from the euro

.

from equipment sales increased eight percent to 1.8 billion delayed by strong

in western Europe. Our gross margin in ag increased in the quarter due to increased volumes likely in

. In

of ag

results

from the margin improvements and for the quarter the ag reporting results as disclosed in the footnotes on an

basis and expressed on the

of the

of ag so, therefore, this operating performance was 6.4 percent of sales compared to 4.6 in 2001.

Construction equipment sales declined five percent to $804 million. Net of the Kobelco American acquisition which added revenues of $63 million in the quarter and construction equipment sales were down 13 percent or $107 million. The decline in revenue was more than accounted for by planned

action in

and wholesale levers to reduce

and company inventories.

Our gross margin in construction equipment declined in the quarter.

addition of Kobelco America were offset by lower production volumes and

.

Construction equipment

results declined $58 million with a loss of $67 million in the quarter on an IAS basis. Again, that's shown in the footnotes. And this would approximate

under U.S. GAAP basis and that was in a very difficult market environment.

For the first half of 2002 special equipment were

essentially unchanged from last year. Net of currency and acquisitions agricultural equipment sales increased six percent while construction equipment sales were down 40.

Including $28 million of incremental profit improvements in the second quarter the year to date total of $48 million is made up of $3 million of manufacturing

savings, $43 million in additional processing synergies and $12 million in

.

Equipment operations net interest expense in the first half declined by $32 million from 2001

to the interest rate

. The impact of the company's

action, i.e.

were minimal since we enjoyed the benefits only for the last two years - two weeks of June.

Turning to the financial services,

capital second quarter net income was $12 million in 2002 compared to net income of $16 million last year.

provisions for the second quarter were $9 million compared to $45 million last year. Since most of the non-core

high or long lost provisioning is behind us.

In 2002 the company also completed an ADS convection in the first quarter, lining 2001 in ADS convection, which completed the second quarter. And this difference in timing negatively impacted the year-over-year comprising for the quarter. In addition,

and design of 2002 reflecting the smaller average portfolio size.

Over "G" nation in the car, retail-financing business, we're up 10 percent over the second quarter of 2001.

In the first half, loan lost provision such as profit sharing in parts, down $46 million from the first half of last year. In other labs, the loan loss reserves were essentially stable through the first half of the year.

Another indicator of the important and the quality of the portfolio, is the decline in North American cap ex delinquencies over 31 days. It dropped again in June to about three point eight cents of the outstanding portfolio.

In the first half, Fiat Kobelco net income increased from suffering at the remainder of last year to 21 in 2002. Lower ADS gain, lower average interest income on the smaller average set up portfolio size, contributed a fifth direction in loan losses.

In total, CNH ended the first half of the year at break even. Different structures and with a net loss of one end out, $62 million better than the net of different structures in 2001.

Turning to cash flow. The first generated from equipment supply rations in the first six months in crude. Equipment supply margin defined as first minus cost of good soil, SG&A and

, of $240 million. So the partition and the multi-position of intangibles, excluding good will of $116 million, first to turn in $328 million. And this modern cover capital expenditure of $87 million and net interest expenses of 201.

We have seen in the cash inflow of $40 million.

I'm sorry, this is net debt, it has declined by $1.1 billion, $240 million, during the quarter, to $8 billion, $440 million. As a result of the reduction of one billion $718 million in equipment operations debt, properties especially upset by your five, 11, $40 million increase in the final first half is net debt.

The reduction in the net debts in equipment operation, one billion, 780, during the quarter is due primarily to the interest increase, trinkled down into the capital reduction in financial services. When this is back to the equipment operation, essentially in the form of a non-cash dividend.

And lastly, to the improved cash flow. The five, 11, eight, $40 million increase in net debt of CHN capital, is due mainly to a $790 million increase in retail financing portfolio. Standing ADS convection later in the year, plus the dividends I just described, and other action to optimize the capital structure of the financial services activity.

Working capital earning quit by $125 million in the quarter, partially due to inflation and increasing in the receivables relative to the seasonal level of wholesale activity in the quarter.

In terms of liquidity, at June 30, CNH capital had a valuable credit line and asset backed facilities of approximately eight billion dollars, of which approximately $3.7 billion was still valuable and

by

following

account in principle.

consolidated net

our position with approximately $2.8 billion at the end of the second quarter.

Now, on to the outlook and for the

business our forecast is slightly more optimistic than the one we gave last quarter in spite of the expected decline in the other 40 or so segments of the

market in North America. Of the third quarter we expect that the worldwide market for

will be up about seven percent, largely on the strength of Latin America and the under 40 horsepower segment in North America. Also, the rest of the world market should be up significantly on a

basis, in comparison to a very poor third quarter in 2001. Of the full year, we believe the worldwide

market will be up one percent.

A

for the full year we expect North America up three percent on the strength of the under 40 horsepower segment, better than what we forecast last time, Western Europe up four percent showing continuing improvement and Latin America up eight percent, now that the fourth quarter funding for

is assured. We see the construction equipment market for tractor loader backhoes,

loaders and heavy equipment

total down as much as 10 percent worldwide in the third quarter of 2002. For the full year we anticipate a total worldwide construction market to finish down in the neighborhood of seven percent, with backhoes down 10 and looking by region for the full year outlook we see North America down 11 percent, Western Europe down 12 percent. Although, we now believe that there is some degree of uncertainty in forecast, but in America up 6 percent and the rest of the world market up five.

For the third quarter 2002 we expect revenues from the sale of equipment to be flat, compared with third quarter 2001. The

business should continue to grow and we will consolidate revenues from the

North American and European operations. Offsetting this is the

unexpected recovery in the construction equipment business, especially in North America. There will be continued pressure on our margin, with one going

actions and weakness in construction equipment offset by our

and format initiatives and in the process we're generating action. Interest expense will decline and the third quarter from solutions of CNH Capital should be better than that, your third quarter, even though we will not be doing a

contraction in

until the fourth quarter.

For the full year we anticipate net sales to be flat to up slightly. The aforementioned

and the tradition of

, thus is the weakness on construction equipment on the top line. New products in production in the

equipment businesses should begin to contribute to the bottom line in the second half, however we will not see the

improvement until the first quarter because in the third quarter

transferred down some other change on it and other new products in production will more than offset the margin improvement.

The successful completion of the company's

actions during the second quarter

by about $40 million.

and for the third year in a row we expect to

margin performance in our

operations.

the trends in our industry forecast since last quarter reflect some decline in

since last quarter, reflect from declining

recovery in the North American

, but with significant improvement in

in Europe and Latin America and in

tractors in North America.

And as we are a global company,

across North America, Europe and Latin America we can take advantage of improvements wherever it occurs.

Now, in the current economic environment, forecasting ETS is becoming more difficult. In a

we expect to report a loss of between eight and 12 cents per share before

, on the basis of 484 million shares.

from our current forecast, we see additional risk

in the third quarter, which would put us in

of the

. But we are comfortable with the

limits of the present

.

Of course, all of this is

and impairment of

.

Apparently we

costs for the full year would be approximately $50 million after tax.

Also, as we explained in our 20-F and

filings,

goodwill, and indicative that we may incur a goodwill

associated with the construction business of up to $7 million in 2002.

The charge is basically a result of the negative trend in the construction industry, and is not potentially an impairment on the

side.

As for our European

, this specific impairment charge applies under a U.S. grant, and there is no different

impact on the

accounting principal.

In terms of cash flow, the pace of new product

this year should increase everybody's capital expenditures to approximately $220 million.

expenses should decrease by approximately $40 million, therefore we expect a further reduction in equipment operations net debt of about $200 million,

levels by year end.

The debt in financial services will decline by year end, with the completion of our

plan for the later part of 2002.

A reduction in working capital should be affect by the investment in

and restructuring payments.

In summary, with all the market viability, we do not yet see any evidence of the beginning of the next cycle. At this point,

environment, we continue to improve our operating margin, and as we have already achieved

million of the original $600 million

targets after the merger, we are confident that our new target of $850 million can be achieved through 2005. And for this reasons, we are confident we can achieve the goals we committed to during the equity

. Thank you very much and I will let

take you through the

counts calculations

after the equity offering.

thank you Michael. Share count. What we are looking at here is basic shares, diluted shares are essentially the same at this time. And as you know, at the end of the first quarter, CNH had 277.1 million shares outstanding. With the equity offering we issued an additional 50 million shares and with the Fiat debt conversion we issued 325 million more shares. Thus on June 14, outstanding share count increased to 652.1 million shares. As these additional shares were only outstanding for 16 days in the quarter, the weighted average number of shares outstanding for the second quarter was 343 million shares. And the weighted share account for the first six months is 310.3 million shares. With the exercise of the greens shoe on July 3, we issued an additional 3.5 million shares, bringing our total outstanding share count to 655.6 million shares. For the third quarter our weighted average share count is expected to be 655.5 million shares, and the weighted average for the first nine months should be 426.6 million shares. For the forth quarter our weighted average share count is expected to be 655.6 million shares and the weighted average for the full year should be 484.3 million shares. This concludes our comments so Michael,

and I will be happy to take your questions. But as a reminder we ask that each questioner please limit themselves to one question and one follow-up at a time.

, could you please retrieve the first question.

Thank you. At this time, if you would like to ask a question please press star one on your touchtone phone. You will be announced prior to asking your question. To withdraw your question you may press star two. Again, to ask a question please press star one. And the first question today comes from David

. You may ask your question, and sir, please state your company name.

this is

. Good morning every body.

Good morning.

Questions related to the agricultural business. The industry's outlook you were giving us in the color exiting the second quarter. The forecast you gave for North America, had a comment about the less than 40 of the Latin America strength, could you give us color on where you see the above 40 horsepower in the third quarter and the full year for the industry? And also some mixed color on Western Europe.

For the third quarter we see the over 40 horsepower tractors in North America up slightly, perhaps 1 percent to 2 percent, and for the forth quarter we see it down perhaps in the range of 5 percent to 6 percent.

Color on Europe - the mix in Europe?

In Europe what we see as Michael said is some strength in the UK, and in France and in Spain, in Portugal.

Well, less than geographic I was thinking more on the product size, the mix in Europe.

Well,

, we don't get the same kind of detail on the European sales on a monthly, timely basis the way we do from the AEM in North America. So, unfortunately, I don't really have much in the way of tractors by horse collar. But I can give you an indication that for the nine percent up in the quarter in Europe both tractors and combines were up about nine percent.

But in any event I mean most of the European market is concentrated in the mid size tractor range. So, therefore, it's basically

which is really showing sign of improvements.

Like 60 to 120 horsepower size?

Yes.

Yes.

And the comment about pricing being a bit better in North America year over year, what's the colleague provide around that? Are there programs you've backed away from from last year actually raising of price? Just some . . .

I think there are several areas. One of them that prices of used equipment are

. And obviously it has an impact on the

net discounting that we have in our revenues.

And so last on the production . . .

Hold on,

. Let me clarify. That pricing in terms of the slight improvement in ag pricing was not a North America comment. That was a worldwide comment.

Does that infer North America pricing was not up?

It doesn't infer anything. It's just a worldwide comment. We don't have that detail right now.

And lastly production versus retail for the full year. You gave some color for the second quarter but for farm equipment if you can break it out geographically or worldwide production versus retail for the full year?

All right.

Or at a minimum what have we done the first half - you know full first half production versus retail and what do you see for this second ...

It's difficult to compare first half and second half because you have a seasonal impact especially in North America. So I think ...

For the first half ag production was about three percent higher than retail. And that was up nine in North America, down two in western Europe, down four in Latin America and up three in rest of world.

Yes. I would like just make a comment on what I just said. The three percent increase for ag is mostly due to the production of combines as we are now anticipating the launch of the new combine

. But the tractor industry is

.

Thank you very much.

, you may ask your question. And, sir, please state your company name.

Good morning. It's

from Merrill Lynch.

Good morning.

Hi,

.

Hi guys. Michel, I just wanted to clarify the guidance you gave for the full year. I know in the press release and I think you said that you expected the company to still be close to breakeven in restructuring. But you also said that that would put it in an earnings range of a loss of eight to 12 cents. Is that correct? Is that what you said?

Yes.

So the 12 cents is slightly above where the current consensus is for the full year loss. So you sort of extended the potential range a little bit, or the band around your outlook for the full year because of some concern about this weakness in construction equipment?

I think the consensus is the range of 10 to 15 currently.

OK. Yes, I've got the average of 10 cents. So I just want to make sure. I realize you're sticking to your guidance, but it does sound like you're providing some more caveats to it because you're concerned about the markets, most importantly the construction equipment market. Is that a fair assessment?

That's fair. We are conservative, yes.

OK. And for the third quarter, I'm sorry, I just want to make sure I understood what you were saying. What did you expect? What was the guidance you gave for the third quarter earnings?

We didn't give any guidance for the third quarter. We just said that there are a lot of waivers including the fact that we are today not a lot of new products, especially in the ag side. We would have, you know, higher launch costs and stopped up expenses and things of this nature in the third quarter.

OK. And then can you just talk a little bit about, what - in terms of the construction equipment business either in North America or in Europe, what's the driver that's causing the equipment to not - the equipment market not to bounce back the way you may have expected?

There is one reason, which is the year of for everyone because it has been said by many, is that in North America clearly the reason of the drop in some of the life equipments last year and this year, was the fact that the run on the houses and not buying new equipment. And finally, they don't show any sign of coming back and buying new equipment. That's one of the reasons. And it would be that it's a special part of the market two years ago.

OK. Thank guys.

you may ask your question and please state your company name.

This is actually

from Goldman Sachs. A few questions on the farm equipment market, you mentioned that you're pretty much unsure in Brazil that

financing is going through. What's really taking place with government negotiations with that?

What we know is that the - in Brazil the government has approved. You know it's a program, which in fact in theory has a term limit. But, we are close to the term and so it's expanded and provided the service. So, and in technically speaking, we may say that there is a rate cut,

is not going to come, but from a political viewpoint and in so we must comment from a micro economy viewpoint, we know it's never going to happen because, you know, our farm industry in Brazil is key to the Brazilian export business.

OK. Any indication of negotiations going into '03?

Yes. And we believe that it's going to be expanded, expanded until March next year.

March, OK. And on corn prices, what is your current outlook for corn prices? Is this something that could help to temper your outlook in the next coming quarter, given that corn prices have rallied in the strain of summertime?

You are asking me a question which is obviously you're asking me what's going to be the top price tomorrow. Let's say, you know, it's carrying in what we have seen so far is some strengthening of some prices because of the weather conditions. Well, if the weather conditions continue to be the way they are, we should see these prices at least where they are, maybe slightly up.

OK. Is that something that could make you take up your outlook for the business?

There is one thing for sure is that if commodity prices go up, especially in North America and some areas in Europe, as this will clearly induce farmers to buy equipment, and especially if they have in mind, you know, the safety net of the farm deals of the coming year and in Europe we don't have the farm day, but we have something equivalent and even richer if we look clearly at the numbers.

OK and one last question. Why did you not take a Goodwill

charge on the farm equipment business? Is that something that's already been charged off?

No.

No, the testing that we've done has indicated that there's no need to take a charge in that business.

OK, thank you.

, you may ask your question and please state your company name.

, Legg Mason. Congratulations on the cost savings guys.

Thank you.

Thank you.

A lot of your competitors have managed to give back their cost savings to retirees, so you've done a good job retaining it. Let me ask you a question about the financial services. In the first half of the year the income increased $7,000,000 and I just got the release, so if it's in the footnotes I apologize, but the -- it looks like the equity account at Financial Services went down ...

Yes.

From $1.147 billion to $984,000,000 ...

Yes.

From an 18 percent ...

Let me explain to you why we did this. It's very simple to understand. I mean, we look at the financial services of your

as a

of

for some of the equipment

side and therefore we are, you know, originating business on the

to our whole operation. Having said that, we have the portfolio of

is, to a certain extent, a

to the volume of activity that we have and what we found out is that our financial services business was, in general, over capitalized and we

too much equity for the size of the portfolio that we are carrying on book. So this is the reason why we have decided to

it, to decapitalize if you wish, the financial services to a more normal level -- more appropriate level and to free up the cash for our equipment operations business and we did it, for instance, in Australia. You know, the Australian portfolio is much lower now than it was a couple of years ago because business is lower. I mean, mostly because we have refocused on our car business and we did the same in North America and also we have

, but we are doing that everywhere we can to resize our equipment for our financial services business to the side of our

No, I totally agree with you. I think at the beginning of the year you had an 18 percent equity to asset ratio in finance, now you have 15 and I guess my point was, given your aggressive ABS program and the factoring of these receivables and such without recourse you're still over capitalized, are you going to take more of the equity out of financial services given that you don't seem to be -- especially with the

, you don't seem to be taking a lot of the risk.

Absolutely

, this is something that we're going to monitor on a continuous basis and if we see approximately -- you know, optimize the financial

of financial services and we will continue to do so and find stuff in new offers you just mentioned.

Thank you.

The next question comes from Michael Harris. You may ask your question and please state your company name.

Good morning, it's Deutsche Bank.

Hi Mike.

Hi. Can I get a little bit more color on this additional $250,000,000 in improvement initiatives. I guess, where do you see them coming from and what do you see now that you didn't see when you first put this plan together and it gives you, you know, confidence that it's actually out there?

You know, I mean I wasn't

at the time of the - of the beginning of the merger, but you know clearly as the time goes by, we understand that

are better, many of the processes of this company. And this is the reason why we are not confident about this

. Let's say this; what we did so far was we have achieved almost entirely the

reduction that we had in our plan. What we - what we did also is that we did all that we said in terms cost

and things of this nature. And what we - I mean we are

in the beginning of the

that are going to come from the manufacturing footprint plans and also because of the

in

.

So I would say at the beginning of the merger, obviously people were probably looking at what was the easiest thing to do, the quickest thing to do, and I think we have done it. And now we have a much better vision of the full picture, including the - this significant manufacturing reorganization of rationalization which is in front of us.

OK, and in terms of timing here, is this something that's evenly spread over the next three years, or is it back end loaded?

Some of the manufacturing footprint rationalization are

to some of the

plans and for instance, if

and obviously

early part of 2004.

OK, and final question here. Do you have to spend anything to - to realize this additional cost savings?

You know when you look at the capital spending the

we had mentioned before, you can consider that a significant portion of this is directed to new products and manufacturing footprint - by the way, the

also combined to a certain extent because in very certain occasions, we do manufacturing

and new products at the same time. It's difficult to say which part is

and which part is the other, but let's consider that this is

.

OK, I'll get back in the queue.

, you may ask your question and please state your company name.

UBS Warburg. Given some of your comments about the capitalization of the credit company, can you please review the logic of the inter-company loan; it looks like it was about a billion seven, from the equipment operations to the finance company? And can you give us some sense on whether or not you plan to change that structure?

I will leave the

better for now. They are mostly technical reasons and as soon as it can get rid of these statistical reasons, we will do in such a way that we can

separate the two things. At least that the

.

, there are

increases that create this

this 18 per segment between the

, particularly

and the credit company. One reason is cost. Sometimes in many jurisdiction, the industrial company has a better - better cost of

versus the

of the credit company. So we use obviously the credit line which are cheaper. In some other countries it could happen that for fiscal reasons we prefer to use the balance sheet of the investor company and

to the credit company other than to

actually to the credit company, or because we cannot go to

.

The third reason is very technical. We have a cash management system most countries in which before we go out and borrow from banks, we

the liquidity that we have in the countries inside our group. So it could happen that

company are liquid, or temporarily liquid, and lend to the financial services organization on a temporary basis. And then we go out and borrow for the remaining. So this creates the bulk of this 1.6

dollars of intercompany

.

to conclude on this. From a pure reporting point of view, we have the argument inside CNH whether we could not clearly

this number directly into financial services. Instead of doing that so we could

, this would have meant restatement of the financial statement and I understand that the

, so we decided not to do it.

Probably not a good idea. Thank you very much.

you may ask your question, and please state your company name.

I wondered if we could get at the issue of production below the level of retail, on a full year basis. In other words, if you hit the targets as you have

them out for us. What will you be producing in 2002 relative to retail? In other words how much will you be

down the wholesale receivables?

okay, let's take

most important issue for us

in construction equipment. We are going to end up

retail between - depends upon the product line.

should take one of the very important

which is

we are going to produce,

produce by 15% this year. Retail.

Okay.

So heavy equipment could be between 5% and 10%.

Okay.

order is less of an issue because you know they are small ticket items. And - so that's what it will be a

there, but not by much. And the ag equipment side, keep in mind that the second part of the year, as we are coming up with new products, especially the last quarter, there will be some buildup,

, however we will

with

. Except for combines.

But I guess I am looking for - can you give us a full year dollar amount? Are we talking 3, 4, 500 million dollars out of the 9 plus billion or just give us some kind of a aggregate flavor.

Let's consider that I mentioned in my presentation that the second half would be a

production in

. You can consider that as a proxy that most of it is coming from the working capital reduction.

But on the full year basis. In other words

On the full year basis, I would say for working capital probably you can also take this

million dollars.

So 200 million dollar working capital reduction for the year, and that is a proxy for the amount by which you

retail.

Yes.

Okay. If we were to look at 2003, do you need any further reduction in dealer inventories anywhere, or will you in fact be producing at the level of retail.

I would say with the

when you are

system that we have I would say that in 2003 we should be producing more or less on the retail level.

Okay.

However we have programs to significantly improve the supply

process and therefore the

and

may have in itself some impact in terms of inventory reduction.

I bet if . . .

. . .

inventory reduction.

Right. But if we're just doing a planning we could more or less for whatever we want to retail more or less that's about what you would produce next year?

Yes.

OK. And then to follow up on the construction equipment, the concerns that you were voicing in the release and in your comments about construction equipment being weaker than you thought in the second half, being a risk factor, was that North America or Europe or worldwide you were eluding to at that point?

I was referring mostly to Europe.

OK. And in Europe if we look at the markets over there, clearly the German market has been the weakest but the Italian, French and Spanish markets have been the stronger on a relative basis proportionately for C&H. Are you kind of across the markets geographically or where are you - are you disproportionately spread in Europe versus the industry overall?

I have a little bit of different

in Europe. I think Japanese

we're weak but France is not very strong either.

OK.

It's almost the same as Germany. Italy is improving and should

strong which is good news because we are

of the world. But I think I mean Germany and France are really the key question mark in

.

And for you as well. In other words, they're proportionately the most important for CNH?

I would say for everybody because you know

.

Right.

The reason of the weakness is the same issue as the one in North America but

.

Right. Thank you very much.

The next question comes from

. You may ask your question and please state your company name.

Yes. Salomon Smith Barney. The number that you threw out for cap ex earlier in the call, the 220. Is that for '02?

Yes.

And what would be the corresponding number for '03 roughly?

Probably the same.

OK. And the other question I had, the other follow up was on earlier in the call you had thrown a number of 3.7 billion of total availability.

Yes.

What's the rough split of that currently between the finance company and the equipment operations, parent company?

I'd leave the

one better for now.

Well first of all there are

which are common. But they can be used either by the credit company or by the

. So, it makes it very difficult to do the spread by - to do the split between the two.

OK. That's fair enough. If it's complex . . .

. . . for example the two biggest that we have which are the $1 million

with

and $1.8 million with the

they can be used by the credit company and the financial company. What we have really as a particular kind of funding for the credit company

and we have three programs, one U.S.

$1.2 billion, one in Canada recently launched to this quarter for more or less $100 million and another one in Australia which is another $200 million.

And these are the key funding and dedicated sources for the credit company. But we have it's also

$1.6 million available but you also said that that would put it in an earnings range of a loss of eight to 12 cents, is that correct? Is that what you said?

Yes.

So the 12 cents is slightly above where the current consensus is for the full year loss. So you sort of extended the potential range a little bit, or the band around your outlook for the full year because of some concern about this weakness in construction equipment?

I think the consensus is the range of 10 to 15 currently.

OK. Yes, I've got the average of 10 cents. So I just want to make sure. I realize you're sticking to your guidance, but it does sound like you're providing some more caveats to it because you're concerned about the markets, most importantly the construction equipment market. Is that a fair assessment?

That's fair. We are conservative, yes.

OK. And for the third quarter, I'm sorry, I just want to make sure I understood what you were saying. What did you expect? What was the guidance you gave for the third quarter earnings?

We didn't give any guidance for the third quarter. We just said that there are a lot of waivers including the fact that we are today not a lot of new products, especially in the ag side. We would have, you know, higher launch costs and stopped up expenses and things of this nature in the third quarter.

OK. And then can you just talk a little bit about, what - in terms of the construction equipment business either in North America or in Europe, what's the driver that's causing the equipment to not - the equipment market not to bounce back the way you may have expected?

There is one reason, which is the year of for everyone because it has been said by many, is that in North America clearly the reason of the drop in some of the life equipments last year and this year, was the fact that the run on the houses and not buying new equipment. And finally, they don't show any sign of coming back and buying new equipment. That's one of the reasons. And it would be that it's a special part of the market two years ago.

OK. Thank guys.

you may ask your question and please state your company name.

This is actually

from Goldman Sachs. A few questions on the farm equipment market, you mentioned that you're pretty much unsure in Brazil that

financing is going through. What's really taking place with government negotiations with that?

What we know is that the - in Brazil the government has approved. You know it's a program, which in fact in theory has a term limit. But, we are close to the term and so it's expanded and provided the service. So, and in technically speaking, we may say that there is a rate cut,

is not going to come, but from a political viewpoint and in so we must comment from a micro economy viewpoint, we know it's never going to happen because, you know, our farm industry in Brazil is key to the Brazilian export business.

OK. Any indication of negotiations going into '03?

Yes. And we believe that it's going to be expanded, expanded until March next year.

March, OK. And on corn prices, what is your current outlook for corn prices? Is this something that could help to temper your outlook in the next coming quarter, given that corn prices have rallied in the strain of summertime?

You are asking me a question which is obviously you're asking me what's going to be the top price tomorrow. Let's say, you know, it's carrying in what we have seen so far is some strengthening of some prices because of the weather conditions. Well, if the weather conditions continue to be the way they are, we should see these prices at least where they are, maybe slightly up.

OK. Is that something that could make you take up your outlook for the business?

There is one thing for sure is that if commodity prices go up, especially in North America and some areas in Europe, as this will clearly induce farmers to buy equipment, and especially if they have in mind, you know, the safety net of the farm deals of the coming year and in Europe we don't have the farm day, but we have something equivalent and even richer if we look clearly at the numbers.

OK and one last question. Why did you not take a Goodwill

charge on the farm equipment business? Is that something that's already been charged off?

No.

No, the testing that we've done has indicated that there's no need to take a charge in that business.

OK, thank you.

, you may ask your question and please state your company name.

, Legg Mason. Congratulations on the cost savings guys.

Thank you.

Thank you.

A lot of your competitors have managed to give back their cost savings to retirees, so you've done a good job retaining it. Let me ask you a question about the financial services. In the first half of the year the income increased $7,000,000 and I just got the release, so if it's in the footnotes I apologize, but the -- it looks like the equity account at Financial Services went down ...

Yes.

From $1.147 billion to $984,000,000 ...

Yes.

From an 18 percent ...

Let me explain to you why we did this. It's very simple to understand. I mean, we look at the financial services of your

as a

of

for some of the equipment

side and therefore we are, you know, originating business on the

to our whole operation. Having said that, we have the portfolio of

is, to a certain extent, a

to the volume of activity that we have and what we found out is that our financial services business was, in general, over capitalized and we

too much equity for the size of the portfolio that we are carrying on book.

So this is the reason why we have decided to

it, to decapitalize if you wish, the financial services to a more normal level -- more appropriate level and to free up the cash for our equipment operations business and we did it, for instance, in Australia. You know, the Australian portfolio is much lower now than it was a couple of years ago because business is lower. I mean, mostly because we have refocused on our car business and we did the same in North America and also we have

, but we are doing that everywhere we can to resize our equipment for our financial services business to the side of our

No, I totally agree with you. I think at the beginning of the year you had an 18 percent equity to asset ratio in finance, now you have 15 and I guess my point was, given your aggressive ABS program and the factoring of these receivables and such without recourse you're still over capitalized, are you going to take more of the equity out of financial services given that you don't seem to be -- especially with the

, you don't seem to be taking a lot of the risk.

Absolutely

, this is something that we're going to monitor on a continuous basis and if we see approximately -- you know, optimize the financial

of financial services and we will continue to do so and find stuff in new offers you just mentioned.

Thank you.

The next question comes from Michael Harris. You may ask your question and please state your company name.

Good morning, it's Deutsche Bank.

Hi Mike.

Hi. Can I get a little bit more color on this additional $250,000,000 in improvement initiatives. I guess, where do you see them coming from and what do you see now that you didn't see when you first put this plan together and it gives you, you know, confidence that it's actually out there?

You know, I mean I wasn't

at the time of the - of the beginning of the merger, but you know clearly as the time goes by, we understand that

are better, many of the processes of this company. And this is the reason why we are not confident about this

. Let's say this; what we did so far was we have achieved almost entirely the

reduction that we had in our plan. What we - what we did also is that we did all that we said in terms cost

and things of this nature. And what we - I mean we are

in the beginning of the

that are going to come from the manufacturing footprint plans and also because of the

in

.

So I would say at the beginning of the merger, obviously people were probably looking at what was the easiest thing to do, the quickest thing to do, and I think we have done it. And now we have a much better vision of the full picture, including the - this significant manufacturing reorganization of rationalization which is in front of us.

OK, and in terms of timing here, is this something that's evenly spread over the next three years, or is it back end loaded?

Some of the manufacturing footprint rationalization are

to some of the

plans and for instance, if

and obviously

early part of 2004.

OK, and final question here. Do you have to spend anything to - to realize this additional cost savings?

You know when you look at the capital spending the

we had mentioned before, you can consider that a significant portion of this is directed to new products and manufacturing footprint - by the way, the

also combined to a certain extent because in very certain occasions, we do manufacturing

and new products at the same time. It's difficult to say which part is

and which part is the other, but let's consider that this is

.

OK, I'll get back in the queue.

, you may ask your question and please state your company name.

UBS Warburg. Given some of your comments about the capitalization of the credit company, can you please review the logic of the inter-company loan; it looks like it was about a billion seven, from the equipment operations to the finance company? And can you give us some sense on whether or not you plan to change that structure?

I will leave the

better for now. They are mostly technical reasons and as soon as it can get rid of these statistical reasons, we will do in such a way that we can

separate the two things. At least that the

.

, there are

increases that create this

this 18 per segment between the

, particularly

and the credit company. One reason is cost. Sometimes in many jurisdiction, the industrial company has a better - better cost of

versus the

of the credit company. So we use obviously the credit line which are cheaper. In some other countries it could happen that for fiscal reasons we prefer to use the balance sheet of the investor company and

to the credit company other than to

actually to the credit company, or because we cannot go to

.

The third reason is very technical. We have a cash management system most countries in which before we go out and lend from banks, we

the liquidity that we have in the countries inside our group. So it could happen that

company are liquid, or temporarily liquid, and lend to the financial services organization on a temporary basis. And then we go out and borrow for the remaining. So this creates the bulk of this 1.6

dollars of intercompany

.

to conclude on this. From a pure reporting point of view, we have the argument inside CNH whether we could not clearly

this number directly into financial services. Instead of doing that so we could

, this would have meant restatement of the financial statement and I understand that the

, so we decided not to do it.

probably not a good idea. Thank you very much.

you may ask your question, and please state your company name.

I wondered if we could get at the issue of production below the level of retail, on a full year basis. In other words, if you hit the targets as you have

them out for us. What will you be producing in 2002 relative to retail? In other words how much will you be

down the wholesale receivables?

Okay, let's take

most important issue for us

in construction equipment. We are going to end up

retail between - depends upon the product line.

should take one of the very important

which is

we are going to produce,

produce by 15% this year. Retail.

Okay.

so heavy equipment could be between 5% and 10%.

Okay.

order is less of an issue because you know they are small ticket items. And - so that's what it will be a

there, but not by much. And the ag equipment side, keep in mind that the second part of the year, as we are coming up with new products, especially the last quarter, there will be some buildup,

, however we will

with

. Except for combines.

But I guess I am looking for - can you give us a full year dollar amount? Are we talking 3, 4, 500 million dollars out of the 9 plus billion or just give us some kind of a aggregate flavor.

Let's consider that I mentioned in my presentation that the second half would be a

production in

. You can consider that as a proxy that most of it is coming from the working capital reduction.

But on the full year basis. In other words ...

On the full year basis, I would say for working capital probably you can also take this

million dollars.

So 200 million dollar working capital reduction for the year, and that is a proxy for the amount by which you

retail.

Yes.

Okay. If we were to look at 2003, do you need any further reduction in dealer inventories anywhere, or will you in fact be producing at the level of retail.

I would say with the

when you are

system that we have I would say that in 2003 we should be producing more or less on the retail level.

Okay.

However we have programs to significantly improve the supply

process and therefore the

and

may have in itself some impact in terms of inventory reduction.

I bet if . . .

. . .

inventory reduction.

Right. But if we're just doing a planning we could more or less for whatever we want to retail more or less that's about what you would produce next year?

Yes.

OK. And then to follow up on the construction equipment, the concerns that you were voicing in the release and in your comments about construction equipment being weaker than you thought in the second half, being a risk factor, was that North America or Europe or worldwide you were eluding to at that point?

I was referring mostly to Europe.

OK. And in Europe if we look at the markets over there, clearly the German market has been the weakest but the Italian, French and Spanish markets have been the stronger on a relative basis proportionately for C&H. Are you kind of across the markets geographically or where are you - are you disproportionately spread in Europe versus the industry overall?

I have a little bit of different

in Europe. I think Japanese

we're weak but France is not very strong either.

OK.

It's almost the same as Germany. Italy is improving and should

strong which is good news because we are

of the world. But I think I mean Germany and France are really the key question mark in

.

And for you as well. In other words, they're proportionately the most important for CNH?

I would say for everybody because you know

.

Right.

The reason of the weakness is the same issue as the one in North America but

.

Right. Thank you very much.

The next question comes from

. You may ask your question and please state your company name.

Yes. Salomon Smith Barney. The number that you threw out for cap ex earlier in the call, the 220. Is that for '02?

Yes.

And what would be the corresponding number for '03 roughly?

Probably the same.

OK. And the other question I had, the other follow up was on earlier in the call you had thrown a number of 3.7 billion of total availability.

Yes.

What's the rough split of that currently between the finance company and the equipment operations, parent company?

I'd leave the

one better for now.

Well first of all there are

which are common. But they can be used either by the credit company or by the

. So, it makes it very difficult to do the spread by - to do the split between the two.

OK. That's fair enough. If it's complex . . .

. . . for example the two biggest that we have which are the $1 million

with

and $1.8 million with the

they can be used by the credit company and the financial company. What we have really as a particular kind of funding for the credit company

and we have three programs, one U.S.

$1.2 billion, one in Canada recently launched to this quarter for more or less $100 million and another one in Australia which is another $200 million.

And these are the key funding and dedicated sources for the credit company. But we have it's also

$1.6 million available on

facility.

And given the credit, you know, the credit issues at Fiat, in fact their credit ratings have been dropping, have you seen any pressure on, you know, the rates you're being charged, you know, under your various credit facilities that are affiliated with Fiat?

I've felt a little pressure, for sure. Real pressure, I do not say so.

OK. Thank you.

, you may ask your question and please state your company name.

My questions have been asked and answered. Thank you.

, you may ask a question.

Yes, hi. A follow-up question on the profitability at ag and construction. Given the weakness we're seeing in the light equipment market, especially back hoes, and the losses you put up there the first two quarters of the year, given the outlook for construction for an industry, should we expect a profitable quarter out of construction any time this year? And if that's not the case, it implies a little bit better for farm equipment profitability than the initial way the press release read about the nix issues with the larger tractors in North America. And kind of tied into that is, when you gave me the answer to the question earlier about third and fourth quarter outlook for the larger tractors, it was actually a little bit better than the way it had read in the press release. So if you can just take me through, again, the construction profitability for the year and what is implied for farm equipment profitability.

Let me explain a little bit the situation in construction equipment. The reason why in the first quarter especially, and the second quarter we got, you know, unprofitable falls in construction equipment. The reason, the main reason, the main driver, is the fact that we have cut production roughly 75 percent in the first quarter. Twenty percent or less on average, in the second quarter and, you know, when you cut production significantly, and also when you cut wholesale, we have cut wholesale, you know, to a dealer invest it's coming down. And by the way, I mean we believe that in terms of months of supply, there's enough in North America today probably in better shape than the average of the industry.

No, I understand that. I can understand why you were unprofitable, but what I'm saying is the way the outlook looks.

Yes.

The way the outlook is and the production potential ...

I think this is a fair guess. We - and we are expecting the Q3 and Q4 for construction equipment to remain unprofitable. And we feel on average, more or less deliver the wear in the Q2 than in Q1.

And then that then transitions to the question I had about, if those are losses, the farm equipment business will be obviously profitable. What I'm trying to figure out and answer my question about Europe and the mix and so forth, I'm trying to get a better understanding of industry data and that's been a little bit better than you implied in the press release in the bigger tractors.

Yes.

And second, you have the TJ that you stated producing a few months back. You've got the new row crops coming out as well. I'm just trying to get an understanding for how much is, isn't CNH a little better mix than the industry because of the new product roll out?

Let me say this. In Europe, first of all where I think we have a very strong market share so that's where we eyeball to pick up the volume as soon as the industry grows up and, you know, in the countries where the market is picking up, I think we have very good positions. Typically in those markets, as we are also producing most of these products locally. We have, also, a good margin, so obviously the contribution margin, when the volume picks up, is obviously significant. The addition -- the new products, I think,

we are going to benefit from this but it's going to be, as we have always said, in the last part of the year, so I would say that mostly the fourth quarter of this year.

OK, I'll follow up. Thank you very much.

You are just ...

The final question comes from Michael Harris. You may ask your question.

Yes, just a quick housekeeping item. Tax rate for the full year, what are we looking at?

Just a second here.

The expected tax rates will be 35 percent in general, but I would expect that much is

about 30.

For the full year, you -- about 30 percent?

Yes.

OK, that's what I needed. Thanks.

I'm showing no further questions at this time. Gentlemen, I'll turn it back to you for closing statements.

OK, before we close I'd like to make one clarification from earlier when we said that the CE operating results in the quarter was $67,000,000 lost, that should have been $17,000,000 lost as shown in the footnotes to the financial statements. Otherwise, we'd like to thank everyone for their attention today and we'll look forward to talking to you soon.

Thanks, bye-bye.

Bye-bye.

Thank you. That does conclude today's conference. You may disconnect at this time.