CNH Industrial NV (CNHI) 2002 Q3 法說會逐字稿

Good day, everyone, and welcome to the CNH Third Quarter Results Conference Call.

Hosting the call today will be Mr. Michel Lecomte, President, Financial Services, and Chief Financial Officer, Mr. Al Trefts, Senior Director, Investor Relations.

At this time, I would like to turn the conference over to [Mr.

Tress].

Thank you, Wendy.

Welcome, everyone, to CNH's third quarter, 2002, results webcast conference call.

We are pleased to have Michel Lecomte, our Chief Financial Officer, and [Alberto Funaro], our Treasurer, joining us today for this call.

In a few moments, Michel will offer management's comment on our results, and discuss the current status of our defined benefit pension plan.

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 may 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 20F for 2001, as filed with the Securities and Exchange Commission, for a discussion of the important risks 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 webcast and their contents are the property of CNH Global NV, and are not to be recorded or rebroadcast without our express written permission.

Now I'll turn the program to Michel.

Hello, again, everyone.

Since you have seen all the press release, I will cover only the [inaudible] very briefly.

Worldwide industry in the quarter were up 14 percent compared to 2001.

They were up 4 percent in North America, led by the under-40 horsepower tractor sales, which were up more than expected, at 9 percent.

Over 40-horsepower tractor sales were down 2 percent.

And the Harvest Heat, where the over 140 horsepower, and the four-wheel drive segments, down 15 percent.

Sales were up 2 percent in Western Europe, with the UK, France, and Germany leading the increase.

Up 14 percent in Latin America, mostly accounted for by Brazil.

And up 47 percent in the rest of the world, more than expected.

Industry sales of combines worldwide were down 2 percent, worse than expected.

They were down 33 percent in North America, much worse than expected, and we believe that the drought is a big factor here.

Combines were up 51 percent in Western Europe, better than expected in most countries, led by Spain, Italy, and Germany.

Combines were up [51] percent in Latin America, driven by the local currency impacts in Brazil of export sales and by the stronger grain price.

Combine industry sales were down 23 percent in the rest of the world market.

Turning to construction equipment, worldwide industry sales declined 6 percent from the third quarter, 2001.

North America was down 12, Western Europe, down 10, both as expected, while Latin America was up 10 percent.

By product line for the quarter, worldwide industry sales of backhoe loaders declined by 12 percent, [inaudible] by six, and heavy construction equipment, down three.

As you know, compared to last year, the decline in North America industry sales were led by a 20 percent drop in the backhoe loaders market.

In unit terms, industry sales have been flat for the last three quarters. [inaudible] orders were down 10 percent, and heavy equipment down 10.

The decline in Western Europe was led by an 11 decline in heavy equipment, and by a 10 percent drop in backhoe loaders. [inaudible] orders were down 9 percent.

On a worldwide basis, agricultural equipment market share was unchanged in the quarter, but did vary somewhat by region.

In tractors, where our share didn't change in the quarter, we gained significantly in Latin America, Asia Pacific, and developing markets.

This was offset by declines in Western Europe and North America.

In our efforts to drive working capital lower to improve our cash position, we might have contributed to the decline by first having a short supply during the quarter of our new products, introduced at the end of June, [inaudible] our low, four months of supply, and third, by limiting our participation in the operating leasing business in North America, which affects mostly the high-horsepower tractors.

In combines, our share declines lagged in the quarter, due to an unusually high of level of European and pre-season sales [inaudible] in several quarters.

On a worldwide basis, our construction equipment market share declined slightly in the quarter.

Although heavy equipment and [inaudible] loader shares were essentially unchanged, backhoe order shares declined in North America, while the industry was down 20 percent.

And this was due to the fact that small to medium-size contractors, our core customer segment for backhoes, has been hit harder in this recession than the larger operators.

In addition, competition for big businesses and [inaudible] has become intense in price, and we have been particularly cautious in this market.

In spite of these mixed results, sales of equipment for the quarter were $2.1 billion, up 4 percent from $2 billion last year.

And [inaudible] equipment sales increased 12 percent, to $1.4 billion.

Net of the Shanghai Tractor acquisition in China, which added revenues of $27 million in the quarter, and [inaudible] several for currency impacts, ag sales were flat.

In dollars, our world ag gross margin increased in the quarter versus last year, due mainly to favorable pricing, synergies, and new product introduction, which more than offset higher pension and medical costs, [inaudible] and launch costs for new products.

Construction equipment sales went up 5 percent, to $670 million.

And net of the Kobelco America and Kobelco Europe acquisitions, which added revenues of $72 million in the quarter, and of the favorable currency impact, construction equipment sales were down 10 percent.

The decline in revenues was due mainly to lower sales of light equipment in North America, mostly backlog orders.

Our gross margin in construction equipment declined versus the same quarter last year, and synergies, acquisitions, and the positive impact of currency were offset by unfavorable volume and mix, and also by increased pensions, medical costs, and [inaudible].

Compared to last year, pricing was unchanged.

Incremental profit improvement in the third quarter was $35 million, bringing the year-to-date total to $83 million.

This is made up of $44 million in additional purchasing synergies, in spite of the significant pricing pressure on [some materials].

Twenty-one million dollars in SG&A reduction-- I should note that this G&A is flat versus last year, in dollars, due to currency, acquisitions, and economics, including, obviously, pension costs, which have offset the synergies in the final results.

And, $80 million in manufacturing [inaudible]acquisitions [inaudible].

For the first nine months of 2002, sales of equipment were $6.9 billion, up 2 percent from last year.

And net of currency and acquisitions, agricultural equipment sales were steady, while construction equipment sales were down 13 percent.

Turning to gross margin, although it increased in the quarter, the year-to-date margin was lower versus last year, primarily related to our restructuring actions taken in the first half of 2002.

At the operating income level, we have seen a substantial improvement in ag since last year, of $117 million- $150 million on 2.6 percent of sales to 3.2 percent of sales.

And this number does include goodwill, and those are on a like basis.

As we expected, equipment operations met interest expense in the quarter, declined by an additional $16 million, reversing a decline of $48 million in the nine-month period compared with last year, and this was primarily related to the company's debt reduction and to lower interest rates.

Turning to financial services, CNH Capital's third quarter net income was $12 million in 2002, compared to a net loss of $2 million last year.

The impact of lower loan losses, primarily on the non-core portfolio, and the successful completion of the [inaudible] in Australia were partially offset by lower interest rates and the smaller average profit [inaudible].

Originations in the core retail financing business were down compared to the third quarter of 2001, due mainly to our actions limiting our exposure to the recent [inaudible] business.

Lower loan losses are the direct result of the improvement in the quality of our portfolio.

North American [inaudible] delinquencies over 30 days dropped again in September to about 3.7 percent of the outstanding portfolio.

And as a result, in the first nine months, CNH Capital net income increased from $11 million last year to $33 million in 2002.

In total, CNH ended the first nine months of the year with net loss, before restructuring, of $59 million, compared to a net loss of $93 million, before restructuring and goodwill, for the same period in 2001, in spite of the very difficult construction equipment market conditions.

Turning to cash flow, the funds generated from equipment operations the first nine months include the equipment operating margin, as defined as cost of good sales-- cost of goods sold, SG&A, and currency expenses, of $203 million, depreciation and amortization of intangibles, excluding goodwill of $171 million, totaling $374 million, which is a proxy for the EBITDA.

Working capital in equipment operations decreased by $470 million in the quarter, while in the comparable quarter it increased by $264 million last year.

Apart from currency and acquisitions, this reduction was largely driven by management's actions, reduced production, and inventory.

CNH is comfortable with the current level of working capital, as far as the construction equipment is concerned, and so we have some concerns on [inaudible] product lines, which might be a little too low should the market pick up again soon.

Consolidated net debt has declined by $1.1 billion over nine months.

I am not going to comment on the $1.6 billion reduction in debt of equipment operations, because we have avoided discussing [inaudible] and because of the [equity increase].

Another word on CNH Capital -- while the $450 million increase in the net debt of CNH Capital is due to the beefing up of the retail financing portfolio, in anticipation of [EDH][inaudible] transactions later in the year.

Now, turning back to the outlook for the balance of the year.

For the first quarter, 2002, we expect the world market for agricultural equipment to be flat.

By region, we expect North America up 8 percent, on a the continued strength of the under-40 horsepower segment, Western Europe, down 2, and Latin America, down 5.

We see the construction equipment market for tractor roll-off backhoes, [inaudible] loaders, and heavy equipment in total down as much as 10 percent worldwide in the first quarter of 2002.

By region, North America will be down 18 percent, mostly driven by the backloaders market.

Western Europe, down 9 percent, and Latin America, flat, and the rest of the world [up 12%].

For the fourth quarter, CNH is expecting revenues from sales of equipment to be up 5 to 8 percent, compared to the fourth quarter, 2001.

Improvements in ag and the consolidation of Kobelco should more than offset the weakness in construction equipment on the top line.

Recent new product introductions in the agricultural equipment business should contribute to share gains and gross margin improvements in the fourth quarter, benefiting the company's bottom line.

The company's debt-reduction actions will continue to reduce net interest expense in the fourth quarter.

As a result, we expect our operating margin performance in the equipment operations to be in line with the first nine months of the year.

In addition, CNH Capital would continue its trend of profit improvement in the fourth quarter.

And thanks to lower loan losses, reduction of delinquency rates, and for the fourth quarter, [DS transactions], we expect CNH Capital to contribute significantly to profits in the fourth quarter.

In total for the quarter, we expect to be closer to break-even before restructuring.

One good news regarding our balance sheet is that CNH is expecting to further reduce its equipment operations' net debt and for the full year, by over $1.18 [billion] as compared to the beginning of the year.

In addition, we are improving operating margins and we are on track to achieve our profit improvement target by $850 million by 2005.

So for this reason, we remain confident that we can achieve the goals we set for ourselves.

Now, let's turn to the current status of our defined benefit pension plan.

Although we operate in various countries, many countries, the major ones, which is approximately [inaudible] in size, are in the U.S. and the United Kingdom.

In the U.S., a large portion of this plan has been replaced by a defined contribution plan, and therefore, the defined benefit plan liabilities are not subject to future increases for salaries or [service] costs.

The performance of the financial market in 2002 has, as you know, adversely impacted our funded status, and our projected unrecognized costs and expenses for future [inaudible].

In the United States, the quarterly return on pension [inaudible] assets through the first nine months of the year, this year, has been a negative 15 percent, compared to our long-term return assumptions of 9 percent.

And therefore, based on quarter and plan asset values, and consideration also given to lowering certain discount rates, we would be required to increase the additional minimum liability by approximately $450 million at year-end, for U.S.

GAAP purposes, not from IAS purposes.

This would result in a decrease in shareholder equity of about $275 million, net of tax.

However, the worst is never certain, and because pension fund assets fluctuate with the financial markets, the final amount will not be known until the end of the year.

Pension costs and retiree medical expenses are anticipated to increase again in 2003, as a result of what I mentioned before.

However, I want to insist upon the fact that our geographic balance of production and sales and the actions that we have taken to limit our financial liability, that these increases would be relatively smaller for CNH as they would compare to our major competitors.

So thanks again, and we are ready to answer questions.

Thank you.

At this time, if you would like to ask a question, please press star-one on your touch tone phone.

Our first question comes from David Bleustein of UBS Warburg.

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

Good morning, UBS Warburg.

Can you walk through any preliminary market forecast you have for product lines in 2003?

I think obviously the situation is quite different between the ag market and the construction equipment market.

On construction equipment, frankly speaking, it's too early to tell how we can see 2003.

We do not see for the time being, as I said before, in the last three quarters, we have seen the market basically, in North America, being flat.

We don't see any sign of pick-up in the demand in this market, and the key question is, when the rental houses and large rental fleets are going to come back in the market.

So I'm sorry to say it's very difficult to know [inaudible].

You know, the general economy and whether we see [inaudible] North America or Europe.

And for Europe, for instance, we see a lot of expectations for the general economy in 2003, and I'm not sure that people know exactly what's going be the situation.

In the ag market, the situation is quite different.

The positive side is that we see commodity prices have moved up.

We believe that the farm bill has not been clearly understood by the market yet, but once it's understood and that people understand that there is a favor of stability in price in the farm bill.

The market should pick up in North America, and this is something that could happen in 2003.

In Western Europe, I think the market will be slightly improved, compared to 2002.

One element of uncertainty, to be completely fair, is the situation in Latin America.

There's a great deal of political uncertainty, as you know, currently in Brazil.

We know about the certainty in a couple of weeks, one, two weeks from now.

Clearly it has probably impacted the market in 2002, and we don't believe that, you know, the [inaudible] of the agricultural business will be next year, but we might have, temporarily, uncertainty at the beginning of next year.

All right, and switching gears, given your comment about potentially too little working capital in ag, do you expect working capital to be a source or a use of cash in 2003?

Maybe that's just the question.

I believe that in an increase-- we expect a slight increase of sales of [inaudible] in 2003, but I think we can perfectly manage a slight increase of the volume without increasing working capital.

However, we cannot [inaudible] to pick up 15 percent, there will be a use of cash.

OK, and then how much debt reduction are targeting for next year?

Specifically, you know, next year, let me-- we have to take all these amounts.

First of all.

Next year, in terms of spending, we don't expect capital spending next year to be different from capital spending this year.

We do not plan any acquisitions, so therefore the improvement of cash generated is going to be driven by the operating performance.

So, difficult to give you a number at this moment, but improvements in-- and the improvement, by the way, of operating performance is also going to be by a reduced interest expense, because we'll have the full impact in 2003 of the equity increase, as well as the full impact, in 2003, of the new product introductions that are coming on now, the [inaudible], we hope.

OK, I'll give someone else a chance.

Thank you.

Thank you, and our next question comes from Massimo Vecchio.

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

Good morning.

Intermonte Securities.

I have a question on the pension funds.

I would like to if, and eventually when, you will be required to make a cash contribution to your pension fund, if it's the case?

I don't know the U.S. regulations on that.

Well, let me say that the situation is quite different from one country to the other.

Because the regulations involved vary in the various countries.

As we have more than 50 countries in this company, I cannot run through all of them, but I will speak about the U.S. plan first.

So far, we are not required to make any cash contribution.

It really depends upon the way the market, the stock market, is going to go.

If it continues to drop 15 percent a year, it's our view that we will have to make a cash contribution next year, and probably, if this happens, we'll have to make a cash contribution at least equal to the payments that we make to the retirees.

The regulations are quite complex, but I would say the worst-case scenario, in my mind, in 2003, would probably a $50 million contribution in 2003.

OK, so it's a kind of percentage on the plan asset?

If it's funded by more than some X percent--

Absolutely--

Then you have to do the contribution?

Absolutely, because you know, I mean, there are some specialists which are surrounding me, but if we go into the--

OK.

OK, thank you very much.

Thank you, and our next question comes from Steve Haggerty.

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

Good morning, it's Steve Haggerty, from Merrill Lynch.

Just two questions.

Michel, in terms of SG&A spending going forward, because of these higher health care costs, or medical costs, and the pension impact, should we assume that SG&A going forward is going to look more like it did in the current quarter than earlier this year, as a percentage of sales?

You know, I would not consider the items of SG&A one by one.

You know, our objective is-- we are currently, at the end of September, at 9.8 percent of sales.

Our objective is 9 percent.

So I mean, I would be maybe a little too cynical, but I would say if we see pension or health care expenses going up, obviously we look at them and try to see how we can optimize the situation, but we will find the efficiencies, we will have to revise the processes, to do whatever is necessary, because our goal remains 9 percent of sales.

OK.

So even-- the point I'm trying to make is, I realize on a nine-month basis, you calculate them as you do, but I'm worried about the last data point being more representative of the going forward, but your sense is that you'll be able to still work towards that 9 percent kind of range, even in the face of these higher--

Absolutely.

OK.

The next question I had, just going back on this AMPL, and its potential impact on ERISA contributions, just in the U.S., I know you highlighted a number for the last caller, but wouldn't it really be what the potential contribution is a couple of years out?

Because it's the way the under-funding today affects ERISA contributions a couple years out.

I guess the question would be, given what we know right now, what would the potential cash contribution be required for ERISA two years out?

No, I said that we would probably have maybe a $50 million contribution next year.

I think we can-- could be a fair assessment to say if nothing changes in the coming year, we stay in the $50 million to $75 million to $100 million, depending upon the year.

OK.

And just one last question -- in terms of the new product launches, New Holland has got a lot new product that's coming out right now.

Should we begin to see in the fourth quarter market share gains as a result of some of that new ag equipment that's being rolled out, the new combines, some of the new tractors?

Absolutely.

How are those launches going?

Very well.

All right, thanks, guys.

Thank you. [Jean Luca Periconi], you may ask your question, and please state your company name.

Credit Suisse First Boston.

Good morning.

Two questions.

The first one is, on your net debt reduction target, by approximately 300 million Euros in-- $300 million in the second half, it's [going] to imply a reduction-- and a further reduction of $113 million in the Q4, just a clarification?

Yes.

This is correct?

Thanks.

The second question is, on pension, what is it-- the current amount of your plan assets at the moment, at fair market value?

Are there, just to be sure, if you can also mention your current pension obligation?

On the pension, the current assets, I'm talking here--

Just your assets [inaudible].

I'm talking here a combination of U.S. assets, the UK assets, and other assets, is $1.1 billion.

That is the value of the assets, not the obligation?

That's the value of the assets.

OK.

And your obligation is 1.5, if that's correct?

The obligation is more; close to $2 billion, on a projected [inaudible] basis.

OK, so you're unfunded for $ .9 billion?

Yeah, but you know, the recognition-- this includes-- this is including this number, the end of funding doesn't mean that we have to include this, because part of this underfunding has already been recognized in the previous year.

Oh, that is clear, the impact on the P&L.

I was just wondering-- so your unfunded-- is it correct to assume that this is $900 million?

Yeah.

OK, thank you.

Thank you, and our next question comes from Joanna Shatney.

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

I'm from Goldman Sachs.

Good morning.

Joanna.

In your commentary, you talked about it- in the financing division, about some of the operating lease risk, and you wanted to stay away from some of the risks there.

Can you just talk about what, in more color, what you're seeing?

Is it combines, is it four-wheel-drive tractors?

Where is the risk?

Joanna, as you can see on our financials, the outstanding of operating leases has been reduced in the last nine months.

This is typically a product which is used in North America, very little outside North America.

This is a product which is mostly used for high-horsepower tractors, not as much for combines, and this is a product which is in some-- even though I would concentrated in some areas, in some states, in the U.S., the Southern part of the U.S.

So it's a very concentrated, I would say, almost a niche, to a certain extent.

And you're lowering that exposure why?

Because the corporate farmers should actually be able to pay that.

Is it just that you don't want to have the risk on the used equipment side?

What we believe is that if you concentrate too many risks in one particular segment, in one particular area, you have to have the capability of remarketing this unit at the end of the lease, and so we have to be extremely careful about the balance between what you originate and new business and what you are able to resell afterwards.

Otherwise, you are creating-- you could create a bubble, and therefore, a risk on the resale value.

OK, fair enough.

Could you just comment on what you're seeing in the used equipment market, on both the farm equipment side and on construction equipment, within North America, please?

You mean in terms of value and price?

And also level of inventory, if there's any issues anywhere.

I don't think that there is any issue in terms of level of inventory.

In terms of pricing of used equipment in ag, I think they are holding, a slight decline in prices.

In construction equipment, there has been some decline in some product lines in North America.

Is it on the heavy equipment side, or is it in the backhoe loader business?

The backhoe loader market.

Thank you.

Thank you, our next question comes from John McGinty.

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

Credit Suisse First Boston.

Hi, John.

Good morning.

Good morning.

I always get lost on this, and the problem is that we have three or four companies all reporting today in conference calls, but if you hit break-even in the fourth quarter, and if you get another $150 million out of debt in the fourth quarter, and if you take a charge of 275 to 300 to equity in the fourth quarter, could you just make sure-- what would your-- those are all, from where you are, those are all mathematical calculations.

What is the debt and the equity at the end of the year on that, versus where we were at the end of the third quarter.

The equity goes from 3327, down by about $300 million, and where is the net debt in that?

Just a minute, John.

We'll get those numbers.

We--

All right, let me ask-- can I ask my next--

The total debt to total cap ratio would go to 59 percent, approximately, and I think that-- I think the total debt--

Net-net debt, right?

Net-net debt would go to around $4 billion.

Four billion.

OK.

On-- thank you.

Yep.

On cash flow, the-- what-- restructuring -- I mean, you talk about capex is the same, we know what depreciation and amortization- cash from restructuring, $100 million, $115 million in '03?

Cash payments -- you mean, for restructuring in '03?

Yeah, and another-- we're looking-- I'm trying to get, you know, cash flow available for--

Yeah, I understand.

You know, as we don't-- the major restructuring costs that we have in front of us is relative to the closure of [East Morris], and that's not going to take place before 2004.

So I think in 2003, we are factoring cash payments should be less than in 2002, maybe to $100 million, instead of 115.

One hundred million in- 1-0-0, in '03?

Yes.

OK.

And then what is-- if you hit your goal, what would the change in interest in '03 versus '02?

You mean in dollars?

Yeah.

I'm sorry--

We should have the full impact of the equity increase, which should give us at least an additional $40 million.

Four-oh, right.

Four-oh, compared to 2002.

Right.

Then the question is, what's going to be the behavior of interest rates in 2003?

Right.

But we pick up $40 million, debt stays about the same, because your cash flow is only modestly positive, and-- and it's just a function of rates.

A conservative assumption.

OK.

Final question -- on construction equipment, could you just refresh us, refresh my memory, on the importance of rentals?

In other words, you lost the tractor loader backhoe account at United Rentals to JCB, which, since they're cutting their spending, might not be that bad a thing, but how big is rental in the construction equipment business, because at least from listening to some of these guys, it doesn't look like there's going to be much kicking in next year.

I don't-- I cannot tell you on top of my head, but my guess would be in North America--

Yep--

--the purchases from rental houses, which typically was about 30 percent, 35 percent back in 2000, I think with the reduction of their purchases, it's probably around 20, maybe.

OK.

So that's at least that much better.

I mean, in terms of less of a negative.

Oh, yeah.

Yeah.

I'm sorry, I did have one more question -- you said ag equipment up in Europe, up slightly next year?

Yeah.

Why not more?

I mean, I know the Common Agricultural Policy gives the limits, but traditionally on higher prices, has actually kind of worked its way through and kind of stimulated things.

Are you being conservative there, or are there other factors?

I would say that, you know, in Europe, there is a big debate in Europe currently about the Agricultural-- the farm policy in Europe.

right.

A lot of contradictions between countries, so it's difficult to know what's going to be the-- we have also, you know, last Sunday, I approved the expansion of Europe.

We are going to have new countries in Europe, where we will have to sustain or so the farming policy.

So you know, it's going to create a lot of debate and [inaudible] in the ag community in Europe.

But they can't possibly bring those new countries in at the same price; you guys would go broke on what they're spending on the ag policy.

As long as the taxpayer can support it.

I see the problem in terms of the debate, at least.

Thanks very much.

Thank you, and our next question comes from David Raso.

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

Salomon Smith Barney.

Hi, David.

Hi.

On the fourth quarter -- I apologize if I missed this, but the president schedule for the fourth quarter, are there shutdowns planned, where are they, and how does that relate to, with new products coming into the manufacturing base that have been absent for the last two years, given the plants that had to be sold with the antitrust ruling, how does that work for bringing new product on, but plants being shut down?

Can you just give us some color on the production schedule?

On the ag side--

Yeah, just ag.

Ag side, there is clearly no plant shutdown.

OK.

And so therefore, the plants are going to run at full capacity on the products they make.

And then on a relative basis, versus fourth quarter last year, did I hear correctly, the fourth quarter 2002 was what you gave for the market, for ag, North America, up 8, Western Europe, down 2, Latin America, down 5.

Did I get that correct?

Yeah.

Where do you think your production will be, relative to those industry numbers, given no shutdowns?

Let me just look at the figures; just a second.

Just a second, please.

I'm just rechecking the numbers.

Well, what I'm trying to understand is, while besides the benefit of new product coming back into the manufacturing base, you have the sources-- but also trying to get a feel for when do you get enough feel from the order book, when do you start getting better visibility on the spring demand?

And are some of those non-shutdown decisions related maybe to early look at the order book for spring, that maybe you're not, at the moment, willing to communicate to us.

Well, David, for the fourth quarter, we're seeing our ag production being about 11 percent under retails, and our CE production will probably be more in the range of 20 percent under retails.

The order book, in the first quarter, becomes much more visible towards the end of November, and into the beginning of December.

I'll get back in the queue.

Thank you.

Thank you, and our next question comes from Barry Bannister, you may ask your question, and please state your company name.

It's Barry Bannister, Legg Mason.

How are you?

Hi.

A lot of questions have been answered, but clearing up the earlier question, you produced the second quarter about 14 percent below retail, and did I hear you say that fourth quarter would be 11 under retail in ag and 20 in CE?

Could you conglomerate that number into a total similar to the minus 14 under retail in the second quarter?

And then could you give that for the third quarter and then the fourth quarter?

For the fourth quarter, in total, it would be about 14 percent under.

For the third quarter, it was 5 percent under.

In total, and for the full year, we're looking at about 5 percent under.

OK, so obviously, taking a hit in the fourth quarter.

Let me ask you a question about the strength in European ag -- are you starting to anniversary the easier animal disease-impacted quarters?

Why should we expect that strength that's existed so far to continue?

I mean, I'm not sure-- I think what you are mentioning here is something which affected the UK market.

Mostly.

And so in the UK, we have seen this year a significant pick-up in the market.

To a lesser extent, France, and also Germany.

Yeah, last quarter, you had said that Europe was strong in dairy, UK was recovering, and France was weak.

So now you're seeing slight pick-up in France, UK is still recovering, and the rest of Europe, what?

Yeah.

UK has been the largest driver of the increase, but we've-- compared to the 2001 market, which was quite weak.

OK, thanks a lot.

Thank you.

And our final question comes from Chuck Harris.

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

Good morning, Chuck Harris, Salomon Asset Management.

Good morning.

Good morning.

I apologize if I missed these, but you talked about under-producing for the year at about 5 percent.

Can you disaggregate that into what the ag under-production is versus CE?

Yes.

Sure, that should be about 4 percent for ag and 10 percent for CE.

And if we simply assume-- now, does that-- by doing that, would you be pleased with where the inventories are on a go-forward basis?

I guess what I'm asking is, does this get all inventory issues exactly where you want them?

Let me say this -- in the ag side, we will probably be pleased.

I'm not so sure that our dealers will be that pleased.

So I think we probably-- we have to manage that very carefully, because I think we need to some [inaudible] of the product in North America, especially.

On the construction equipment side, we will be pleased for sure.

By the way, the we are significantly lower than our competition in terms of months of supply, in North America, and we have been like this consistently over the year-- over the quarter this year.

So, if we look at next year, '03, and we assume that there is some pick-up in demand for farm equipment, would it be fair to also assume that in your plans, you have some recapture of market share, simply because there's a transition issue this year?

Yes, absolutely.

So--

I would say that there are two things.

There will be a market share pick-up for the products that are basically being phased out.

You know, for instance, for the Case I in Europe, we are clearly not having the [inaudible] and the availability of the product that we would like to have.

That's one thing.

The second thing is that I think we have a [distributor] system which is [inaudible] enough to catch up with the increase in demand in 2003.

So there should be a pick-up in production, therefore, next year?

Now on an adjusted cost base, because you've done a lot of restructuring, I don't know what kind of incremental margins to put on your farm equipment business anymore, on a-- you know, on an improving dollar, what kind of operating profit would you like to generate in that farm equipment business?

It really depends by product line.

Can you throw me an average?

Yeah, in fact, to answer your question, one way to look at that is the amount of fixed costs, including the product cost, and I would say that the ag business can take an average of between 10 and 15 percent of the costs.

Pardon me, I missed that number.

10 percent of fixed costs in the ag business.

Terrific.

Thanks very much.

Thank you.

And this concludes our question and answer session.

We'd like to thank everyone for listening in today, and if you have any additional questions, please don't hesitate to give me a call.

Thank you.

Thank you.

Thank you very much.