CNH Industrial NV (CNHI) 2002 Q4 法說會逐字稿

Good day everyone and welcome to the CNH Full Year Results conference call.

At this time, I would like to inform all participants that you will be able to listen only until the questions and answer session of today's conference.

Today's call is being recorded at the request of CNH.

If you have any objections you may disconnect at this time.

Hosting the call today will be Mr. Al Trefts, Senior Director Investor Relations.

At this time I would like to turn the conference call over to Mr. Trefts.

Thank you sir, you may begin.

Thank you, Bridget.

Welcome everyone to CNH's Q4 and full year 2002 results webcast conference call.

We are pleased to have Michel Lecomte, our Chief Financial Officer and Giovanni Maggiora, our new Vice President and Treasurer, joining us today for this call.

As some of you may know Alberto Finaro (ph.) our previous Treasurer is Vice-President and Controller of CNH Capital.

We also have with us today Harold Boyanovsky, President Worldwide Construction Equipment Business to assist us in answering any of your questions on construction equipment.

In a few moments, we will have management comments on our results and then we will be available to answer your questions.

But first, I must say that in recognition of Regulation FT 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 20F for 2001 as filed with the US 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.

For your convenience, we have provided slides to illustrate some of the key messages of our comments.

If you do not have them already they are available on our website cnh.com under Investor Relations.

Finally, this conference call and webcast 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, normally I would turn the next portion of the call over to Michel to provide some comments on the results.

Unfortunately, he has lost his voice this morning, so I will provide the voice for his thoughts so that he can save it for the Q & A session.

First of all, see our press release.

We will cover the highlights briefly.

On slide 4, you can see the Ag Equipment Industry results for the quarter.

It is important to note as a result in North America where both tractor and combine sales were worse than we expected.

We believe the drought was a factor here.

Europe performed somewhat better than we expected in the quarter and Latin America was up in both tractors and combines.

We think that for Brazil there may have been some pull ahead in 2003 business.

Looking at our share, the key points to know are first, in North America we have suffered from tight supply of our new over 100 horsepower tractors and second, our new combines have been very well received in Europe and this is reflected in our share for the quarter.

On slide 5, we see the CE side of the business.

The total world market showed only a 4% decline in the quarter due entirely to the strong performance in Asia where CNH is not major player.

In the quarter the Light Equipment business, both in North America and Western Europe, was down more than the heavy equipment business.

Looking at our share for Heavy Equipment, it went up in North America and down in Western Europe.

But was flat on a worldwide basis.

For Light Equipment, our share was down slightly.

As we explained last time this was due to the fact that small to medium sized contractors in the US, which is our core customer segment for backhoes, seems to have been hit harder in this sluggish economy than the larger operators.

Turning to slide 6, we see that in spite of these mixed results, sales of equipment for the quarter were $2.4b, up 8% from $2.2b last year.

Our Agricultural Equipment sales increased by 7% to $1.6b.

Overall, during the Q4, the impact of currency was legible as the positive impact in Western Europe offset the negative impact in Brazil.

Our Ag gross margin increased in the quarter versus last year, due mainly to new product introductions, synergies and pricing.

I would like to clarify that our Ag share in the quarter was impacted by limited retail availability of new products launched at the end of last year.

These machines, which have higher margins were a significant portion of our revenues and of our margins for the quarter and we expect to see the share impact in the coming months.

Construction equipment sales went up 9% to $765m net of the Kobelco America and Kobelco Europe acquisitions which added revenue of $70m and the favorable currency impact of $27m.

CE sales were down approximately 5%.

Our gross margin in CE declined slightly versus the same quarter last year and the positive impacts of the Kobelco acquisition and synergies were offset by increased manufacturing costs and lower production volumes.

On slide 7, we can see that our incremental profit initiatives in the Q4 totaled $31m, bringing the year to date tune to $114m.

Through 2002 we have achieved a total of $547m towards our target of $850m in profit initiatives by the end of 2005.

Moving to slide 8.

For the full year in North America the Ag industry was down in the over 30 horsepower tractor segment and for combines.

However, in Europe sales were up in both tractors and for combines.

Tractor sales in Latin America were better than expected driven by the local currency impact on proceeds from export sales and stronger grain prices.

In terms of share, in 2003 we will benefit from the full availability of our new over 100 horsepower tractors in both North America and Western Europe.

In combines, where we enjoy high margins, we did benefit from the full availability of new models in North America and Europe and gained share in both markets.

On the CE side of the business, slide 9, the total worldwide market showed a decline of approximately 4% in the full year despite a strong performance in Asia.

In the quarter sales of Heavy Equipment in Western Europe and in North America did not suffer to the same degree as Light Equipment.

For the full year, our overall share of Heavy Equipment was flat while our share in Light Equipment was down slightly for the same reasons I covered earlier.

For the full year, sales of equipment were $9.3m, up 3% from last year as shown on slide 10.

The impact of currency and acquisitions on agricultural equipment was negligible while construction equipment sales, adjusted for the impact of acquisitions and currency, were down 10%.

On slide 11 we compare equipment operations 2002 and 2001 results on an aggregate basis and we see an improvement in EBIT and EBITDA in spite of a drop in the gross margin percentage.

When we look at the data from the segment footnotes to the press release, as shown on slide 12, we can see that the operating result for the year on an IS basis has shown a substantial year over year improvement in the Ag business.

While in CE, the operating results shows the impact of the weak market plus the impact of our concerted efforts to bring inventories in line with demand.

For example, at the end of the fourth quarter our worldwide combined dealer and company inventories of backhoes was nearly 40% lower than it was at the end of the fourth quarter of 2001.

For skid steer loaders, the difference was nearly 20%.

Now digressing for a moment.

The fourth quarter segment results which [Dion] analysts will see within the [Fiat] results showed a $40m improvement in the quarter.

Moving onto our financial services results on slide 13.

CNH Capital's net income for the year increased from $4m last year to $60m in 2002.

The impact of lower loan loss provisions and increased ABS gains accounted for most of the bottom line improvement.

Retail originations in the core financing business were down compared to 2001 and this was due first to lower retail sales volumes of equipment operations, as mentioned earlier and second, to the company's decision to limit originations of operating leases.

I want to point out however, that the quality of the portfolio has continued to improve as shown by the steady drop in North American captive delinquencies over 31 days.

On slide 14, you can see that our Equipment operations SG&A for the year have declined to 9.5% of sales, bringing us very close to the target that we have set for ourselves in 2005 of 9% in sales.

In total, CNH ended the year with a net loss before restructuring charges and accumulative effects of a change in accounting principals of $63m, compared to a net loss of $170m before restructuring charges and goodwill amortization in 2001.

For a third in a row, CNH has steadily improved its bottom line performance in spite of having flat sales in a sluggish market environment.

In fact, on slide 15, when you look at our EBIT, defined as net income before accumulative changes in accounting principals plus interest expense and taxes to which we have added back goodwill to make the numbers comparable with 2002.

Or as, you can see, on our equipment EBITDA including financial services since the merger, we have now surpassed the 1999 pro-forma results for both.

Now, let's look at a few selected cashflow items on slide 16.

Again, we see that our EBITDA has steadily improved and we have been reducing our inventories each year.

Our net interest expenses were down in 2002 with the drop mainly in last six months of the year following our debt reduction actions.

Our mid-year debt to equity swap with our major shareholder plus our successful public equity offering, together accounted for most of the reduction in the equipment operations net debt as well as most of the improvement in our consolidated net debt.

Now, let's look ahead to the first quarter of 2003, we see on slide 17.

We expect the worldwide market for agricultural equipment to be down slightly.

In Latin America the quarter could be weak due to the uncertainty of the economic funding.

For the whole year, we expect that the worldwide market for agricultural equipment will be down with North America and Western Europe essentially unchanged.

Similarly on slide 18, we see the construction equipment market is basically flat on a worldwide basis in the first quarter of 2003.

North America should be down, driven by backhoe loaders.

While in Latin America the pattern is similar to Ag.

For the full year we expect the total construction equipment market to remain flat with a slight recovery in North America and some decline in Western Europe and Latin America.

In view of the uncertainty of the worldwide economy in general and our industry in particular, we are not forecasting any industry recovery for this quarter.

We know that employee medical and pension costs will go up while interest expense should go down.

Let me just say something here about our pension fund situation.

In common with most US companies we took a non-cash charge to equity in 2002 recognizing the impact of the recent poor performance in the equity markets.

For us, the 2002 charge amounted to $278m net of tax, which is less than 10% of our total shareholders equities.

The recent poor performance of the equity markets along with lower assumed discount rates, lower projected returns on assets and a higher projected medical inflation, will lead to a total pension and OPEC cost increase in 2003 of approximately $90m.

Now lets move to our 2003 profit initiatives.

The majority of our SG&A and material cost savings have already been achieved.

While still to come are the bulk of the manufacturing rationalization synergies.

We are entering into sort of a transition period.

The next major improvement should come when we implement the major restructuring actions we have announced and this will not happen until later this year and into 2004.

Taking everything into account, our bottom line performance for the first quarter will at about 2002 levels before restructuring charges.

For the full year 2003, our priorities remain the same.

We continue with the introduction of our new products.

To continue implementation of our manufacturing footprint rationalization plan in order to reduce costs long-term and to generate positive cash from operations after an estimated cash contribution of roughly $50m to our US pension fund.

On top of this, we will continue to show progress at CNH Capital.

The bottom line in 2003, we expect to improve our operating performance and achieve a positive earnings per share before restructuring.

This concludes our comments, so Michel, Harold, Giovanni 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.

Bridget, can you now please retrieve the first question.

Thank you and as a reminder to anyone that would like to ask a question, please press '*1' on your touch-tone keypad.

Our first question will be from Manesh Mania.

Your line is open.

Good morning from JP Morgan.

I just had one question and a follow up.

First one is, you guys have debt maturities coming up this year.

I think one issue is at the credit company, second one is at a manufacturing company.

Can you just sort of talk about how you plan to diffuse the bonds?

And then two is with all the restructuring at the automotive unit in Italy, how do you think it is going to affect your liquidity?

Giovanni Maggiora to answer your question and then we can make a comment on the last if I can.

Yes indeed.

Good morning everybody.

As far as the current maturities and most of the middle ones is better of one of our outstanding bonds which is maturing actually in less than a weeks time.

Now it happens to coincide with an extra period of our conduits as far as a retail receivables are concerned.

We are in a position to expand that program today given that the rollover that we have recently renegotiated a number of receivables - a particular valuable rate.

We could not place over the conduits until last year are now eligible for these kind of transactions and that allows us to expand again our availability on those conduits including much the expected outflows for the repayment of the bonds.

So that is the first and most immediate need which is covered.

I am summarizing by saying move on.

Absolutely.

As far as the rest of the other maturities which are significantly happening in the fourth quarter and that's where we shall also have typically ABS activity that will be covering, once again, those needs.

So we are not materially concerned about those things as well.

My comment on the second part is that typically in the first quarter, this is the quarter where the working capital needs on a seasonable basis are designing strong needs and obviously the company has been always focusing on inventory and working capital control.

This year it is going to be exactly the same.

Now on the question regarding what's happening in Italy with regard to restructuring of the auto business and the consequence of us.

My view is this and I think it is maybe a mixed operation because obviously we are not performing on a day-to-day basis what's happening there and I am sure that a lot of actions are taking place.

My personal view is that everything we did, and we really did aimed at structuring the Fiat auto business and Fiat in general.

So I would say the worse case scenario is that nothing won't happen to us, and best-case scenario is we significantly [indecipherable] of Fiat and CNH.

If I may just follow up.

You know the question that I am really trying to focus on is, you know, at the end of September you guys had over $4b of liquidity in terms of your bank line availability.

And I am just to trying to figure out, I mean, should we think that most of that is going to stay in place despite what happens with Fiat Automotive?

There is no reason why it shouldn't.

OK, thank-you.

Thank you.

Our next question will be from John McGinty.

Your line is open, please state your company name.

Hi, Credit Suisse First Boston.

Good morning.

Morning John.

Could I just get a quick review of the major cash flow items.

You said $50m excess to the funding.

Could you remind us of what in 'O3 the restructuring cash outlay is supposed be and just with Capex and depreciation?

Let's start with position is around $200m, $120m.

The position separate of costs.

I am quoting excluding the amortization of goodwill.

Now in terms of capital spending, I think because we are going to be in the order of $250m.

OK.

In terms of restructuring costs.

Most of the restructuring cash actions are going to be directed to many defunct actions especially in the construction equipment side of the business.

Many operators are downsizing operations here and there.

Mostly in Europe and I believe that cash for restructuring payments should not exceed $90m.

$90m, okay $90m.

And as far as the $50m of cash contributions to pension, the cost is mostly going to the US pension fund.

And that I would say is the minimum requirement would be the balance in these expansion plans.

The follow up question, assuming that your forecast of the industry and your forecast of CNH sales is correct, would you expect working capital to be neutral for 2003?

A source of funds or a use of funds?

Let me say this.

As you say, assuming that our forecasts is what is going to happen, but it is difficult thing.

Well I know but we have to have a starting point

My view is that assuming this, the working capital in total should decline slightly mostly because we are continuing to put pressure in terms of reducing the working capital in construction.

Would be talking in the area of $50m to $100m?

I think, yes. $100m I think would be the number.

Thank you very much.

Thank you.

Our next question will be from Steve Haggerty.

Your line is open, please state your company name:

Hi, it's Merrill Lynch and welcome Giovanni.

Hi Steve.

Just two quick questions guys, just to make sure I am clear on this.

The guidance you're giving in Q403, the implication that you'll be around the break even or in the black, would still be significantly lower than the consensus estimates that are out for '03 on first call.

Is that a fair assumption?

Is that a common way.

I think between zero and 11 there is a margin, which is quite considerable.

OK, so I need to be clear on this because this can be a big range.

I mean zero to 11 is fairly big range.

You're comfortable with 11 cents being sort of, to be consistent, at least need to be permanently consistent with the guidance you're giving.

In the current circumstances I think it could be possible.

Okay.

While we've got a minute, maybe we could ask Harold to talk a little bit about what he has been focusing on since he has taken over President of the construction business and what are the major issues he has been trying to deal with over the last couple of months?

Clearly, for us, is dealing with our brand and product strategy is a fair priority.

And one of the things that we have done is completely looked at our product development plan and our portfolio and decided which product lines really are required for us to maintain our global leadership position and provide adequate returns to the company.

So, basically those products are excavators, motor backhoes, skid steers and wheel loaders.

With that aspect we have reviewed our short and long-term product development plans to reallocate our capital and funding to make sure that we are focused on those cores product lines.

The second area that is critical is the brand strategy.

To make sure that it is concise and executable.

And clearly from our standpoint we're focused on driving global brands and focusing where we have strong strengths to get a good return on some regional brands such as O&K in Germany and Length Built in North America.

Clearly, our strongest global brand is Case construction equipment.

OK, thanks guys.

Thank you.

Our next question is from Gary McManus.

Your line is open.

Please state your company name.

JP Morgan.

Imbedded in your first quarter and full year guidance, what kind of tax rate assumption are you using?

In the first quarter, basically, we are using the 35% tax rate that we have.

That was 25%?

35%.

For the first quarter?

I would keep the same percentage for the balance of the year.

And, it seems like you have been making fairly good headway in EBIT improvement pretty consistently from quarter to quarter.

Why is that stopping in the first quarter when you say, you know, net profits are flat year over year?

Is it the impact of the higher pension and healthcare expenses or, what is behind?

That is a significant compliment.

I would say in the first quarter, I have mentioned, you know, the pension contribution is a fairly significant contribution that obviously we didn't expect to be that much a couple of months ago.

But there is another point.

As we mentioned, you know this synergy to use a very common language program.

We have done in part of the synergy program [indecipherable] selection.

Now we are going to be in another phase of the synergy program [indecipherable] and some of the actions in the rationalization of [indecipherable] and things of this nature.

And the first two quarters from a timing point of view are not the quarters where we will get definitive [inaudible].

The objective in total, that hasn't changed.

It is a question of timing.

Obviously on the other hand we continue to get the improvements relative to the new products and selections and some of them are going to come in the later part of the second quarter.

I also find that I would like to mention.

You know, in 2002 I can tell that if we didn't have the unfortunate drop of the Brazilian Real, which had an impact on our CNH we would have done better and as you know we don't expect the first quarter of 2003 to see any change in terms of guarantee.

We believe that the [Shinami] financing is going to come back, no doubt.

They inform me that when you have a changing impression, you might have heard of [indecipherable].

The government has been set up only recently and I am sure that the people in the profession are not going to be completely operative soon.

So I think the first quarter this is mainly the reason.

I would say it's a constant changing type of situation.

In as far as the first question, in the full year '02 you lost, and I am looking your segment that mentions $159m in the construction area.

You are not really expecting much improvement there.

How much headway can we make in terms improvement in that business without any kind of growth in the industry?

I would say approximately $150m.

Almost $160m.

Most of them were construction equipment.

I think in the quarter [indecipherable] accounting principle does include [indecipherable] opposition to this number.

Apart from that keep in mind that in 2002 part of the drop in the profitability due to the fact that quarter after quarter we had been continuing to under produce and therefore under [indecipherable] if you wish, the industry and the retail activity.

Yeah, as an example in the Q4 we under produced about 20% from retail and on the full year about 10%.

So we expect in 2003, in other words, this under production program to retailers not to be as much as what we had in 2002.

So we believe it should have an impact in reducing the absorption loss that we got in 2002.

OK, thank you.

Thank you.

Our next question will be from Mark Koznarek.

Your line is open.

Please state your company name.

Hi, it's Mark Koznarek at Midwest Research.

Good morning, everyone.

Morning Mark.

I've got a question about pricing.

Price realization both in Ag equipment and construction what you experienced in 2002 and then what you are anticipating in your outlook for 2003 in each of those categories please?

I would say first of all, pricing has been slightly positive in the Ag business in 2002.

But the measurement of pricing is a little bit more difficult in the period where you are introduce new products because basically you don't have reference compared to what we have.

It is clear that in Construction Equipment pricing was not a factor.

The only factor, I am thinking apart of what happened in Latin America while basically we are increasing price to follow inflation of costs.

In North America and Europe, pricing was almost not a factor in North America and was slightly important in Europe.

CE, I would say immaterial.

I am sorry, CE was?

Immaterial.

Okay.

So you didn't see any deterioration last year?

Then are you expecting any improvement in either side of the business this year, net realization?

I mean, I sort of feel that Harold should answer this question.

Again in Ag it is difficult to measure because we are going to come up with new products and obviously the new products would be priced in a different way as opposed to other products.

I think the new product effect is similar on construction equipment where we will launch over 50 new and upgraded models in 2003.

A good portion of them coming in the second half of the year.

But pricing overall will vary based on the retail economics.

We think that we should get something close to 1%.

Okay and Harold, could I just follow up with one item and that is the CE outlook, what is it that has you folks thinking that the market will improve on a full year basis even though we are starting out the year slow?

And, you know, in this market, at least in North America, sales are kind of front end loaded.

So how do you expect to make up for this shortfall in the second half?

As we look at the macro micro drivers of the business, clearly GDP is a significant indicator as well as, you know, how things start for the Light Equipment.

Clearly if the general economy in the US moves along as forecasted, you know, we are looking at something in the range of 3%, 3.1% GDP for the full year and with the likely effect, we think that as the year moves on that should certainly help us.

Okay, thanks very much.

Thank you.

Our next question will be from Mike Kender.

Your line is open, please state your company name.

Yes, Salomon Smith Barney.

I have a couple of pension questions.

One was, I was wondering if you could talk about the return rate and discount rate assumptions.

Did those change?

I assume they did given that the expense numbers were up and what are the new numbers going forward?

We found that the returning asset assumptions --- you know in the pension area, in the two large pension funds and let's say pension systems that we have in North America and also in the UK.

In general we have assumptions in the UK.

They are much more conservative than the assumptions that we have in the US.

In the US, speaking about return on assets, in both 2001 and 2002 the return on assets that we had was 9%.

And we have reduced the assumption by 25 basis points.

Ad as far as the discount rate assumption, we are now 7.5% and we have reduced the pensions to 8.75%.

This is basically a 75 basis point reduction.

On the health care, because you know we speak otherwise about pension.

The only issue is not pension.

The real issue is health care benefits.

This is [a government funded] thing as far as everybody else.

And we have kept the short-term trend in terms of cost increase at 10% per year, which is a reasonable number and we have also tried to protect the retail assumption to 7.5%.

So that is the assumption that we are taking.

Okay, great, thank you.

And just one follow up on the pension.

Do you have the PBO number and the total asset number?

You gave the after tax liability adjustment.

I was trying to get back to the raw numbers.

Total assets I am talking about defined benefit trends.

It's $150m.

I am sorry, what was that number?

$1b, 150m.

Okay.

Or maybe around $2b.

Okay.

Great thank you very much.

Thank you.

Our next question will be from Robert Sniofski (pf.).

Your line is open.

Please state your company name.

Hi this is actually Bob Legate at CIBC World Markets, good morning.

Morning Bob.

I actually had two questions.

You provided in your press release an outlook for skid steer loaders of up moderately.

I was hoping that you can maybe define moderately and given the excess inventories and weakness in rental, you know, what exactly should we look for to be a catalyst for the up moderately forecast?

I am going give this to Harold on this question but I would like to make just a correction.

I don't believe that we can speak about excess inventory.

I think that as far as we are concerned, with the action that we have taken, our motor supply in most of our product lines is down compared to what they were last year and have come back to I would say a more normal acceptable level.

Harold.

On a industry level, you know, the industry inventory seems to be up pretty dramatically year over year.

Are you concerned about any excess discounting?

Harold D Boyanovsky.

Let me, if I could just talk about our inventory position a little bit.

Year over year we have reduced from about a month of supply and so our motor backhoes were down under 3-4 months supply, which we think is in great shape.

Skid steers because we have a combination of agricultural sales and also industrial sales, the forward month supply is, you know, something around the 4, a little under 4.

So it is little more than motor backhoes but relative to the skid steer business because a big portion of it is driven by the Ag sector as well as Construction Equipment, we get an uptick in the Ag business that will impact the skid steer market.

I think there is a general trend just like with many excavators in key market because of the application of the skid steer and the returns that the contractors get that there is going to be completely natural growth in that segment.

Other segments may be soft.

Secondly, just getting back to pricing.

Recognizing it's difficult to quantify, you know, any partial realization given the new product offering.

Maybe if we look at an existing product, have you seen any price realization, positive price realization and if so, specifically in Europe how much of that is due to currency?

That's really difficult to answer as clearly pricing in Latin America has been driven by the devaluation and consistent quarter over quarter.

Europe, we have planned slight net realization in pricing but clearly we have got to control the cost side of our product and our manufacturing to improve [inaudible].

As I said earlier we don't have more than 1% in our planning for the year.

I am sorry, less than 1%?

Yes.

Great.

Thank you very much.

Thank you.

Our next question will be from Barry Haynes.

Your line is open.

Please state your company name.

Chase Asset Management.

Good morning.

I have two questions.

One is if the '03 outlook is as you describe, you know, flat to slightly down for the industry what would your production schedule be for '03 given that you ought to be able to produce closer to demand this year compared with last year when you were pulling down inventories?

And then the second question is, in the CE business, just looking at the fourth quarter, the revenue decline was $31m year over year], I am sorry this is for the full year.

The revenue decline was $31m and the operating decline was $172m.

Now you mention that the pulling down inventories may have been part of that but I am wondering if there was anything else in there in terms of a major reason why the profit swing would be so much more than the revenue swing.

Thanks.

I will start with your second question and I'm going to let Harold respond to the first one.

Let me say this.

I mean first of all in Construction Equipment we have the changing sales year-over-year you know.

So including the sales coming from Kobelco.

In fact on a comparable basis dropping in [indecipherable] was more than what you see in that.

How much was the Kobelco sales in that number?

Do you have that number?

About $250m.

OK thanks.

We have also some currency impact.

So basically, I would say, the sales drop in terms of volume and mix etc. is about $330m year-over-year excluding currency and excluding acquisition.

Now having said that, the drop in sales also included a change in the mix of products and mostly because [synergies] on top of [indecipherable] was in North America and in some of the product lines where we have good margins.

So if you have a drop in sales where you have good margins and in addition a reduction of inventories, the combination of the two can be dramatic.

And then making a very simple example, if you reduce certain inventory in system where it is the leader and company inventory by $100m, when you have products with a 40% contribution margin sooner or later you lose [indecipherable].

Right

This is exactly what happened.

It didn't happen in the same quarter at the same pace but if you take an 18 month horizon, basically it is what happened.

I am going to let Harold answer the first question.

In our outlook we are still assuming that for full year we will slightly under produce our retail sales and continue to bring down inventory.

But we expect that production could be up as much as 5% year over year.

Great, thanks very much.

Thank you, our next question will be David Bleustein.

Your line is open.

Please state your company name.

Good morning.

It's David Bleustein, UBS Warburg.

Morning David.

Hi, David.

Good morning.

I think you mention lack of product -- lack of product availability as a reason for market share loss in North America.

I guess the question is, are there any products still with limited availability and when should we expect to see you start to recapture some of the market share loss?

I think you are referring mostly to the Ag business.

Ag in North America.

North America, I think, we are also to consider Europe.

Probably in terms of [indecipherable]in the mid size thus far.

This is probably where we have seen the most product.

So I would say the answer is yes.

We should have new products in our product offering and I think this is something that 2003 this is something [indecipherable] is going to be where we will really recover and fill the gap.

Okay.

So if I understand the answer to the question.

There are no gaps left in North America but there is still a gap in mid-sized farm tractors in Europe and you would expect that gap to be cleared up over the next couple of months?

Yes.

Alright, terrific.

Thank you.

Thank you.

Our next question will be from Cathy Nolan.

Your line is open.

Please state your company name.

Hi, yes, Cathy Nolan Solomon Asset Management.

I am wondering if you could just clarify some of the comments that you made regarding pension and healthcare costs?

I thought I heard you say that the increased costs running to the P&L for those two items would be $90m in 2003?

Is that correct?

Yes certainly is.

But what would the incremental cash cost be with regard those two items in 2003 and if you could break those down separately I would appreciate it?

Basically, I would like to differentiate pension and medical care.

In terms of pensions, it is going to be most entirely incremental because we didn't make a substantial cash contribution in [2002].

And that would be the $50m contribution?

Yes

Okay.

And what is the increased dollar amount for healthcare that you expect to expend in 2003?

I think in 2002 we spent around $30m.

Excuse me, seven-0?

In 2002, we paid cash about $30m.

Thirty?

30, 35, if I correctly remember the number.

And next year there is going to be an increase of about $10m.

Okay.

By the way, I mean we have a strange accounting system because the cash payment is much less than the income expense.

OK.

What is, so those are P&L numbers that you just gave me?

Yes.

What's the incremental?

What's your sense of the incremental cash cost?

I don't know.

Let me come back to the health care and medical benefits.

In terms of cash payment in 2002, we probably paid around $35m and in 2003 the cash payment is going to go up $10m.

OK

The increase of the medical costs charged to the P&L is probably around $50m-$60m.

The actual incremental cash cost is $10m.

Yes for healthcare.

For healthcare, that's correct.

That's what we're talking about.

Perhaps you could also, just to change topics a little, elaborate a bit more on the line to credit.

My understandings are that your lines of credit, you're either co-obligor with Fiat or Fiat has guaranteed those lines.

And could you discuss, given the restructuring that's going on at Fiat or the talk of a restructuring, is the company making any effort to get their own independent lines of credit?

And I guess, if not why is it that you think that Fiat can undergo a restructuring of its, you know, balance sheet or operations and that not affect your credit lines giving your co-obligor or Fiat is?

You are perfectly right that many of our credit lines are either guaranteed by Fiat or we have some kind of co-obligation with Fiat.

Now, just to give you a number.

We have about $7.3b of credit line provided to us, of which $4.3b is either guaranteed by Fiat or combined with Fiat.

Now, having said, that I would say that our primary objective is clearly to be cash generating from a administration and operation viewpoint.

But our priority number one is clear that when it will be time to renegotiate the credit line and in with Fiat what's going to be the best solution for us in terms of having the trade line separated from Fiat.

That is clear but as long as we have a credit arrangement, which is the one that we have, I mean, we have the association that we have firmly [elected] to Fiat [indecipherable].

So, I mean, [indecipherable] acquire our [indecipherable].

Thank you.

Thank you, our next question will be from Andrew Wilmond.

Your line is open.

Please state your company name.

Yes, hi.

Andrew Wilmond, Creative Partners.

Quick question about your leverage.

It seems quite high and I was just wondering, in terms of what do you see possible in reducing it?

Do you expect another debt to equity swap cost reductions or are you basically waiting for increase in economic activity to get more cash flow to pay off that?

How do you see that going forward?

We feel that we are a high leverage company.

On the other hand, what you have to understand also that after the merger nobody would have thought that the economic environment and the business cycle would be the one that we got.

Actually, if you compare 2002 to 1999 on a pro forma basis, the same activity, same entry less than what you got in 1999.

But there is an imbalance.

I think it is clear that in the down environment clearly difficult to any merger company which was created mostly on the next cycle very soon after the merger.

Now having said that, we clearly have important operations.

We have clearly the working capital under control, I think in down cycle.

I think we have done quite good, significant follow up in trying [indecipherable].

Now, having said that, we will pursue this strategy on a short-term basis.

I mean 2003.

Sometime we believe that the cycle will change the actions but consider that the volume will have come down.

In a company where we have a significant reduced break even point I would say the margin improvement should be quite significant.

Other than that, of course, we are on a continuous basis but in all our localities [indecipherable] we don't have plans anything [indecipherable] balance sheet function.

Okay thank you.

Thank you.

Our next question is from Stuart Hofhensky (ph.).

Your line is open.

Please state your company name.

Vanguard Group.

Good morning.

I wanted to if I could, get back to just have a couple of question.

I want get back to your bank and your credit facilities.

And I am not sure what we can talk about but if, in fact, Fiat Auto becomes a separate entity and Case is no longer part of that entity, it's difficult for me to imagine that Fiat would continue to provide over one half of your credit facilities and would continue to have exposure, you know, a credit exposure to you in the order of $4b.

Have there been discussions with Fiat to separate that, to find alternative credit facilities.

Where are you on that?

And also have you had discussions with the rating agencies regarding the impact on your ratings if you were separated from Fiat?

And I ask that in part because according to the agencies your current ratings are very much tied to, or reliant upon, the strength of Fiat and on a [indecipherable] basis the agencies are indicating that your rating could be quite a bit lower.

I would say, first of all, you know, I mean, we cannot speculate on issues that we believe [everyday] about what would happen if.

Now, maybe the question should be directed more to Fiat than to us.

But again, I mean, it is important for us to make a separation about what we [inaudible].

I would just like to say that this management is extremely busy in turning around this company and this is our primary objective.

I guess the answer to my second question, have you had any discussions with the agencies?

We have discussions on a regular basis with rating agencies.

By the way, I mean, every time we have discussions with rating agencies usually you do a press release.

And when we discuss with our rating agencies we speak of our CNH business and CNH operations.

Yes.

Okay and if I can just follow up with one quick one.

It appears from what you have said earlier that in order to satisfy your upcoming debt maturity you're going to be securitzing your receivables rather than really refinancing the debt and in every market barring from Fiat or other sources.

Is that a correct assumption?

Your question might be interpreted as if we were doing securitization for the first time

No I am just curious from a funding standpoint.

I mean, I think you should relate to the first point that somebody mentioned at the beginning of this discussion.

We have an upcoming maturity coming in the Case credit side and what we said is that we will be funding this debt because we have another funding [...] which is basically the wholesale fund rate, financing structure which allows us to use better, which has not been the [indecipherable] so far to say how to repay the debt.

We have effectively broadened our capacity to stop the market compared to where we were two months ago.

Actually compared to where we were in December and we are going to be able to utilize that for repayment of the bonded [indecipherable].

Thank you.

Our follow up question will be from John McGinty.

Your line is open, please state your company name.

Yes, Credit Suisse First Boston.

Couple of follow ups, I guess.

What was the currency penalty to earnings in all of 2002?

Let me answer it this way.

If you consider you are from North America, basically the variation of the US dollar has made more impact on impairment.

Okay.

Reason being that the translation impact on the supplier is not the upside that the transaction impact because as you know from '79 we produced substantial collections.

A natural hedge, yeah.

It's a natural hedge.

The US dollar is a natural hedge.

Brazilian is natural as well.

We not only have the translation impact but we have also the transaction impact that we incorporated in Brazil [...] for the engine and other transmissions.

So I would say basically, the guarantee in that area, probably in terms of modern impact, net of the production in NG&A, which had is a translation impact.

My guess is that in 2002 it's probably $20m-$35m impact.

Pre-tax or after tax.

Pre-tax

Pre-tax.

Okay.

Could I get--

We have also two areas of the world where we might have energies from currencies.

One is in Australia and the other is Canada.

I think in 2002 the balance of this is probably relatively minimal.

Okay.

You mentioned just to follow up the points.

You mentioned interest expense being down.

Can you give us a number of what we should use versus the 466 for the full year '02?

yes.

Assuming that the interest rates are down and remains the same we believe that earnings in 2003 compared to 2002 probably going to be around $40m.

4-0 million?

Yes.

Okay.

And the credit company that the net income of the finance subsidiary was, I think, 60, $60m.

Should we look for maybe $70m or does it stay relatively constant or does it go down?

That is a very difficult thing for us as outsiders to forecast?

Our objective is, first of all, the credit company, we do not expect in 2003 to see the margins moving significantly from 2002.

Okay.

We believe that we will gain again some or continue to reduce the costs of the top four.

I think we will add some -- the overall size of the top four you know is going to be probably stable to slightly down.

I would say, however, our view today is probably the possibility for this business is going to slightly the same as the one -- maybe slightly better and not so much compared to 2002.

Okay.

Then in the fourth quarter the equity in the equipment operations climbed very significantly but it was $13m in the quarter, $15m for the year.

Is that because now you are bringing in Kobelco?

You're bringing in the Fiat Hitachi.

Or is there a seasonality?

In other words, does that number stay where it is next year or are we at now a $50m run rate for the year?

If you refer to the income on the joint ventures?

Yes. $13m in the fourth quarter and $15 for the year.

Kobelco is not a significant.

The only piece of Kobelco which will be in this line is our 20% interest in Kobelco machinery in Japan.

This has an impact obviously.

But I would say where we have some improvement all around the world--

John, we got some improvements in that partially and that we received some dividends from some subsidiaries.

So that was kind of, not a one time, but that's a seasonal.

So probably leaving that flat for the year would be about the best guess?

I mean, it's not a new run rate.

Absolutely.

OK.

Then, Harold, one question. [Gallagher] raises prices in constructions equipment worldwide 2.25%.

Volvo says in New York they intend to go along assuming Deere does not discount.

Komatso America says the same thing.

The word that we are getting out of Deere is that raised prices 1%.

They are looking very seriously at doing more.

Have you seen this?

In other words, is your 1% just, kind of, what you view the market is?

I assume that if the other guys go up too you're not going to be the one that tries to drag the industry down or am I wrong?

Clearly, if there's an opportunity in the market place around the world on any of our product lines we'll take it.

So you will follow happily I assume along with everyone else if they, in fact, do go that direction?

Exactly, because, as you know, price realization being the prop of the industry is down significantly and as the industry flattens and starts to come up we as well as the competition tend to move in alignment.

Okay.

If I could have one final question.

I am not sure I understand why the benefits from the second phase of the next phase, not second, the next phase of the profit improvement program which relates to footprint and other kinds of things, why that kicks in the second half?

Is it timing of a new product, a new factory?

What is the event that means it's a second half benefit rather than, you know, just something that is ongoing?

I think it is mostly the timing of the downsizing of some of our manufacturing facilities or closing.

Also, the timing of moving products inside our system.

And those events that either the closing, the downsizing or the moving are specifically tied to time, a calendar, a timeframe that occurs in the first half of '03?

Absolutely.

Thank you.

Thank you.

Our last question come from Manesh Mania.

Your line is open.

Please state your company name.

JP Morgan.

I just had one question and just I wanted to confirm something else.

I think earlier in the call you said in construction you produced, under-produced in demand for retail sales by 20% in the fourth quarter and 10% [inaudible] in 2002.

Yes, 10% for the full year.

And 20% in fourth quarter?

yes

And can you give us the same statistic for Ag?

Yes, for Ag for the quarter we under produced by about 3% and for the full year about 1%.

Thank so much.

Thank you.

I show no further questions.

Thank you Bridget.

I would like to thank all of you for joining us this morning or this afternoon, as may be the case.

If you have any further questions, please don't hesitate to give me a call.

Thank you and good day.