CNH Industrial NV (CNHI) 2003 Q1 法說會逐字稿

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

You have been placed on listen-only mode.

Today's conference call is being recorded.

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

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

Sir, you may begin.

Thank you Sarah.

Welcome everyone to CNH's First Quarter 2003 Results Webcast Conference Call.

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

We also have with us today, Harold Boyanovsky, President of Worldwide Construction Equipment Business and Tom Kennedy, our Corporate Executive Vice President of Agriculture Equipment Business, to assist us in answering any of your questions on either of our key segments.

In a few minutes, Michel will offer management comments on our results and then we will be available to answer questions.

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 issues another press release on the subject.

We will be using slides today to accompany management's remarks, which are available on our website at www.cnh.com if you do not yet have them.

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 for a discussion of the important risk factors and uncertainties in the companies business that are subject to change and could cause actual results to differ materially from our expectations today.

Finally, this conference call and webcast and the contents are the property of CNH Global N.V. and are not to be re-recorded or re-broadcast without our express written permission.

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

Thank you Al.

Hello everyone.

I would like to start first with what happened in the last quarter and looking at slide 4.

The [indiscernible] tractor industry sales increased in North America due to the strength of the Under 40 horsepower segment.

Western Europe was essentially unchanged, which was better than what we expected.

Latin America was down.

On a worldwide basis [indiscernible] was up, mainly due to the North American Under 40 horsepower segment and to the rest of the world markets.

Industry sales of combines were down in Latin America and [pre-season] sales were down in North America and Europe.

On a worldwide basis, the industry went down by about 3,000.

In North America our sales of Under 40 horsepower tractors suffered from limited availability of new products launched at the end of last year.

In Latin America we had a very conservative forecast for the first quarter because we had seen a lot of poor [activity] in the first quarter of 2002 linked to the uncertainty regarding [indiscernible].

When [indiscernible] was confirmed mid-way through the quarter we were short of products.

In North America weakness in the dairy industry has impacted our sales of utility tractors and [indiscernible] tools.

In Western Europe, our market share increased significantly on sales of our new combines.

In the Rest of the World markets, our market share increased in all major product lines.

Turning to slide 5, turning to construction equipment.

The worldwide industry sales declined from the first quarter 2002.

Both North America and Western Europe were down, while the Rest of the World sales was up slightly.

Heavy Equipment industry sales were flat on a worldwide basis, being weaker than expected in the Americas while Western Europe was essentially flat.

Worldwide industry unit sales of light equipment were also much lower than anticipated in the quarter as [indiscernible] declined in North America and Europe more than offset gains in Latin America and Asia.

Looking by product category.

Industry sales of backhoes were down significantly in North America, while Western Europe was flat.

The Skid Steer market declined moderately in both North America and Western Europe.

In the quarter, our heavy equipment share was down in all major markets.

Turning to light equipment, the picture was similar with the exception of Skid Steer Loaders in Europe.

However, our feeling in the quarter is that the share situation may not be as gloomy as it looks because we have summed out about the industry numbers.

We think the number might be inflated due to the [indiscernible] rental fleet renewals in the quarter.

I am talking about North America.

We also know that there may be some pricing action that we may not have participated in.

Turning to the financials on slide 6.

Sales of equipment for the quarter were $2.3b compared to £2.2b last year.

Over a 5-year period, you can see that our [indiscernible] business has grown steadily despite of required divestitures and generally weaker industry conditions.

Slide 7 is just a summary chart, just to remind you of all the basic figures and to clarify how we calculate EBIT and EBITDA and to also explain the segment information.

So I will not comment any further on this.

As you know, turning to slide 8, we analyze our business segments on an IAS basis as explained in Footnote 3 to the final short statement.

To the [indiscernible] of slide 8, you will see the figures from the footnote of the press release.

Then you see the various adjustments to the IAS operating results for equipment operation to which the operating margin and our GAAP, which [indiscernible] basically that we achieved a $50m operating margin and our GAAP in the first quarter of 2003.

If you divide the adjustments between AG and construction equipment, basically on a 65%/35% basis you have the operating margin by segment under US GAAP.

As you see, adjustment shows that the drop in AG margin and the percentage of sales is more than accounted for by the increased employee, medical and pension costs.

That remains a healthy number.

Now turning now to interest expense on slide 9.

The drop in net interest expense in the quarter was due mainly to the company's debt reduction actions completed in June 2002.

The successful debt reduction action occurring during 2002 and at the beginning of this month has lowered our equipment operations debt to [CAP] ratio dramatically.

Our equipment operation debt to [indiscernible] ratio now stands at 26% on March 31, 2003 proforma basis.

This compares to a ratio of 56% on December 31, 2002.

Also I would like comment on the interest compensation to financial services which is the line that we have added to the P&L.

This is just the interest [data] of equipment operation to financial services. [indiscernible] period of the wholesale [indiscernible] provided through dealers ordinarily in North America.

Now turning to cash flow on slide 10, we can see that the net debt of equipment operation which is total debt less cash and intersegment notes receivables increased by only $135m during the first quarter, which is usually our seasonally high use of cash because we are building inventories for the spring selling season.

Last year net debt increased by $383m and working capital and the acquisition of [indiscernible] North America consumed almost $250m more cash than in the same period this year. $170m use of cash for intersegment working capital in the first quarter simply reflects timing differences between equipment, operations and financial services and is not a permanent use of cash.

In total, equipment operations net debt on March 31, 2003 was $3.7b.

Following the exchange of debt for preferred shares that we recently announced, the net debt is now approximately $1.7m.

We have included some details in an appendix to this presentation to help you understand the change in the debt.

Now on to our outlook.

Turning to slide 11, we see the pluses and minuses from the first quarter that we carry through the balance of the year and help us [indiscernible] our outlook.

On the one hand, we are pleased to see the rebound in the Latin American markets now that FINAME is assured.

We are very satisfied with the perception of our new products in the market and the higher margins they carry.

The lower interest expenses following the exchange of equipment operations debt for preferred shares is also most welcome.

On the other hand, we are concerned with the weakness we see in the North America construction equipment market.

Especially the significant drop in the light equipment sector.

Our share position in construction equipment for Western Europe and North America is a temporary concern.

We are also concerned with the weakness of the North American AG market across most segments.

Higher project costs to support new product launches will also impact the bottom line.

We have responded a great deal to the concerns by accelerating our profit improvement actions.

Moving quickly on, our structuring [indiscernible] and initiating significant production [indiscernible] in construction equipment.

Turning to the market outlook on slide 12 of the second quarter.

We now expect that industry sales of heavy [indiscernible] equipment in both North America and Western Europe will be down slightly.

A big change from last quarter's outlook is that North America will be below 2002 levels.

While Latin America should be up, reflecting the renewal of FINAME financing.

We anticipate that the construction equipment market for backhoes, skid steers and heavy equipment in total will be down moderately on a worldwide basis.

By region, the changes from our prior outlook are similar to those in our AG outlook.

We now expect North America to be down and Latin America to be down only slightly.

Looking at AG on slide 13, we expect that share gain from new products will compensate for the additional industry weakness, especially in North America and Western Europe.

The quick resolution of the FINAME situation in Brazil means that volumes will move back towards 2002 volumes.

That is good news for us.

So in short, AG is healthy and we believe that our AG business should continue to improve through the balance of the year.

On slide 14, the construction equipment situation is a different story.

We have noted the increasing weakness in the industry and we have already reacted aggressively to manage the situation.

We expect North America construction equipment industry weakness to continue especially for light equipment.

In the second quarter, we are cutting production by 18% compared to the base plan in order to manage our inventory level.

This means that our wholesales will be lower in the second quarter.

We are implementing aggressive cost reduction actions in all aspects of the construction equipment side of the business to control costs now in the current quarter.

More importantly, we are implementing [indiscernible] actions intended to make the business profitable going forward.

These actions cover a wide range of opportunities to achieve greater efficiencies ranging from consolidating back office's activities in the various countries, focusing factories and engineering centers to that we concentrate our expertise in key product lines and specialist location.

[With] those changes, we will make a significant restructuring cost and starting in the second quarter. [indiscernible] approximately $60m of pre-tax restructuring costs for the organization of its business.

Slide 15.

For the second quarter 2003, we expect our AG business to perform at last year's level while construction equipment will be slightly down.

Reductions in interest expense and improved results of financial services, resulting from the timing our first major [inaudible] transaction are expected to offset higher employee medical and pension costs and the impact of a weaker than expected market.

The net results will be a slight improvement in net income before restructuring compared to the second quarter of last year.

Total restructuring costs in the second quarter net of tax could be as much as $45m.

For the full year, slide 16, the current political and economy uncertainty in most major markets, introduces a significant level of uncertainty into any industry and company forecasts.

We believe the worldwide AG market will be down slightly, with the Americas down slightly.

Western Europe and Rest of the World market flat.

The construction equipment business for the full year, we expect both North America and Western Europe to be down moderately while Latin America and the Rest of the World market should be basically flat.

Slide 17.

For the full year, our outlook for the AG industry in total remains essentially unchanged versus our previous forecast.

Although the North American market should be weaker while Latin America and Rest of the World market should be stronger.

Share gains from higher margin new products are expected to offset the forecast through industry weakness.

Overall, our outlook for the AG business is unchanged from our February conference call.

The AG business will continue to improve on a year-over-year basis and the new higher margin products make it an increasing [indiscernible] of our product offering.

Turning to the construction equipment full year outlook on slide 18, we expect the industry to remain weak, particularly in North America and especially in light equipment.

The new products we will launch in the second half of the year, will have a modest impact on the bottom line this year.

The aggressive cost cutting and our structuring actions underway should mitigate the impact of the industry decline and reduce the loss suffered in 2002 by about half.

Overall, on the full year, slide 19, we expect the AG business to remain on track.

Construction equipment is [acting] rapidly to recover in a market that will probably remain weak throughout the year.

Financial services should be stable and continue to improve the quality of the portfolio.

The strengthened balance sheet will result in lower interest expenses for the year and the net dividend should be a bottom line [indiscernible] of 2002 of about $100m before structuring charges.

This result is confirmed with the adverse results from construction equipment offsetting the interest expense savings.

Restructuring charges are expected to total approximately $325m pre-tax with a maximum cash impact of approximately $75m in 2003.

Finally on slide 20, you can see our outlook for cash flow and debt for the year.

We confirm our commitment to reduce our consolidated net debt by a further $700m to $900m in 2003.

With equipment operations contributing between $200m and $300m in free cash flow, mostly through working capital management, of which construction equipment is considered a significant part.

Financial services contributing between $500m and $600m through a reduction in the [fund book] portfolio.

However, the managed and serviced portfolio of financial services will continue to grow as we continue to expand our financial services activities.

All of which will only further improve our liquidity profile.

Now, Al, Giovanni and Tom and I will be happy to take your questions.

As a reminder we ask that in the question and answer session, each questioner should limit themselves to one question and one follow-up at a time.

Thank you.

Sarah, could you please release the first question?

If you would like to ask a question, you can press star, one.

The first question comes from David Raso.

Please state your company name.

Smith Barney, good morning.

Morning David.

A question on the AG outlook change.

Probably the weaker than previously expected North America offset by Latin America and Rest of the World seems a little better than you thought.

That sounds like an adverse mix, the trade-off of North America more [indiscernible] the US.

What is the impact on your margin assumptions for AG and what changed about North America in your outlook in particular?

Is it the over-flow you are seeing coming in as we move further into the second quarter, the key selling season?

What changed?

And again a question on [indiscernible].

Tom Kennedy here David.

The first quarter of North American industry results has of course driven us to be a little bit more conservative in our Q2 outlook.

The mix in the first quarter was heavily [indiscernible] to the under 40 or the compact tractor business where the industry was up 15%.

The rest of the industry over 40 horsepower was in fact down 2%.

Last year, our second quarter industry, the numbers were pretty [indiscernible].

So we believe that on balance the second quarter will not be as robust as what we had hoped for.

The other mitigating situation there is that [indiscernible] impacted our over 100 horsepower package that not really put the farmer into a real buying [indiscernible].

So we don't think we will see that segment of the business really pick up until the second half.

But what is the outlook for greater than 100 horsepower now versus a quarter ago?

Your 2003 outlook for 100 horsepower and above in North America?

It is basically flat versus a year ago.

What was it?

What was the outlook?

You mean before?

Correct.

We had expected at the beginning of the year to see the spring selling season be a little bit more robust than what it is going to be.

Obviously as I said, the farm [indiscernible] as well as the [indiscernible] situation, we believe has dampened the buying potential [inaudible].

The follow-up related to that is, basically I am hearing a company that is struggling significantly on construction, even not participating in the price increases, you are still seeing some share erosion.

It is putting a lot of pressure on your AG business to draw the company's earnings and given the adverse mix on your outlook for AG, what does that suggest around pricing on AG over the next couple of quarters?

I mean especially given the TGs and TJs from New Holland, you know it is pretty apparent from the dealers that the price of the new TGs and TJs are coming into the market, are so close to the case pricing, if anything some case sales are cannibalizing some of the New Holland.

I'm just trying to get a feel on a pricing strategy given the pressure on AG to draw the company's profits?

You are raising a very complex question [indiscernible].

So I will let Harold speak first about the construction equipment situation and then Tom will answer on the pricing for AG, but I don't think that there is really pressure on the AG business because of the construction equipment situation.

I think there are separate businesses and we are managing them on their own merits anyway.

This is Harold.

The last time we were together we talked about a planned effective pricing year-over-year of about 1%.

We now have in place, in the marketplace, which we began in January and have made progressive movements throughout the first quarter to where our overall pricing year-over-year will be about 2% which is in line with the industry.

However having said that, clearly in the first quarter we have seen continued aggressiveness of discounting by the competition in the marketplace, be it low rate financing, zero percentage or other initiatives.

But from a CE perspective, we feel that on a full year basis that we can hold the 2% pricing.

From an AG viewpoint, a couple of comments to make.

First of all in North America, even although as we just discussed our outlook has changed somewhat on the [indiscernible] tractors.

In the key utility tractor segment our first quarter results in terms of retail activity was better than the industry.

The industry was down about 2% and we were up significantly.

These tractors are of course from a heritage viewpoint, very good [indiscernible] tractors for CNH and this is the range where we have introduced a new model into the [indiscernible] brand which we are seeing a good customer reception on.

Likewise in our European market, where the industry has been relatively flat, the bulk of the sales in Europe are under what we would call 150 PTO horsepower.

Which again is a very good CNH product, both for the New Holland and the [indiscernible] brands.

From a pricing press review point, we continue to see in the North American market very aggressive programming by some of our significant competitors, particularly in the under 100 horsepower and under 40 or the compact tractor segment.

We do not expect that to deviate in the short term.

Thank you very much.

I'll get back in the queue.

Your next question comes from Joel Otez(ph).

Please state your company name.

Hi, I'm with Lehman Brothers.

How are you doing guys?

Hi Joel.

Can you give us any sense of who is gaining the market share in the construction equipment business?

Let me comment Joel about the first quarter in general.

I think from a share perspective as Michel indicated earlier, we know clearly that [indiscernible] has reloaded their [indiscernible] stores significantly in the quarter with sales were over a quarter up, 25% to 27%.

On the other side of the coin, the business with the national rental companies continues to be soft.

Although the fleet is aging in excess of 42 months which would indicate that clearly there will be some replacement of inventory.

Many of the national rental companies are finding that their book value is significantly greater than market value.

So as they look to refresh their fleet, they are looking for the suppliers to take this over-valued use and/or in addition to that guarantee buybacks on the new products being sold.

When we look at the economics of those two factors, clearly it is not a profitable situation.

From a CNH perspective at this point in time, we have not chosen to follow that path to hold the margin.

I think those two things have impacted the share in the first quarter.

On the other side, as you may be aware on the CE division we are planning on launching over 50 new products in 2003.

Most of those new products begin to flow in the second quarter and the second half of the year.

Percentage wise, we have seen 5% in the first quarter, 50% by the end of the second quarter and then 45% in the second half of the year.

So as we begin our launches and this is particular for North America in Q1 we were short of inventory of our new line of [hydrostatic] [indiscernible].

We were short of some tier 2 engines that have impacted our wheel loader sales.

I would expect that North America to see a more normalized share of market moving forward in the second quarter.

Clearly in Europe as we look to Europe, we are in transition from the Fiat Hitachi to the Fiat Kobelco distribution and product lines and that marketplace and customers have only seen the new evolution crawler excavators begin to get the market the last phase of the quarter.

So I would expect to see that improve.

In the month of March we filled the void of distribution and the [imported] UK market [inaudible].

Okay.

As long as you are talking about the future, can you give us a sense in your view of what needs to happen to get the CE market to really start to turn around and your sense of what pent-up demand is out there?

In the 35 years that I have been in this business, I am a little cautious about the scenario of pent-up demand because both in the AG and the construction equipment business never materializes to the pent-up formula or philosophy.

Clearly we need to see a raise in consumer confidence, the EDP rates need to be something north of 2.5% other than what they are forecasted to be.

We see that happening worldwide, we see a growth in construction.

We know in particular in North America, while the government budgets and spending were cut, there is some as you know debate about [T21] funding.

The only thing holding reasonably well is the residential construction sector of the market.

So the fears about meaningful industry over-capacity are not really shared by you guys?

I can say from an CNH standpoint, as Michel indicated over the last several years and continuing moving forward, we are sizing our [investoral] footprint to the industry capacity as we see it.

I can't speak for the other players.

Okay.

Thank you very much.

David Bleustein, your line is open.

Please state your company name.

Good morning, UBS Warburg.

Morning Dave.

The 18% reduction in CE production in the second quarter relative to plan, what is that relative to last year?

About 20% of [inaudible].

20% 20?

12, sorry.

12% okay.

Do you have an early lead on April sales for farm equipment in North America and Europe?

It's Tom Kennedy.

Could you repeat that question please?

Sure Tom.

How do sales look month to date?

I know we are only half way, well two thirds of the way through.

But how do sales look in April so far?

April, through the first two weeks in North American continue to track more or less in line with what we saw in the first quarter.

Smaller tractors are okay, larger tractors we haven't really seen any pick-up.

In terms of our European sales, we continue to be a little bit pleasantly surprised by the continuing strength in several of our key European markets [inaudible] like I said, it is a little bit more positive than we were expecting [inaudible].

The sun is just starting to shine; farmers are just starting to think about getting into the field to plant.

So this is the time of the year in our business where sometimes you become a little bit more optimistic [inaudible].

Alright.

Terrific, thank you.

Your next question comes from Steve Haggerty.

Your line is open and please state your company name.

Merrill Lynch.

Good morning.

Good morning Steve.

Just two quick questions.

Can you go into a little detail about what backhoes are so weak?

It seems as though some of the residential spending, where I think backhoes in North America might be used is holding up.

But this particular segment of the market does appear to be very weak and your outlook is fairly weak?

I think that if you look at the backhoe of customer segments, there are still significantly a lot of owner operators that purchase tractor loader backhoes.

These small companies or owner operators are more affected by the decline than by say the major engineering or pipeline companies.

Also the rental of demand for [indiscernible] equipment, [TLDs] as well as skid steers continues to be off and as indicated earlier, clearly the rental companies are not significantly refreshing their fleet or building their fleet.

In fact for most places they are either level or down.

I think those two factors, because [TLD] is the big, as you gentlemen know, item for rental fleets.

Just one quick follow-up.

Just in looking at this release, the basic assumptions that you gave us last quarter for cash restructuring charges, pension costs, they look to me to be the same as we got at the end of last quarter.

Is that correct?

From a cash point of view in 2003, you are correct.

I think pension is in the same ballpark too isn't it?

Yes.

Alright, thanks guys.

Mark Koznarek your line is open.

Please state your company name.

It is Midwest Research.

Good morning.

Could I get a clarification on something that was just said?

You were talking about the market trends in North America and Europe in AG and said you were pleasantly surprised in Western Europe, but yet the overall Western Europe AG outlook as been reduced.

Can you resolve those two for me?

Hi, Tom Kennedy here again.

The question was at the first part of April, how do the sales look.

And looking at the first two weeks, I want to emphasize two weeks; the tractor business has been a little bit better than what we had anticipated.

So our outlook for the second quarter, even although it is a little bit on the conservative side, the first two weeks would indicate that we will see better results.

Okay, so you've reduced the outlook for macro reasons, but so far these first 15 days or so are a little better than expected?

That is the way we would characterize it, yes.

Okay.

Here is the question I wanted to ask.

It is on construction equipment.

It is with regard to the new platforms that are being rolled out.

Could you give me an idea of what proportion of your product line on a revenue proportion would these things represent?

Is it an upgrade of 50% of the total line or is it something that is more like 15% or 20%?

I think if we look at the full year basis and the impact of the new products in the coming year, it is in excess of 60% of the volume will have been refreshed in the last several years.

But again, most of the new products as I indicated earlier are flowing into late second quarter and mid to late fourth quarter.

They include not only tier 2 product upgrades of most our product lines, but also upgrades for the majority of our brands.

Would these new products be the ones that we have talked about before conceptionally that incorporate new designs that have substantially improved margins?

Or are we still one generation away from that?

We will not see much improvement on the income statement from new product margin in 2003.

This will begin to flow in a good number in 2004 with the launch of the current products in 2005.

Just to give you an idea, we started the division with over 79 different platforms.

None of them were common.

By the end of this year, we are down to 60 and we will have 12 common platforms.

By the end of next year, we will be down to 49 and 17 will be common.

Okay.

Great, thank you.

Your next question comes from Mike Tender(ph).

Please state your company name.

Yes, Salomon Smith Barney, Citigroup.

I was wondering on the free cash flow that you threw out, just a couple of clarifications.

Is that before or after restructuring and pension spending?

Includes everything.

What was that?

It includes everything.

Okay.

So basically the only thing that it doesn't include is debt pay down.

So basically the $200m to $300 -

Yes.

Okay.

Great, that's my question.

Thank you.

The next question comes from John McGinty.

Please state your company name.

Credit Suisse First Boston.

Just a couple of quick clarifications.

One on the cash guidance.

You said it was the same as you had mentioned in February.

What about the additional, what appears to be additional $60m of restructuring and construction equipment that was initiated or was that just pulled forward from later?

Or is there a cash impact on that?

The $60m of restructuring I was mentioning for construction equipment is the [indiscernible] in the P&L.

So there is no cash on that?

There will be some cash on it, but it was already included in the total numbers.

So then this is not a new restructuring, this is just pulling the restructuring forward from the second half?

It is the speeding up of the process of accelerating the rationalization of some of our construction equipment operations.

Which were, they were an 2003 event, but now they are a Q2 2003 event rather than a second half 2003 event?

Yes.

Okay.

Just another clarification, in answer to the question about the track loader backhoe market, the rental market being weak for track loader backhoes and skid steers that is absolutely true.

But listening to what [Deer] says that the market is so weak that it becomes a non-event since it is down 70 on down 70, yes the market is weak but there was nothing there last year.

Does this mean that for CNH it was an important market last year -

John, [indiscernible] the fact that if you have a bigger market share to begin with it makes a big difference.

Okay.

So it was still 20%, 30% of your sales last year in rental, in the backhoes?

Yes.

Okay.

My question is and I just want to make sure I got this right, that construction equipment in answer to David Bleustein's question, the second quarter compared to the second quarter is down 12% production-

Production.

Production.

And on a comparable basis AG in the second quarter is what compared to production in the second quarter a year ago?

I cannot answer directly.

I think you know in the AG business because of the seasonality of the business it may be better to look at the production versus retail -

Let me just ask, for the year?

Because there we get over the seasonality and then I want to get production versus retail.

But for the year, what is the plan for CE and for AG for the year production in 2003 versus 2002 now?

Let us speak for construction equipment first.

In total, for the product lines production is going to be down compared to last year by about 7%.

7% for the year?

For the year.

And relative to retail it will be?

For retail it will be 9%.

So 91% of retail?

Yes.

A comparable number for AG?

For AG, we are going to under produce retail by about 2%, so I think it is not really significant.

Under-produce retail, so that is 98%.

But what is it in 2003 total versus 2003?

For AG?

Yes.

AG is slightly down compared to last year.

Like 1% or 2% down from last year?

Yes.

Okay.

Alright.

Thank you very much.

Your next question comes from Giovanni Borschelli(ph).

Please state your company name.

[indiscernible] I have two questions.

The first one is about the restructuring charges, which we are going to have in the next coming quarters.

Do you include in those restructuring charges also some goodwill impairment for the year, such as you have done in the final part of the year in 2002?

And secondly, about the synergies program that you did not mention in this release.

If you could maybe give us an update?

Thank you.

Okay.

Well first, the restructuring charges we are mentioning here do not include goodwill impairment.

They are [indiscernible] related to structuring rationalization for the construction equipment business.

The bulk of the charge we were mentioning is also related to the closure of the [indiscernible] plant in the AG business, which is a larger combined plant, which is part of the manufacturing footprint that we have already described many years ago.

In terms of synergies I would say for the time being, we are on track compared to the objectives that we have given in the past.

You will remember that we mentioned that we would achieve $850m of total savings relative to this.

In the quarter the estimate of what we have achieved is about $25m for the quarter.

Most of it has been achieved in selling and general [indiscernible] expenses.

But we are on track.

Thank you very much.

Your next question comes from Joanna Shatney.

Please state your company name.

Morning, Goldman Sachs.

Morning Joanna.

Can I just talk about European AG?

I am a little confused because the quarter was kind of flat and your outlook for the second quarter is down and the rest of the year is pretty flat.

What is making the second quarter look a little off?

And then just to follow-up on that, you think you are gaining share in Europe [indiscernible] thinks you are gaining share in Europe, where are you getting the share from?.

I guess the last question on European AG, now that [indiscernible] is owned by [indiscernible], is that considered a real competitor or maybe before they were just both more regional, or is it still too small to matter?

Tom?

I think on the first question, I have already addressed that.

The second quarter in Europe, we have conservatively forecasted the sales, the industry to be somewhat down from last year.

That was basically driven by what we were seeing in terms of the Middle East situation, some dampening of the [indiscernible] and that sort of thing-

But there is no dryness or any weather problem out there?

Not anything other than the normal.

Some locations are dry, some locations are wet.

But nothing year-over-year that we see from a crop viewpoint that would [ride] that situation.

So again, our forecast could be best characterized as a conservative outlook for the second quarter.

Okay.

The second part of your question was what?

The share changes?

You guys had a [indiscernible] share -

Yes sure.

Obviously as we have been saying for the last couple of years, as we worked our way through the first couple of years of our merger where we had to divest significant products in the European marketplace.

As we move towards our common platform strategy where we would be introducing significantly new products into not only the [indiscernible] IH distribution channel, but also the New Holland channel.

We are starting now to see the benefits of our plans.

Our products are coming into these two brand distribution channels, well accepted by our customers -

But Tom, can we look by products or by region or by?

Where is it coming from?

You are picking it up even it is recaptured share?

Okay.

If you look at the key, let's say, 60 to 130 horsepower segment, where the [Doncaster] supplied products into the [indiscernible] IH brand has now been replaced by a combination of products coming from our [Jesi] and our Basildon European plants, those products are contributing to our share of gains.

Last year in Basildon we introduced and updated what we call a TM MXM range of products, which extended the product specifications on the upper side of the range.

That product is our best selling product.

In fact it is the best selling product line of any competitor in Europe.

That has been received very positively by our customers.

We are just now getting now into full availability of that product line in both brands and all the different transmission and engine specifications.

On top of that we have introduced a lower horsepower tractor from our plant in Turkey.

That product line is now coming into the [indiscernible] IH distribution channel, both in Europe and in North America again being received well by our customers.

Okay.

Just one last question on [indiscernible].

Now that they are part of [indiscernible], is [indiscernible] now a real competitor, where they didn't have a real tractor product before, they were probably too small to matter.

Has that changed in your view?

Not really, [indiscernible] and [indiscernible] already share many of the same dealerships and particularly the important French market where [indiscernible] is basically only known.

We don't really see that as a threat.

Okay, great.

Thanks.

Your next question comes from Eli Lustgarten.

Please state your company name.

Good morning, H.C. Wainwright.

Morning Eli.

Hi.

Can you talk a little bit about currency and the impact in running the business?

I mean you gave us some data in the report, you know AG was down 3% and CE was down 9% currency.

Can you give the impact on the profitability on what is going on in currency?

How the currency is affecting the rest of the year and how you are handling the big changes?

And we had a quick question on pricing.

Are you getting some advantage [indiscernible] from Europe that you don't have to worry about offsetting some of the competitiveness from the US?

Well let me describe the situation from currency this way.

Obviously there have been significant changes in the strengthening, the strengthening of the euro versus the US dollar.

There have been all sorts of weakening recently of the British pound, which obviously impacts some of our cost base in Europe.

We are also very aware of the devaluation of the value in currency as a main factor.

There are some other slight, Canadian dollar, Australian dollar where we are [indiscernible] locally.

So obviously the change in currency is impacting the profit.

Overall what I would say is this.

If you consider the US, Europe system inside CNH, on the net sales basis it is clear that we have an impact depending on the [indiscernible] currency.

But of the margin, the translation impact is more or less offset by the transaction impact.

In other words, when the euro strengthens against the dollar the margin of the European operations [indiscernible].

On the other hand it impacts the cost of the products that we import in the US from Europe and vice versa.

The balance of the two is almost [indiscernible], it depends upon the volumes, it depends upon the quarter.

The situation is quite different in Brazil, but I would say it is less of a concern to the extent as you know, when you have a significant currency evolution, you have also inflation locally in the country and inflation in the pricing evolution and if you manage well your balance between pricing and cost as everybody does in this country, the only risk that you have is really a translation impact of the total margin of the [indiscernible], not really a translation impact.

We might have some small impact in Australia and Canada.

But on sales it is clear that it has a significant impact.

So I would say that [indiscernible] set itself, not [indiscernible].

So it looks like our margin cost [indiscernible] are decreasing, but part of it is due to this.

Can you tell me why the currency impact for the rest of year because with all the new products coming out and the sources and the pricing wasn't a very competitive market?

I'm sorry, could you repeat the question?

[indiscernible] currency impact on the new products coming out in the second half and the rest of the year, particularly the very competitive market introducing new products [indiscernible]?

I don't believe the currency impact will have different impacts on new products than it has in the current products.

Alright.

Thank you.

Our last question comes from David Raso.

Please state your company name.

Smith Barney.

I just wanted to clarify Tom, on the AG production.

In a year where your mid-sized case tractors, after the past few years of having to buy them from [indiscernible], given you had to sell the plant on the Anti-Trust ruling you are now producing them again.

Then the high horsepower tractors in Winnipeg, you had to sell the dealer, you are now producing them again.

The under 40 horsepower tractors for [indiscernible] brand new product category, so all new productions.

Production down 1% to 2% year-over-year, where are the cuts coming from?

We said that the production to retail was down 2%.

The production-

Year-over-year, the impression I got was year-over-year -

It might be a little bit of a misunderstanding on the question.

What I was referring to was the production [indiscernible], that in absolute terms in production year-over-year, total production is going to be up about 3% in AG in total worldwide.

That makes a little more sense. 3%.

What is happening -

With cash.

What is happening also then, even if up 3% makes more sense, that is still a lot of production that is all incremental this year.

What should we think about core [indiscernible], [Fargo] [indiscernible] and they [indiscernible] are selling pretty well right now.

I think I am just looking at the guys sitting next to me.

I am pretty sure that when we compare production year-over-year, in our production [inaudible], we include the purchasing of products [indiscernible].

So in fact the 3% that Tom is referring to, is not really production versus production.

It includes purchases and that especially purchases from [indiscernible] in particular - production, internal production I am quite convinced that productions for the year will be up slightly more.

So your core production will be up more than 3% --

Absolutely.

And the new products I assume are carrying more margin than when you were buying at break even from [indiscernible]?

Yes.

Okay, appreciate it.

Thank you.

Okay.

Thank you all for joining with us this morning for our first quarter results conference call.

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

Good day.