CNH Industrial NV (CNHI) 2003 Q2 法說會逐字稿

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

All lines will be placed on listen-only until we're ready for the question and answer session.

I would also like to remind all parties the call is being recorded.

I If anyone has any objections, please disconnect.

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

At this time, I will turn the call over to Mr. Trefts.

Thank you.

Sir, you may begin.

Thank you, Laurie.

Welcome everyone to CNH's Q2 2003 Results Webcast Conference Call.

We are pleased to have Michel Lecompte, our Chief Financial Officer, with us today along with Rich Christman, President of our AG North American and Australia and New Zealand region, and Jim McCullough, President of our Construction Equipment, North American region to join us for the Q and A session.

In a few moments, Michel will offer Management comments on our results.

Then we will be available to answer your 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 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 for a discussion of the important risk factors and uncertainties in the Company's businesses that are subject to change and could cause actual results to differ materially from our expectations today.

Finally, this Conference Call and Webcast and their contents are the property of CNH Global N.V. and are not to be re-recorded or rebroadcast without our express written permission.

Now, I'd like to turn it over to Michel.

Thank you Al and hello everyone.

Let me comment first of the first quarter performance, then I will comment on the outlook for the balance of the year.

On slide 4, agricultural factor industry sales increased in North America, mainly due to the strength of the under 40 horsepower segment.

Western Europe was slightly down, but less than what we had expected and Latin America was up.

On a worldwide basis, the industry was up significantly, mainly due to the North American under 40 horsepower segment and increases in the rest of the World markets.

Industry sales of combines were down in total by about 5% and down in all regions except for Latin America where the industry almost doubled.

In North America, our small tractor sales lagged dramatically down in the 40 under 40 horsepower category due to limited supply, while our over 40 horsepower tractor sales increased in line with the markets.

Our combined market share increased slightly in North America and significantly in Western Europe, despite the weakness of the market, also due to the continued success of our new combines.

In Latin America, we were sold out and could not keep pace with the dramatic rise in industry demand right at the end of the season.

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

During the quarter, we underproduced agricultural equipment for sale demand by 13% and decreased worldwide inventories to three months of supply.

Page 5.

Turning to construction equipment, we can see that worldwide industry sales increased by 6% from the second quarter of 2002.

Western Europe was down slightly while both the rest of the World and North American market sales went up.

In North America, this was due mainly to the strength of sales in the month of June.

Heavy Equipment industry sales were up on a worldwide basis, stronger than expected in North America, but down slightly in Western Europe.

Worldwide industry sales of Light Equipment were also much stronger than anticipated in the quarter and moderate declines in Latin America were more than offset by significant gains in Western Europe, Asia and increases, mainly in June, in North America.

By product category, industry sales of backhoes were up significantly, again mainly due to North America where we believe some of the independent controlled companies may be returning to the market.

We believe that there have been some rather substantial volumes going into captive rental yard.

On a worldwide basis, the skid steer market remained basically flat with North America up, again we think because of rental yard demand.

In the quarter, our heavy equipment share went down in North America and Europe.

Turning to light, equipment the picture was similar, with the exception of skid steer orders in Europe, which remained basically unchanged.

Turning to the financials in slide 6.

Sales of equipment for the quarter were $2.8b compared to $2.6b last year.

At constant currency, construction equipment sales dropped 9% while AG sales were flat, all as result of the inventory reduction actions taken during the quarter.

Slide 7 summarizes our calculation of the adjusted EBITDA for the quarter, which as you can see was essentially unchanged from the second quarter of last year.

However, net of currency EBITDA expressed as a percentage of sales also was essentially unchanged compared with last year.

As you know on slide 8, we analyze our business segment on an IAS basis, as explained in footnote 3 to the Financial Statement.

At the top of the slide you can see the figures from the footnote to the Press Release for the second quarter.

Then you can see the various adjustments to the operating reserves for which the operating margin under GAAP.

You should divide the adjustments between AG and Construction Equipment basically over a 65/35 basis to get to the operating margin equivalent by segment under US GAAP, which has improved slightly compared with last year.

AG declined slightly more than accounted for by the increase in pensions and medical costs for active employees, while Construction Equipment improved significantly in spite of lower sales.

Turning now to the bottom of slide 9.

A drop in net interest expenses a quarter are due mainly to the Company's debt reduction actions completed in June 2002 and in April 2003.

These successful debt reduction actions have lowered our Equipment Operations net debt to net capitalization ratio dramatically to 28% at the end of June compared to 56% at December 31, 2002.

Now a few comments on the first half results.

Slide 10 shows our adjusted EBITDA for the first six months, which has declined compared with last year.

Reflecting primarily the decline in the first quarter of this year.

Please note also that SG&A at constant currency decreased by 9% on a year-over-year basis.

Also please keep in mind that these numbers include $97m of new products and cost reduction savings, part of the original plan of $280m of profit improvement of new products and $850m of synergies, to which we have now added another year and another $100m of savings.

Our program now totals $1.25b of improvement since the merger.

The details of this can be seen in the appendix to this Presentation.

On slide 11 you can see the segment revenues for the first six months, which again reflects the decline in the first quarter.

Note that the US GAAP operating margin of the Construction Equipment business is positive compared with negative results for the same period last year.

Slide 12 highlights the results of our continuing actions to take [indiscernible] out of the business as shown by SG&A, expressed as a percentage of net sales, which is continuing to decline.

Excluding the currency impact the decline in SG&A was essentially the same.

Coming to cash flow on slide 13, let me emphasize some key points regarding our change in net debt.

Due to the substantial inventory reductions achieved during the last six months of 2002 working capital at the beginning of 2003 as reported was over $300m lower than at the beginning of 2002.

As such, in the first half of 2003 the increase required to get to the desired level for this year's market condition and product programs were substantially higher than the increase required in 2002.

Despite that fact, working capital at June 30 2003 was still approximately $70m lower than it was at the end of June 2002 as reported and would have been approximately another $200m lower on a constant currency basis.

The $187m source of cash in the first half of 2003 labeled orders increased primarily the cash tax difference of approximately $100m and the credit for the non-cash portion of pensions and offset costs accrued in the first half of this year.

Net cash from investing activities represents primarily capital spending.

Note that in the first half of 2002 the $247m use of cash included not only capital expenditure but also the acquisition of Kobelco in North America and our investment in Kobelco Japan.

In total Equipment Operations net debt on June 30, 2003 was $1.84b compared to $3.83b at the end of June last year.

Following the $2b of debt for equity exchange that occurred at the beginning of the quarter, the net debt to total and net capitalization ratio was 28% at the end of June 2003 compared with 56% at the end of June 2002.

We have also included some detailed slides in an appendix to help you understand the changes in the net debt.

Turning to our industry outlook for the second half and for the full year on slide 14, we now expect that worldwide industry sales of agricultural equipment will be up significantly, reflecting the expected increase in the North American under 40 horsepower tractor market.

Latin America also should be up reflecting the continuation of the financing.

We anticipate that the Construction Equipment market for back hoes, skid steers, and heavy equipment in total will be up slightly on a worldwide basis for the full year, reflecting the strength of the rest of the World market, which is up slightly for the second half.

We expect both Western Europe and Latin America to be down but [indiscernible].

Turning to slide 15, we see the pluses and minuses from the second quarter as they challenge for the balance of the year and define our outlook.

On the one hand we are very satisfied with the good reception of our new AG and Construction Equipment products by the market and with the higher margins these new products carry.

We are also very pleased with the share gains we have seen in combines and utility tractors, which interest expenses are lower and our debt to equity ratio is much improved.

The better liquidity and debt maturity structure we should have with our newly announced bulk offering is more positive news.

On the other hand that unseasonably hot weather conditions in Europe, our concern is that could affect second half AG Industry performance.

In the Construction Equipment business, we are looking to recover our position in the light construction equipment sector as the North American market conditions normalize following an unusual month of activity in June.

All-in-all our positive initiatives and new products are gaining momentum, our cost cutting and restructuring actions are continuing and we expect to see significant year-over-year improvements in the second half.

Overall for the full year, slide 16; we remain committed to our $100m improvement in net income before restructuring, which is about [indiscernible] improvement in adjusted EBITDA.

Our Construction equipment business is recovering.

Our AG business is stable and our margins are improving, mainly due to the new products.

Reductions in interest expense and improved results in the financial services are expected to offset higher employee medical and pension costs.

The quality of our financial services portfolio should continue to improve and our balance sheet continues to strengthen.

The factoring charges are still expected to cost a total approximately of $325m pre tax depending on the findings of the closing of this morning's Illinois facility with the maximum cash impact of approximately $75m in 2003.

Finally, on slide 17, you can see our outlook for cash flow and debt for the year.

In line with our previous forecast we confirm our commitment to reduce our consolidated net debt by a further $700m in 2003.

Equipment operations should contribute about $200m in free cash flow, mostly driven by working capital reduction.

However, if market conditions improve to our year-end we might have to increase production to ensure adequate supply of our Most popular units.

Financial services contribute about $500m through reductions of non-core assets and operating leases in their unbooked portfolio.

Even though their managed and service portfolio will continue to grow as we continue to expand our overall financial services activities.

Now Al, Rich, Jim and I will be happy to take your questions.

But as a reminder, we ask that in the question and answer session each question asker could please limit themselves to one question and one follow-up at a time.

Now, we'll take the first question.

Thank you.

If you would like to ask a question, press '*1' on your touchtone phone. '*1' on your touchtone phone.

David Raso, you may ask your question and please state your Company name.

Smith Barney.

My question relates to the AG Equipment margins for the second quarter with some insight looking forward.

Can you help me understand the incremental pension pit in the second quarter in the AG Division?

Yes the total increase, as you know on a full year basis of pension and medical benefits for company wide is about $90m - $100m.

The share of AG probably is around 60% of that, 65% of it and then you're speaking by quarter.

So the end result of this;

Al is going to give you the exact number.

In the operating margin, it's 11% year-over-year.

Incremental?

Additional amount that would be in other income for the inactives and the retirees and that would probably be about another 5% or 6%.

The mix in the quarter for AG, under 40 even though you lost a little share there, you're probably up more than your larger equipment in North America for the tractors.

But still the Large Equipment above 40 in North America was up still pretty healthy, up double digit if you are inline with the industry.

I'm trying to understand maybe the under-production you referred to versus retail.

Was it more in the heavy equipment?

I'm trying to understand why the margin didn't give us a little more in AG and then trying to understand where the potential is in the next couple of quarters?

Okay let me turn to Rich for this question regarding North American tractors.

When the end of production actually occurred?

Well if we look at the industry in North America, what we really find is a couple of differences.

As you indicated, the under 40 was extremely strong and the bulk of that being from the under 20 horsepower, where right now we don't have the product lines to compete in the full range of that.

We will have that next year.

On the over 40 horsepower tractors in North America, our share was actually up just a little bit in total from where we were last year.

Your other questions were relative to the margins?

Well the gist of the whole question was, your larger tractors maybe went up as much as the under 40, but still just the margin given that the bigger tractors were up double digit.

I'm trying to understand, is this all leading to either some pricing we should be cognizant of in the second quarter, why the margin didn't show through more?

In over 40 horsepower tractor segment in North America last year we more or less produced what we retailed.

This year in this particularly segment we under-produced retail by almost 31%.

Merely a production reduction in order to keep our inventory as low as possible.

Okay, so for the wrap up is, the under-production was driven by under-production of big tractors in North America.

Exactly.

Thank you very much.

Thank you Massimo Vecchio you may ask your question and please state your Company name.

Good morning, Intermonte Securities.

I have a question on the net debt figure.

You were talking about reducing net debt by $700m in 2003, does this include also the ABS transaction you are going to do or is it excluding it?

Thank you.

The $700m reduction of debt is connected with the consolidation of debt; it's the combination of debt of Equipment Operations and debt of financial currencies.

The split of the $700m is about $500m of our debt was in financial services.

The movement in ABS minus will reduce significantly because basically what we are going to originate as receivables this year is probably going to be a sweet year.

For the major realization of the final $500m debt under financial services is relative to the run-off of the portfolio of non-AG and Construction Equipment paper and is also due to the reduction of the outstanding balance of operating leases.

These two items run-off the currency on the basis of about $30m per month.

Massimo we've done two ABS transactions for a couple of years and we've generally done one late in the year.

So year-over-year the ABSs really wouldn't contribute to a change in the net debt.

Okay, you have the same outstanding figures.

So it doesn't impact the net debt you're saying.

Right.

Okay, thanks very much.

Thank you.

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

Hello, Credit Suisse First Boston.

Good morning.

The slide 14, which is your industry outlook, you always do this, which is fine I understand it; you're straightforward about it.

You always do it in units, we unfortunately only see dollars, because we don't see what your unit sales are.

So could you translate your outlook for the major categories both for AG and CE on a full year basis to a deflated dollars or a dollar ex-currency so that we can understand what it means.

For huge gains in the under 40, that doesn't mean a lot in dollars, so could you kind of walk through those on a dollar basis rather than a unit basis?

John, I agree with you it is not easy for you to understand.

But it's not also easy to extend the outlook because we have one other factor, which involves the dollar, which is the currency evolution.

For this sort of currency, we have seen so many things happen in the recent past that the only assumption we can make is that the currency level will remain at the level it is now.

So basically having said that, I think I may have to turn to Rich for the AG business and to Jim for the Construction Equipment business.

Hi John.

How are you today?

I'm great Rich; how are you?

Excellent.

If we look at the tractors and kind of weight them on a dollar basis, which I think John was your question.

Yes.

We offer an outlook for the full year that says smaller tractors will be up a little less than 10%.

Okay.

So the small tractors will be up more, probably closer to the 15% and a little less than the larger ones.

How about North America versus the other regions?

Specifically just in AG tractors, let's just take North America and Western Europe?

Well if you look at it, the AG tractor market in Western Europe, it is primarily all the over 40.

Okay.

As a percent, the under 40 in Western Europe is very small.

But you talked about weather hitting, so the question is if you're looking for total tractors to be at 7% to 9% call it, are you looking for North American tractors to be up 10% and Western Europe to be up 5%, that's what I'm trying to understand.

I'm sorry.

The numbers I gave you were for North America.

That was North America, okay, great.

Then Western Europe would be up slightly because of the weather issues?

Western Europe John we have as basically being flat.

Okay and that's comparable on a dollar as well as a unit basis?

Excluding exchange.

Exactly, excluding exchange.

Okay, I'm sorry.

Now can we do the same thing for CE?

Morning, John.

Morning, how are you?

Good.

Firstly, let me start with North America and I'm sure because you keep such good close watch on us, the first quarter in the industry was obviously not just weak but surprisingly weak and down considerably over the first quarter of '02.

The phenomenon of the second quarter is basically the industry has almost 100% caught up to where it was or where it should have been as of June 30.

So you now you had Light Industry just a little bit lower than last year, by about 0.8 and on the Heavy side it's about 1.8 up.

I think there are certain segments that you'll see continued improvement.

Loader backhoes, Skid Steers, Excavators, wheel loaders have been probably a bit softer than usual, most of that is because many of the Government municipalities are in deficit positions and obviously have curtailed purchasing.

The commercial side seems to be pretty good and the excavator business for us and the industry has been very good.

So other pieces like the Telehandler business, some of those areas that enjoyed phenomenal growth in big rental years have not yet begun to recover.

I would expect that those recoveries will be relatively slow, because the utilization on that equipment in the rental yards takes many years to get the hours that cause the need for return if you will.

We see the national account side of the business as improving, certainly not reflective of the late '90s at this point but they're beginning to have to make some changes in the fleets due to the age.

Then there's also an increase in demand, many of the contractors have taken a position of, "if I have a utilization at 70% or greater I'll buy it, if not I'll rent it".

So we see some of the rental markets improving and some of the rental markets have not improved.

Mostly due to some very unusual spring and summer weather where, I think many of the entrepreneurs have held back putting equipment in, just based on whether they would not get instant utilization or not.

But we've seen the moves by some of the competitors such as Caterpillar.

So I think everybody is beginning to feel cautiously optimistic.

We expect the year, probably going to be flat to last year.

It could come up a little bit in those segments that I just talked about, which seem to be moving at a faster pace than some of the other ones.

Mini excavators are beginning to go very well in North America, that was a fledgling industry only about 2 or 3 years ago.

So there's a lot of dynamics going on but the overall outlook is improving.

Probably not as fast as some would like, but we cautiously optimistic that this year will turn out to be much better than we thought it was going to be in March of this year.

In Western Europe where you're forecasting down on a unit basis, would that also be down ex-currency, would that also be down on a dollar or euro basis?

In other words, it's not been scooped one way or another by large or small?

Well first of all Europe is a little bit reverse of North America, in that the Heavy Equipment is usually their strongest suit.

What we've seen so far is that Heavy has been a little lower than expectation but the Light Equipment has been better than expectations.

Keep in mind that Europe did not go into a down cycle for about one year/18 months after North America.

So I'm pretty sure they're going to follow us out of it, but they are probably not through some of the changes.

Particularly in some of the markets that were explosive, France and the UK, some of the traditional markets that have been strong CE markets are probably going to be lack luster for a little bit yet.

But areas like Germany are finally beginning to improve, Italy has been strong and the opportunities in the former East Block Countries is also beginning to improve, if you can find sources of capital to finance it.

Latin America is down a little bit and APAC is starting to explode, most driven by China.

Then just the final follow-up, you make the very - comment that's very provocative about CE sales for Construction Equipment sales, the declines in North America due to the stocking and the Company's decision not to match certain competitor pricing actions in the quarter, which kind of flies in the face of what we've been hearing.

When we heard from Volvo yesterday, we heard from Caterpillar that they're both achieving 1% - 2% and 2% - 3% higher price realizations.

Was this something special, was this something out of the ordinary, could you discuss that?

Well I can tell you that there is not a lot of change in the face of the North American market place.

It's been extremely competitive and almost in a hyper-competitive environment for 4 or 5 years.

I recognize that the comments that the competitors make all say it isn't me, but the reality is that the price wars continue out there.

There's obviously ways to produce an incremental margin and that's through cost reduction as well as pricing.

So the combination of the two, I would say it's difficult to ascertain what the magic formula is for each of the companies, but there's no question in my mind that the contractor is in that position where he can go shop.

Certainly shop back and forth to make sure that he's picking up the best deal possible.

So pricing has been and continues to be extremely competitive and I would tell you that many of the companies that have factory stores, who knows what the next couple of years will show as far, it might look like strong pricing, but you have to wait.

Gee, I wonder who that could be.

Thanks a lot.

Thank you.

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

Good morning, Goldman Sachs.

Good morning, Joanna.

You've given us some pieces of these, so if you could just to through, kind of how you get to that $200m of free cash flow guidance?

Since that was the net income number, its kind of break-even, and you've got $75m in cash charges.

Can you just give us what D&A, CAPEX, working capital change and if there's anything on taxes and then inter-company, just so I can feel comfortable with the $200m?

On an EBITDA basis, we have achieved $420m.

So we believe that should be about $500m.

Okay.

Interest expense, I'm rounding, I think that it's $300m to be on the safe side.

We got a tax refund this year, which is about $100m.

So we are this far into that $300m.

Capital spending should be around $220m.

Then we have the restructuring charges of cash $70m - $75m, at the end of June we are $35m.

The working capital change will be about $200m.depending on the profile of the last quarter of the industry in the last better half of the year.

Is there any inter-company stuff?

Between the finance subsidiary that helps?

The inter-company financial services reduces the debt by $500m down.

This should closely [indiscernible] by reducing the inter-company financing.

Okay.

Just on the working capital, I may have missed this, I apologize.

You guys have through the first half of the year used some cash for working capital, which is normal seasonally, but was great year-over-year.

Is there some explanation as to why there was a $200m increase year-over-year in working capital used?

Yes, it's a very complicated story because the landscape is becoming complicated by the currency fluctuation.

So what we've tried to explain in our slides and in our comments, but it was not very clear also, but we tried to explain is the net of currency basis.

So I will summarize and I'll give you a more precise number.

So the summary of this, in the first half of 2003 the working, capital seasonal increase was about the same as the one of last year.

On the other hand, we had significant drop in working capital in the second half of 2002.

So this means that the benefit of this reduction in the second half of 2002, this continues year-over-year, net of currency probably the working capital changed today year-over-year net of currency with a positive $300m maybe a little bit less than that.

Well we started off the year working capital about $480m less than last year on a constant currency basis.

So from our lower starting point we had to increase working capital a higher amount to get to the desired level that we wanted for this year.

After that we are still net-net in the same - actually slightly lower working capital at the end of June this year, than we were at the end of June last year.

But on a constant currency basis, working capital increased $342m this year versus $268m last year.

That's essentially the difference.

Now maybe I would ask Rich to make a comment about the AG specific situation.

Good morning, Joanna.

Good morning.

The other thing we need to understand what's happening on the AG side of the business is where we started introducing a lot of new products at the end of last year.

So for instance on the Case IH side, the small tractors, those under 100 horsepower, so there is some pipeline still that is occurring as we get our dealers and the competitive level of inventory that they need to grow their business.

Some we're seeing on the New Holland side and some of the large tractors with the new combines coming on.

So part of that is we knew that at the end of last year our inventories in some of these growth segments were lower than they need to be on an ongoing basis.

Okay, thanks.

Thank you.

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

Hi it's Mark Koznarek at Midwest Research.

Good morning.

We went through the Construction Equipment outlook, Jim, and there are a lot of moving parts there.

I guess maybe I'm just confused, because we've got the full year worldwide up, but then the three segments, one is flat and the other two are down.

So could we just kind of run through that quickly?

Not necessarily all the product details, but just what are the key assumptions for the regions and how do we get to up worldwide for the full year?

Well, Mark, very quickly you get to up for the full year because the rest of the world is up significantly.

But we are not a major player in the rest of the world markets.

So on the slide that we've just shown, North America, Western Europe and Latin America, because those are particularly the markets where we're the most active in.

Okay, so you're worldwide is not the sum of your three markets?

No, as Jim said, it's China that's booming that's really driving the rest of the world total and the total, total.

What are the magnitudes of these three regions that you've got there, for North America for the answer to the last question I got up slightly, but then Western Europe and Latin America I still would like some...?

Mark, let me respond this way.

It depends by segment, on the Heavy Equipment segment the rest of the world market is probably close to half of the total worldwide market.

In Light Construction Equipment, the rest of the world market is much smaller piece.

But what's really booming in the rest of the world is Heavy Equipment, excavators in particular.

That's probably going to be up for the full year in the range of 20% - 25%.

Okay, so what's Europe going to be down for the market, do you guys anticipate for 2003?

Slightly stable.

Stable to down 2% or 3%.

Okay, so down 0 to 3 roughly?

Please also consider that Europe is Europe.

So it depends also by country.

Some of the countries have dropped significantly at this point, for instamce, Germany.

Some other countries like Italy, as Jim mentioned, have a very good market so far.

So I think there are major differences also within Europe.

Okay.

Then secondly on Construction Equipment, what do you guys attribute the big pick up in June to anything beyond rental?

Is there any other dynamic that you can identify in North America is what I'm referring to now?

I would say there are certain sectors of what we'll call the commercial contract business that were up.

Generally speaking, called Government sales relatively flat and those companies that sell direct to the national accounts that business has been up.

But as drivers I guess I would put rental at number 1, retailing of fleet's number 2, improved commercial probably in excavators and to a certain extent in load to back hose and skid steers.

Then after that the Government being probably relatively flat for most of [indiscernible] competitors year-over-year, but [indiscernible] in the context of the first quarter looked like this industry was going to have probably the worst year in a long time.

The strength of the second quarter has more or less put it even with last year.

So that's a very positive sign because essentially in three and a half months we've done six months worth of business.

So now the question is, as you go into the third quarter, is it going to be as strong as what it was in the second half of the year?

I think most people are cautiously optimistic, obviously there are mixed economic signals out there, part of it being very good, such as the housing starts.

The highway build is still going through much of the politics, so what work has already been awarded they need some equipment, but non-residential has been relatively soft.

Somewhat of an over-supply in office buildings etc, so some segments are fairly good and some others are relatively soft.

Then you almost have to look around the country region by region because you have some regions that are out-performing others significantly.

So we're not really extrapolating the second quarter growth but your full year outlook is a little bit better than before?

Yes, consciously optimistic as I said.

I believe the third quarter will tell the story on whether or not the industry actually ends up to be improved over last year.

But right now I'd say that it's looking much better than it looked on April 1 and probably there's an opportunity for flat to up a little bit as we indicated.

Well thanks for the clarification.

Thank you, Paul Hanson (ph), you may ask your question and please state your company name.

[Lumit Sales].

Hi guys.

Could I have some clarification on a couple of...?

One is the slide show, I didn't get that.

How would I get my hands on that?

It's on the website.

I wasn't able to locate it.

On the 65/35 sales breakdown does that translate to the operating income line?

65/35 breakdown is the split of the IAS to GAAP adjustments that are very difficult to specifically identify to either AG or CE, so for the most part we allocate them based on sales.

Okay, and what would the operating income break down be between AG and Construction?

What we showed was that in IAS for the first half of this year we had $101m profit in AG and $46m loss in CE for a $55m profit.

But when you then make the adjustments, which include adding back goodwill that is still amortized on an IAS basis and other things, you come to a net GAAP operating margin of $206m, which is split $198m AG and $8 CE.

Some of these other questions may be on the slides too again, but I haven't located them.

What's production for the second half expected to be against retail?

In total second half we expect that production will still be slightly lower than retail, possibly in the range of 2% - 5%.

2% - 5% okay.

Then the net debt breakdown, did I hear it correctly that $500m is on the financial side and then $200m is on the Equipment side?

Yes.

Then I also missed when you were talking to Joanna about the $200m working capital, let's say, I'm assuming that's an improvement or a source of cash?

Yes.

Okay, great.

Thank you very much.

Okay.

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

Good morning, UBS.

Could I trouble you to divide the $26m of restructuring between AG and CE in the quarter?

Mostly CE.

Mostly CE, all right.

Then following up on John's question.

Who is the most aggressive on the pricing side out there?

I think I understood the allusion to Caterpillar, but could I trouble you to flush it out?

First of all, I don't think we said that Caterpillar was the most aggressive out there.

I said the market continues to be extremely competitive and perhaps in a hypercompetitive environment.

Meaning that anybody on a transaction can choose to be extremely aggressive.

I also said, having understood the competition who have stated improved pricing scenarios that that's arrived at by a couple of different ways.

Some of it is price increase and some of it's cost reduction.

Those with factory stores, may show today, there is pricing opportunity, but I think you have to follow the use to find out what really happens in the transactions.

But I would tell you that all the primary competitors at any given moment have the opportunity to get extremely aggressive transaction-by-transaction, especially when you get to a multiple unit opportunity.

So is the pricing pressure you're seeing, would you describe it as isolated or would you describe it as broad based.

Is it really an improvement from last year or is it worse than last year?

Well I think the pricing scenario for North America for CNH is improved, as I understand it it's also improved for Caterpillar and it's improved for Deere.

But again you have to remember you can arrive at net pricing increases to a couple of different ways and I'm not sure of the mix of the competition.

All right, terrific.

Thank you.

Thank you.

John McGinty, you may ask your question.

Please state your company name.

Just one quick follow-up on an earlier question.

I think I missed it Al.

You were talking about producing below retail of 2% - 5% in the second half, I'm sorry was that overall, was that CE, was that AG?

That was overall, CE and AG combined.

Can you differentiate between the two of them?

And also tell us what that would be therefore for the year?

AG would be about equal.

In the second half?

In the second half.

CE would be down in the range of 15% - 20%.

Okay and for the year?

For the year AG should be about plus 1%, so zero to 2%.

Okay.

And CE will be down say 7% - 10%.

Okay.

What I see, John, at this moment is we've actually added production in North America, so as we go forward, of course the lead times are less than they used to be so we have opportunity to be flexible and over the last, I'll say six weeks, we've actually added some significant production industrial wheels or load to back hose, if you will.

A little bit in skid steers and significantly in excavators, so right now I probably would say 7% - 8%, but it really depends on the retail and we'll respond as necessary to make sure that we're not over-supplied or under-supplied.

As a follow-up.

On the rental, the fact that you lost your preferred space with one of the major national rental companies, it's not a market share issue there right now?

Well I'm not sure where we lost our space.

What about JCB came in and took the United Rental slot.

That's not losing your space; that's having your space purchased.

Okay.

Having your space purchased may have an impact?

No our business with the nationals is actually up 35% over a year ago.

Okay, in terms of just getting back to the factory store, your comment obviously was referring to Deere, I assume, who owns 35% of the distribution?

No not necessarily.

Okay, so you were talking about factory store on the rental side?

We have factory stores by various manufacturers throughout Canada, North and the United States and they're not just Deere, you have Komatsu in the business or [indiscernible].

We have Volvo through LB Smith.

And now Volvo from Pennsylvania to Florida, so.

Let me come back to one of the points you made, which is I think worth pursuing.

If what we saw was nothing but - or was largely the rental channel being renewed, and yet we didn't see the size of the rental fleets go up on a unit basis, that must mean there was a surge in used equipment, because that has to flush out somewhere on the other side.

I mean, because it doesn't disappear.

So how would you characterize what you see right now out there?

Are used equipment prices falling, in other words if all of a sudden there's a whole bunch more of used equipment than there was, if people have brought down their rental fleets.

Then are we seeing used prices - how would you characterize what's going on in the used equipment right now?

Let's do this by a couple of pieces.

Number 1, in the rental side of the business there aren't very many of the entrepreneurs that are into heavy excavators.

So the excavator side of the rental market never really got over supplied or over saturated and as such excavator business has really not been tainted I'll say by the explosion of the late '90s.

Okay.

The loader backhoe business, the skid steers business, the Telehandler business, all of those businesses, certainly I'll say late 2000, all of 2001 and a good piece of 2002, there was a bountiful supply sent to auction and a lot of liquidation of rental fleets due to under utilization or poor rate opportunities.

I think for the most part we're through the big wave, we're at least through the wave that would be late model low-houred equipment and now most of what you're seeing is actually equipment that legitimately belongs there, 5000-hour type stuff.

Yes, that's fine.

I agree with you fully on that, but if we saw such a surge in June that was nothing that rental, wouldn't that mean that there's a whole bunch of stuff that came out of that?

Not necessarily, hold on John.

Because kind of what happened is, if you go through the period of time that I just described, there was a lot of defleeting and non-replacement.

Okay, so in other words?

What created the space a while back and obviously the individuals weren't going to put more assets on the books when the utilization opportunity was not as strong.

Now at least one of the competitors is beginning to [indiscernible].

I think the strategy is to compete more effectively with the nationals and has built a pretty good supply within their own distribution network.

We see improvement from the nationals but they're not at the kind of numbers that you saw back in the late '90s at this point.

I think everybody is being real cautious, placing equipment in the markets where I'll say the demand is just a little bit better than supply and everybody is trying to match those assets so that the operations are profitable and there isn't more cash flow tied up than what's necessary.

Got it, great, thanks very much.

Thank you.

Mark Koznarek, you may ask your question.

Please state your company name.

Still Midwest Research.

I just have a follow-up on AG Equipment.

How would you characterize the pricing environment now in North America, did CNH get positive price realization in the quarter?

Yes, there is some, not a whole lot I will tell you, I mean some of the things that Jim talked about on the Construction side, they're still goes a little bit deal to deal.

And if you get into any of the multiple units the pricing tends to get still fairly aggressive.

On the small equipment, as you know, there is great use, not only by us, but also by others as well on the low rate.

The 0-36.

So it's been out there, but I'd say overall in the first half our overall pricing was probably in the range of around 2%.

Okay, achieved 2% net?

That's right.

Okay, then what would your guess be across both CE and AG equipment for new models, the number of new models for next year?

If we have 80 this year, is next year going to be similar number or is this the pig in the python this year?

I would say that by the end of this year we still have some other new models coming out this year.

We will have achieved the majority.

We still have some I should say on the sell side in the very first part of '04.

Okay so '04 will be a lower new model year?

Certainly, Mark, in terms of the significant new model improvements, we have launched at the end of last year the new 100-140 horsepower tractor.

We launched the new utility tractor.

This year we have the new APH, which is a heavy utility.

So by the end of that, we will have replaced the bulk of the tractor fleet.

We've got the new combine on the New Holland side we launched at the end of '01.

We've got the Case combine coming up this year.

By the end of the year, we expect that we've got about 81% of our revenue coming from new products.

So I think that the pace of it next year will probably be slightly lower than this year.

I just want to add there as indicated.

We will have a line of the tractors in the under 20 horsepower, which is the one that had the most explosive growth, they come out late this year, early next year.

Okay.

By the end of next year, we expect that new products on the AG side will be about 84% of total revenue and CE will be fairly similar.

Okay.

Does that imply then any significant reduction in R&D or SG&A associated with rolling out these new models, like in the engineering and marketing or is that not that significant, is that more just simply volume related, sales volume?

On the R&D side if you consider the situation, R&D compared to last year, there has been some reduction in the R&D expenses, but I would say they were not related to the reduction of the production of new products, because there is still a lot of work to be done.

Especially on the TF3 engine [remission].

So I think the savings in R&D are not related to reduction.

They are more or less a much better efficiency of the structure of our engineering facility.

On SG&A, yes, I would say most of the drop is in the G&A area, not that much in the sales area.

I think it has very little to do with the fact that we're going to reduce new products.

By the way we had a drop in LD&A as a percentage of sales by almost 2.5 points since the merger and we have been able to generate these new products.

So I think it's collectively a different issue.

Okay, thanks a lot.

Thank you, our last question comes from Steve Haggerty.

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

Merrill Lynch.

Good morning everyone.

A quick question if I can simplify it.

If I think of your share of the worldwide agricultural market in the first half of the year and the second half of the year, you're share of tractors worldwide, it was up?

For the first half, worldwide share of tractors was virtually unchanged.

And North America was in that?

Tractors in the under 40 in North America share was down slightly as we've said, because we don't have the new product in the near 20 horsepower yet, but our share in the over 40 horsepower was flat year over year.

And in combines in the first half of the year?

Combines increased slightly compared to the last year on a worldwide basis.

Real quickly.

For the second half of the year, for both tractors and combines worldwide, do you expect to be up in both categories?

For the second half of the year, if you consider the more than 40 horsepower tractor, we expect market share to slightly increase and to expect the market share increase in combines to continue.

Okay, thank you very much guys.

Thank you very much.

Thank you all for joining with us today.

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

Thank you, Operator.

Thank you, sir.

Have a good day.

Thank you.