CNH Industrial NV (CNHI) 2003 Q3 法說會逐字稿

Good day everyone and welcome to the CNH Third Quarter 2003 results conference call.

Hosting the call today will be Mr Michel Lecomte, Chief Financial Officer, Mr Giovanni LaJoya (ph), Vice President and Treasurer, and Mr Al Trefts, Senior Director Investor Relations and Corporate Finance.

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

You may begin, sir.

Thank you.

Welcome everyone.

Michel and I are coming to you from the Turin office today and Giovanni is joining us from the Lake Forest, Illinois office.

We will all be available for the Q&A session.

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

But first, I must say that, in recognition of Regulation FD, we have provided public earnings guidance in this morning’s press release which will be elaborated on in today’s conference call.

After this call, earnings guidance will not be updated until CNH 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, 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, I would like to turn the microphone over to Michel.

Thank you, Al.

Hello everyone.

If you looked at the slides before, you will see that first quarter a little [indiscernible] tractor industry sales increased substantially in North America, mainly due to the strengths of the under 40 horsepower segments.

Western Europe went basically unchanged, but better than what we had expected in light of the drought.

Latin America and rest of the World markets were down, but Latin America remains still a strong market.

Industry sales of combines were basically unchanged in total, with North and Latin America significantly up, while Western Europe and rest of the World markets, including Australia, were substantially down.

Now, moving to CNH’s retail sales performance.

In North America, our over 40 horsepower tractor sales improved significantly versus last year while our under 40 horsepower tractor sales lagged the market, primarily due to the rapid growth of the under 420 horsepower segments where we have limited presence.

In Europe, CNH [indiscernible] sales in tractors and, in fact, in spite of a drought, we increased our tractor sales in all five major markets.

In Latin America, our tractor sales dropped slightly more than the market.

For combines, our market share increased substantially in North America.

In Western Europe, our combine share in the quarter decreased slightly, but remains up substantially for the first nine months compared with last year.

In Latin America, our combine market share increased significantly driven by our recently-introduced new products.

And during the quarter, the under produced Agricultural Equipment retail demand by 8% continuing our aggressive action to reduce inventories.

Coming to Construction Equipment on slide 5, we see that the worldwide industry sales increased by 6% on the third quarter 2002.

Both Latin America and Western Europe were down moderately, while North America sales went up.

Heavy equipment industry sales were up on a worldwide basis, much stronger than expected in North America and down less than expected in Western Europe.

Worldwide industry unit sales of light equipment were also stronger than anticipated in the quarter.

A significant gain in North America more than offset declines in Western Europe.

By product category, industry sales of backhoes were basically unchanged, a significant decline in Western Europe were more than offset by substantial gains in North America.

On a worldwide basis, the skid steer (ph) market was up mainly due to North America.

In the quarter, our heavy equipment share was basically unchanged in totals, with gains in North America offset by declines in Europe.

Turning to Light Equipment, our skid steer loader share remains basically unchanged in total.

Our loader backhoe share was down slightly, mainly due to the limited supply of the products coming from the Burlington plant, with this facility still in the process of being reconsidered to become totally devoted to this product line.

In addition, our loader backhoe share was also affected by our pricing discipline during the quarter.

Turning to the financials, starting on slide 6, sales of equipment for the quarter were $2.4b compared to $2.1b last year.

At constant currency, Construction Equipment sales dropped 6% as CNH under produced Construction Equipment retail demand by 13%.

Our total inventory level is now about where we would like it to be on a worldwide basis.

At constant currency, (inaudible) were up 10%, reflecting strong selling in the Americas than in Western Europe where, again, our market performance improved despite the industry declines in some of the major markets.

Slide 7 summarizes our calculation of adjusted EBITDA for the quarter which, as you can see, was substantially improved from the third quarter last year.

CNH equipment operation gross margin for the quarter increased by $43m.

The benefits from additional margins from new AG products, slightly better pricing, and higher AG volumes in the Americas more than offset increased costs associated with the launch of new products, especially in Europe.

On the CE side, slightly higher pricing in North America and manufacturing efficiencies offset unfavorable volume and mix.

And, in addition, a start of our integration actions has seen a decline by $24m, despite $14m of adverse currency movements and they also decline for the quarter.

In total, our operating margin improved by $82m.

From the $72m for this year’s operating margin on slide 8, you might be interested in understanding the segment contribution.

As you know, we analyze our business segments following Fair Accounting Principles, as explained in footnote 3 to the Financial Statement.

At the top of slide 8, you will see the figures from the footnote to the press release for the third quarter.

Then you see the various adjustments to the equipment operations operating results for which the industry operating margin under US GAAP.

If you divide the adjustments between AG and Construction Equipment, basically on a 65/35 plus basis, you get to the industrial operating margin equivalent by segment under US GAAP.

As you can see, our AG margin has almost doubled--from $36m to $71m, and our CE industrial operating margin has improved significantly for the reasons I previously explained and in (inaudible).

Now, a few comments on the first 9 months.

Slide 9 shows the increase in our adjusted EBITDA for the first 9 months, compared with last year, thanks primarily to our improvement in the third quarter.

Let me summarize. $75m more of industry operating margin, which converted into $16m more net income before restructuring costs.

I want everyone to remember that we have an increase of $38m in (inaudible) medical and post-retirement costs in the period that is included in the Other Income and Expenses line item.

Also, the contribution of our Financial Services subsidiary has increased substantially.

On slide 10, you can see the segment analysis for the first 9 months.

Note that the US GAAP industry operating margin for CBS is now positive, compared with the negative result for the same period last year.

Industrial operating margins, in total for the first nine months, has improved significantly compared with last year, due mainly to positive pricing, synergies and the new AG products.

Higher medical and pension costs, and ancillary volume and mix had (inaudible) effects.

Slide 11 highlights the results of our continuing actions to take costs out of the business as shown by SG&A, expressed as a percentage of net sales, which is continuing to decline despite adverse currency movement and getting closer to the target we set.

Coming to cash flow on slide 12, let me first discuss some key points regarding our change in working capital.

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

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

During the third quarter of 2003, working capital declined by approximately $150m as compared with approximately $470m for the same period last year.

The difference is due primarily to $200m slower than last year’s contractual receivables, as sales were higher, and to the maintenance and inventory levels to support new product launches going forward.

Looking at all changes in net debt on the next slide, and beyond the changes in working capital, means now that the $32m source of cash in 2003, labeled 'Other', includes primarily a cash tax refund of approximately $100m that we discussed last quarter, offset by pension contributions made this quarter.

Net cash from investing activities represents primarily capital expenditures.

Note that for 2002 the $374m user cash included not only CAPEX, but also the acquisition of Kobelco North America, Kobelco Europe and our investment in Kobelco Japan.

In total, Equipment Operations net debt on September 30, 2003 was $1.9m compared with $3.5m at the end of December last year and with $[1.8b] on June 30, 2003.

And, as you know, in August and September this year, CNH issued a total of $1.050b of 9.25% senior and secured notes, substantially strengthening our debt maturity profile.

Net proceeds were used to pay down approximately $450m of equipment operations debt and the remaining proceeds will be primarily used during the first quarter to pay down other maturing equipment operations debt.

The issue of these bonds unfavorably impacted our EPS in the quarter by approximately $0.05 per share.

Turning to our industry outlook for the first quarter and for the full year on slide 14, we now expect that worldwide industry sales of agricultural equipment will be down 5% in the first quarter, but up slightly for the full year, with North America being flat in the quarter but up for the full year, primarily on the strength of under 40 horsepower tractors.

All other markets are expected to be down in the quarter and will be down for the full year, except for Rest of World markets, which will be up.

We anticipate that the Construction Equipment market for backhoes, skid steers and heavy equipment in total will be up slightly on a worldwide basis for the quarter and for the full year, reflecting the strength of the rest of the World markets which are up substantially and the North America market which is up slightly, and both Western Europe and Latin America are expected it to be down for the full year compared with last year, as we do not expect a short-term improvement.

Turning to slide 15, this is very similar to what we showed you last quarter.

We are pleased with the margins, share gains and consequent bottom line impact coming from the new launches in our agricultural business.

In the Construction Equipment business we are turning the corner, showing already some slight recovery as the North American market conditions normalize and as we also gain share in the heavy segments.

In our Financial Services business, the profitability continues to improve and, as a consequence, income contribution has increased substantially.

The most significant piece of news since last quarter was the bulk offering that created a significant long-term liquidity improvement for CNH.

Our AG business is expected it to remain strong, although our margins are expected to be flat, mainly due to the new product launch costs incurred in Europe.

Our CE business is recovering and its US GAAP industrial operating margins are expected to be at or above break-even during the first quarter.

The quality of our Financial Services portfolio should continue to improve and our balance sheet continues to strengthen.

We expect an income contribution of the same magnitude of large year based on the ES transactions planned for the quarter.

As of September, net income before restructuring improved by $60m.

Looking forward, based on industry conditions and improvement of CNH capital, we remain committed to our improvement in net income before restructuring charges of approximately [$100b].

During the first nine months of 2003, CNH has incurred approximately $62m in pre-tax restructuring charges, mainly in the CE business.

For the full year, restructuring charges are expected to total between $300m and $325m pre-tax, depending on the timing of the closing of our East Moline, Illinois facility, with a maximum cash impact of approximately $75m in 2003.

Although our pension fund status has been seriously impacted during the first nine months by FX returns in excess of assumptions and contributions to plant assets, CNH may be required to increase the minimum pension liability by approximately $150m at year-end, resulting in a decrease in shareholder equity of about $100m net of tax.

This increase may be required because of a change in assumptions regarding the discount rate used to [plan] value of the future obligations.

There is no cash impact associated with this charge, and there is no impact charged to equity, of course, and there is no impact on our financial statements and our Fair Accounting principle as a result of this charge to the equity under US GAAP.

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

In line with our previous forecast, we expect to reduce our consolidated net debt by $700m in 2003.

Equipment operations should contribute about $[1200m] in free cash flow, mostly driven by the working capital reductions.

However, if market conditions improve towards year-end, we may decide to increase productions to ensure adequate supply of our most popular units.

Financial Services should contribute about $500m through reductions from non-core assets and operating [leases] in their on-booked portfolio, even though their managed and service portfolio will continue to grow as we continue to expand our overall core Financial Services activities.

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

As a reminder, we ask that in the Q&A session each, question asker could please limit themselves to one question and one follow-up at a time.

Please, can we receive the first question?

Thank you very much.

(Operator’s instructions) Our first question is coming from Barry Bannister.

Please state your Company?

Barry Bannister, Legg Mason.

Michel, a great quarter.

Thanks.

You mentioned that you had positive results in Europe, one of your competitors had moaned that Europe was down and it was industry-wide, could you talk about an individual company, excuse me, country level where you had the strength that offset perhaps German weakness?

Yes, let me say first that in Europe during the summer period, the drought affected Europe in a very strange way.

The Southern countries were impacted by the drought whereas the Northern countries were in fact severely impacted by the drought.

So, in general, where we did see impact is more in the South than in the North.

So, to answer your question precisely, if we take for instance Germany, we had about a 9%, 10% drop in market in Germany but we had a significant increase in UK, France, Spain was I would say flat, so these were the countries where we have seen some changes in the industry.

And how was Italy?

Italy was down almost as much as Germany.

Thanks.

Thank you, Sir.

Our next question is coming from David Bleustein.

Please state your company?

David Bluestein from UBS.

Two questions, first can you talk about the recent levels of dealer optimism or pessimism and what the dealers are telling you to expect for 2004?

Yes, I don’t have precise figures as far as the European industry is concerned but I believe, as far as North America is concerned, dealers are relatively optimistic for the first quarter in the AG business and I would say, I don’t know exactly on the Construction Equipment side, but I would say they are moderately optimistic given the industry (inaudible) in the recent past.

But David, we haven’t officially put together a 2004 outlook yet and we’ll have that when we release Fourth Quarter results.

Okay, and one follow up question.

Of the $325ish of charges taken this year you mentioned $75m of cash impact in the fourth quarter.

Will there be any cash impact from that charge trailing on into 2004?

I believe that the $75m cash impact, yes.

I would say for 2004, I don’t have the precise number in front of me but I would say it’s probably around the same number, maybe slightly more.

Thanks David.

For clarification of %75m that Michel mentioned in his comments was a full year number not a fourth quarter number.

Okay, $75m in total out of $325m in ’03 and then another potentially $75m in ’04 from that same charge?

Right.

Okay, terrific.

Thank you.

Thank you, Sir.

Our next question is coming from Mike Tender.

Please state your company Sir?

Yes, City Group.

I was wondering on the, you gave a net income number of $100m plus positive comparison year over year for the full year, could you give us some numbers for EBITDA?

These were (inaudible) it’s probably a number around $80m.

Great, thank you.

Thank you, Sir.

Our next question is coming from Mark Koznarek.

Please state your company Sir?

Hi, it’s Mark Koznarek with MidWest Research.

Hello.

Just a comment here about the North American AAG outlook here in the fourth quarter expecting flat for, you know, tractors and just would like you to elaborate a bit more given that we just got the retail sales for September and they were surprisingly strong.

Do you think that was an anomaly or are we just being cautious here in your outlook?

You all must understand what I was going to say is that September was surprisingly strong.

Now, having said that, keep in mind that when we, as far as we are concerned they are mostly talking about the more than 40 horsepower tractor segment because, you know, the total industry sales in North America is distorted by the less than 40 horsepower segment which is really booming in the last couple of years and still continues to do so this.

And, as you know, we have smaller presence than some than others in this particular segment so, when we are talking about the AG first quarter outlook, we really refer to what the main market force, which is the more than 40 horsepower tractor.

But those categories were also up pretty sharply in September.

True, that’s true and this is probably a surprise.

We didn’t expect such an increase in this market.

So the outlook could be a bit conservative here?

Hopefully it is.

Okay, then if I could ask a follow-up on East Moline.

What, how are you going to supply your dealers with product if that plant is closing?

I’m just curious about sort of the inventory and the channel management strategy while we’re in shutdown there.

I would say, I mean if the question is short-term, the answer is quite simple I think it’s clear that we’re going to pilot some inventory of products before the final closure.

Long term, as you know, we are going to produce the same combines in another plant in North America as part of our manufacturing footprint process.

So we had two plants in North America, today we have only one.

And, you know Mark, the combine that’s been moved from East Moline to Grand Island is a common platform product with the one already being produced in Grand Island so there shouldn’t be the normal kinds of launch difficulties with a brand new product that you might otherwise think.

We are having the same suppliers providing the materials.

And, yes, we will build ahead a little bit out of East Moline to ensure that our dealers have an adequate supply and we’ve got it all programmed into the production schedule so that we have sufficient overlap to make sure that the product you need is available.

Great, thanks very much.

Thank you, Sir.

Our next question is coming from John McKenzie.

Please state your company Sir.

Credit Suisse First Boston.

Good morning, good afternoon.

Hi John.

Hi, could you talk, first question, for the quarter, ideally year to date but the quarter that’s all you’ve got, could you talk about price realization?

You mentioned both in Construction and AG, could you give us an order of magnitude of the higher, of the year on year price realizations and to the extent, I assume it’s kind of tricky because you’ve got to separate out currency as things go back and forth.

But if you just can you do it, can you give us a flavor of just pure price in AG and Construction either for the third quarter or year to date?

If you talk about the third quarter first, I would say the price realization in the AG business is relatively minimal.

Is that both, by the way, in North America and Europe?

In other words, is it more North America and less in Europe or is it essentially the same?

No I would say it’s about the same.

Okay.

On the Construction Equipment relative to the size of Construction Equipment, pricing was slightly more substantial and when you talk about less than a half, less than 1% average price increase, that this could be more a North America situation for the time being.

So, in other words, the less than 1%, is that total CE, but it might be more than that in North America and less than that in Europe and the rest of the World?

Absolutely.

Okay, and it’s a somewhat unrelated follow-up.

You talked about under producing, I think under producing AG by 8% and under producing CE by 13%, two questions.

What is that under producing for CNH all together, in other words, what is that for the total and what do you expect it to be for the year in the two businesses in the total?

Yeh, just one second to talk, I think it will come to me.

The combined total is under production of 9%.

9% for the third quarter?

Right, and for the full year in total it should be about 1%.

And for AG versus CE?

AG should be about 1% for flat to 1% under.

Right.

And CE should be about 6% to 10% under.

No, 6.

6, about 6% under.

So flat to 1 and 6 averages down to 1?

Yes.

Down to 1, thanks very much.

Thank you Sir, our next question is coming from Andrew Casey.

Please state your company Sir?

Prudential Equity Group.

Good morning.

Morning.

Good morning.

Just a question, I think it was Mark Koznarek’s question, getting back to the North American AG outlook.

Was there any unusual things going on in September like accelerated incentives or anything like that that make you hesitant to extrapolate the September performance or is it just, you’re seen to have faith and you just don’t want to extrapolate it?

I think that, at this point in time, we’ve seen a lot of signs that are positive but you’ve also got some drought in some specific areas that will impact certain farmers, certain crafts and we’re just hesitant to be too optimistic at this point in time.

We, one of the factors that could occur in December is some buying related to the accelerated tax depreciation but we don’t know yet whether that’s going to occur or not.

It might so there is the possibility that the industry will be better than we’re seeing right now but it’s very difficult to tell for sure.

Okay, thank you very much.

We do have another question from Mr Ruthman.

Please state your company?

Giselle Ruthman, Cavelli and Company.

Hello.

Hello.

Yes.

Yes, I was wondering if you could speak on your experience in Latin America, one of your competitors reported very strong gains in that region and I’m wondering why you are [indiscernible] the contract?

As far as Latin America is concerned, first of all I suppose that you’re talking about the [indiscernible] side of the business?

Yes.

In Latin America the market for tractors was slightly down compared to last year in the quarter but the level of activity is very very high in the (inaudible) anyway.

So I wouldn’t have characterized these changes as within the [indiscernible].

What has been a significant change compared to last year is the combines market, the combines market went up significantly and we did increase also our presence in that market because of products that we produced earlier in the year.

So I would say a flat market for tractors and substantially increased market for combines.

Thank you.

Thank you Sir.

Now we have another question from David Raso, please state your company Sir?

Smith Barney.

A quick question on Construction Equipment.

I’m trying to get a feel obviously we’ve had all these negative numbers here for a while on the operating profit, I’m trying to get a feel for the ability of the division to turn profitable.

If I remember correctly, the highest margins for you are backhoes and skid steers.

All the heavy equipment unfortunately has been somewhere we’ve been gaining some share and the times have been better.

Can you first just clarify for me the FX, the foreign currency benefit.

The sales were about $44m in the third quarter.

What did that provide for the operating profit, just Construction Equipment?

Well, I would say almost, I’m talking on top of my memory because I don’t have the numbers in front of me, but I would say not very significant.

Okay.

Now, on Construction Equipment, what you have to understand is that where we had the greatest weakness in recent past.

In North America we clearly had a very weak market affecting us in the last couple of quarters.

In Europe, what has been affecting us compounding the difficulty is the fact that we have a very complex industrial structure, we had to rationalize our product lines etc. so, in order to answer your question about the structural turnaround of the business, I would say that the key words here are [indiscernible], manufacturing footprint and manufacturing rationalization and the other key word is (inaudible) manufacturing efficiencies and the second one is the rationalizing of our (inaudible) operating and new products.

But I’m trying to figure out, how far along are we in footprint sales?

Some of you dealers have said it to me that you’ve had some shortage of products like backhoes that they would have like to have had but, due to whatever reasons, the product wasn’t available, obviously part of it’s your focus in trying to get inventory down.

Both your backhoes went a little too far and, seeing the demand in skid steers and backhoes fairly robust in North America and that’s where you make your money, can we see Construction Equipment profitable in fourth quarter?

Well it was profitable on an operating basis in the third quarter.

Well, I was looking at the way you reported it International with the goodwill.

No, true.

It’s the goodwill that went up in the third quarter.

We wanted to [indiscernible] including goodwill etc in the first quarter.

Inherently, I know you’re not making ’04 predictions but I’m just trying to feel, can Construction volume be profitable next year and, and if skid steers and backhoes are going into the year with fairly light inventory and you have your footprint fixed, that’s what I’m trying to figure first.

Is the footprint where you want it to be?

Absolutely, absolutely.

In terms of timing yes but I have to recognize that it’s maybe a little bit more complex than what was originally thought a couple of years ago and, especially in Europe, with the weakness of the industry.

So, in order to answer your question precisely in terms of what the timing of the recovery in Construction Equipment, it’s too early to tell because we have not, I would say, concluded our internal process yet but I would say that one of the considerations for obtaining is not the way we are implementing our manufacture of footprints, it’s more what’s going to happen in terms of industry and market especially in Europe.

Thank you very much.

Thank you Sir.

Our next question is coming from Robert (inaudible) Please state your company Sir?

Hi, it’s Bob at ABC World Markets.

Good morning, good afternoon.

Good morning Bob.

I just wanted to get a little bit more color on the N-Market demands, specifically in North America on the small equipment strength.

What do you see as the source of that strength, is it small contractors given the strong residential activity, is it rental companies.

On the heavy equipment side, you mentioned that it was stronger than expected, up to 12% for the industry.

What do you think the strength was there, what the origination was and, moving on to Western Europe, are there any particular countries that are weaker than others relative to Construction Equipment?

I can answer this first question immediately.

Yes, there are significant [indiscernible] country.

There are two countries where we have the largest weakness so far, in Germany and France.

It’s, by way, also a very significant market in Europe.

Now, coming back to your question about North America for light equipment, we believe and continue to believe that the first part of the year, let’s say it’s between April and June/July, the industry performance for light equipment was driven by some rental fleets we’re building in some areas in the bigger network and amongst some competitors.

It’s too early to say if this is still continuing and we may see other phenomenoms coming on now on top of this rental fleet we’re building.

On the heavy equipment side, I don’t know, I’m not sure.

It’s difficult to say on the heavy equipment side, the general economy which is probably having abnormal impact in this segment.

Okay.

Fair enough, thank you.

Thank you Sir, and our final question is coming from Mr. Andrew Casey.

Please state your company Sir?

Prudential Equity Group again.

Just one final question on Latin American agricultural equipment.

Given some of the disparities in numbers that I think in an earlier question were asked about, are you seeing any unusual inventory build up on any of your competitors, specifically in the Latin American region, thanks?

Well we don’t really track the inventory build up on the part of our competitors.

I’m not sure what you mean by number disparity.

I mean, the Brazilian market numbers are available through the Association of Vehicle Manufacturers’ website and everybody can see them by manufacturer by month for both tractors and combines.

Al, Al, I understand that.

The, but in a phone teleconference yesterday one of your competitors described Argentina as basically going through the roof.

Yes, true

That’s a small market.

That is true, you know, the Argentine market numbers are also available, as reported on the Internet, and I think on a year over year basis from the numbers that I’ve seen, year to date September tractor sales are about 2,600 units, which is up from about 500 last year.

So, yes, the market is up about five times but I think that on this reported basis it’s only about 2,000 units.

Okay thank you.

And we don’t all calculate retail sales on the same method I think.

We tend to use potentially a more conservative method, particularly in looking at the Argentine sales, so that, you know, our numbers, we would say the Argentine market is only about 2,300 units versus what the published figure is.

But that’s still, on a percentage basis, it’s a huge increase year over year but, in terms of absolute number of units, it’s not quite that large.

Thank you very much.

If there are no further questions then I think we’d like to thank everyone for participating and listening to us today and, if you have any further questions, please don’t hesitate to give me a call.

Thank you.

Thank you very much.

Goodbye.

Bye.