CNH Industrial NV (CNHI) 2004 Q1 法說會逐字稿

Good day everyone, and welcome to the CNH 2004 First Quarter Results Conference Call.

Hosting the call today will be Mr. Michel Lecomte, Chief Financial Officer, Mr. Giovanni Maggiora, 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 over to Mr. Trefts.

Please go ahead.

Thank you.

Welcome, everyone, to CNH's First Quarter 2004 Results Webcast Conference Call.

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

We also have with us Harold Boyanovsky, President of our World Wide Construction Equipment operations, and Rich Christman, President of our Agricultural Equipment North America, Australia and New Zealand operations, to assist us in answering any of your questions.

In a few moments, Michel will offer management's comments on our results.

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 and webcast and their contents are the property of CNH Global NV, and are not to be recorded or re-broadcast without our express written permission.

Now Michel would like to provide comments on our results.

Thank you Al, and hello everyone.

I'd like to start with what happened last quarter.

Slide four for the web presentation.

The agricultural tractor industry sales increased, most substantially in North America, with the higher of our segments strengthening more than expected.

Overall, the Western Europe tractor industry was unchanged from last year, with Spain going up significantly and UK, Germany and France remaining stable, and Italy declining.

The Latin America tractor industry was up 14%, due to the strength of Brazil, Mexico and Argentina.

Substantially better than we anticipated.

Rest of world the tractor industry markets were up substantially, driven by Turkey, China and Pakistan, where we have a significant presence.

Industry sales of combines were exceptionally strong in Latin America compared with the first quarter of 2003, but were unusually weak due to the uncertainty of financing programs.

Sales of combines declined moderately in Western Europe, and were essentially flat in North America.

So let's now move to our sales.

In North America, our tractor sales were constrained by limited availability of certain new models in the under 40 HP segment.

Retail sales of over 40 HP tractors increased versus last year, mainly in our 40 HP to 100 HP category, thanks to the new products we introduced.

Combine sales were very strong in North America, and we continued to gain share.

In Latin America we also gained some share in combines in a booming market, but without share infrastructure due to pricing realization action.

Industry sales were much stronger than we had expected in the quarter.

In Western Europe, where both the market and our share were essentially flat for tractors, our combine market share increased slightly in a down market.

Turning to construction equipment on slide five, we see that heavy equipment industry sales were up significantly, led by North America and Asia.

Western Europe remained basically flat.

Industry sales for backhoes were up in all major regions, except for Western Europe, where they were down significantly, and the skid steer market also improved substantially in all regions except for Western Europe, where sales were basically flat year-over-year.

In the quarter, our North American heavy equipment share was basically unchanged, as our sales essentially kept pace with a significant growth in the industry.

On the light equipment side, our backhoe market share in North America decreased versus last year because of the limited availability of some models, while our skid steer loader unit sales grew in line with the industry in North America.

In Western Europe, our heavy equipment year-over-year retail sales declined significantly, where we decided to protect our margins at the expense of some volumes.

Our market share of light equipment declined across the board, as we are phasing out some older models in anticipation of the new launches later in the year.

Turning to the financials and starting on slide six.

Our net sales of equipment in the quarter were $2.7b, compared to $2.3b last year.

And excluding currency variations, AG net sales increased by 9% versus last year, with gains in all major markets.

Net of currency variations, construction equipment net sales increased by 3% in the quarter.

Gains in the Americas were partially offset by a 20% decline in Western Europe net of currency, as we have also reduced retail demand by approximately 9% this year, compared with over 20% for the first quarter of 2003.

Slide seven indicates our calculation of adjusted EBITDA for the quarter, which as you can see almost doubled from the first quarter last year.

The main driver for the increase in adjusted EBITDA for the quarter was the improvement in gross margin of $76m.

Both the AG and the CE gross margins increased by over 20%.

SG&A increased by 6% in the quarter, mainly due to currency.

R&D declined slightly in the quarter.

And the combination of these items resulted in an industrial operating margin of $117m for the quarter, which was up 134% from the first quarter last year.

And I will have a few more comments on this in a moment.

Other expenses increased primarily due to higher retiring people costs and foreign exchange losses.

The improvement in net income of unconsolidated subsidiaries reflects the increased contribution of Financial Services.

On the other hand, depreciation and amortization increased due to accelerated depreciation of the manufacturing facilities we are closing this year.

And increased goodwill amortization related to continuing investments in new systems to support integration.

In summary, our adjusted EBITDA almost doubled in the quarter versus last year, and consequently it now covers a net interest expense, excluding interest compensation to Financial Services, after tax.

On slide eight let's look at the segment contributions to the $117m industrial operating margin for the first quarter.

As we have said before, we manage our business segments following fair accounting principles, as explained in the footnote tucked into the financial statement.

At the top of slide eight, you'll see the figures from the footnote of the press release for the first quarter.

Then you'll see the various adjustments for the Equipment Operations operating results, for which the industrial operating margins under US GAAP.

And if you divide the adjustments between AG and CE, basically on a 65%/35% basis, you get to the industrial operating margin equivalent by segment under US GAAP.

Our AG margin improved from $66m, or 4.1% of net sales, to $110m, or 5.7% of net sales.

And most importantly, our Construction Equipment industrial operating margin moved into the black, with a $23m improvement in the quarter.

The improvement in the AG industrial operating margin was primarily due to higher pricing, reduced costs and improved margins on new products, and favorable currency variations.

Positive volume and mix contribution from the Americas were offset by Europe.

Higher macroeconomics and launch costs were partial offsets.

And for Construction Equipment the results were similar, effects of currency were slightly negative.

Construction Equipment volume declines in Western Europe also offset gains in the Americas.

Slide nine shows the continuing decline in SG&A, expressed as a percentage of net sales of equipment.

At the end of the first quarter of 2004, SG&A was only slightly higher than our long-term anticipated level of 8.5% of sales.

Although our SG&A increased in absolute dollar terms, due mainly to currency, the percentage increase was less than our percentage increase in net sales.

Now let's look at what happens to our Equipment Operations net debt, on slide ten.

In total, Equipment Operations net debt on March 31 2004 was $1,944m compared with $1,902m at the end of last year.

Turning to working capital, the increase in the first quarter of this year reflects the normal seasonal build up of inventories, of [$262m] excluding currency.

This build up of inventories was slightly smaller than in the first quarter of 2003.

Payables also increased slightly in the quarter, again in line with the seasonal trend.

Receivables declined, reflecting more efficient funding mechanisms in place this year.

In total, Equipment Operations working capital was only about $130m higher on March 31 2004 than on December 31 2003, net of currency.

Let me also point out that net cash from other operating activities in 2003 reflected a tax refund of approximately $100m, that didn't recur in 2004, and that essentially explains the [indiscernible] in the year-on-year other line item within cash flow from operating activities.

On slide 11, I would like to review what I feel were our pluses and minuses for the first quarter of 2004.

We were disappointed by the poor performance in Construction Equipment in Western Europe, which was worse than what we expected.

However, the impact of these lower volumes was offset by lower fixed costs resulting from prior years' restructuring actions.

And our retiring medical costs increased in the quarter, as anticipated.

On the other hand, pricing realization was positive, and we have improved profit from the new products launched last year.

We gained market share in combines in all three major regions, and in hay and forage equipment in North America.

The CE business achieved a positive industrial operating margin, mostly driven by the North American performance.

Much improved over 2003, but still unsatisfactory in total.

Finally, I would like to briefly talk about CNH Capital.

Our Financial Services net income improved, driven by the carry over fundings of the Company's final 2003 US ABS transactions, and by lower risk costs due to the improvement in the quality of CNH Capital's loan portfolio.

Second, CNH Capital's cash generation increased, thanks to higher profits and the continued reduction of the non-core portfolio.

This has allowed CNH Capital to reduce its dependency on Equipment Operations fundings again this quarter.

Now turning to our industry outlook for the second quarter of 2004 on slide 12.

We expect that worldwide industry sales of our agricultural equipment will remain strong, up 10-12% above last year.

North America should be the strongest market, up almost 20%, primarily on the strength of the under 40 HP tractor segment.

But we expect that the over 40 HP segment will be up in the range of 10%, and the higher horsepower tractors and combines as a group will be up about 10%.

Latin America is expected to be flat in the second quarter, with tractor sales up slightly but combine sales down, reflecting the [indiscernible] of trends from the second quarter into the third.

Industry sales in Western Europe should be flat to down slightly for both tractors and combines, as in the first quarter.

We anticipate that the worldwide market of Construction Equipment in the second quarter will again be flat.

We anticipate that the North American market will be up moderately, in the 5-10% range, with backhoes and the heavy equipment giving the strongest showing.

In Western Europe, where there is no clear sign of recovery, we believe that industry sales for both heavy and light should continue to be flat, similar to the first quarter.

We expect Latin America to continue to strengthen.

In fact increasing dramatically their [indiscernible], especially for heavy equipment and backhoes, but this is an easy comparison.

Based on this industry outlook on slide 13, we expect to see a broader improvement of up to 30% in our industrial operating margin, driven by continued price realization, volume and margin improvements on new products.

In addition to the improvement in industry volumes, both our AG and our CE market share should improve, thanks to the new tractors, combines, backhoes, wheel loaders, skid steer loaders and other new products that we have that have been recently introduced.

Partially offsetting the improved operating margins, industrial operating margins, will be some increases in the cost of steel that we will not recover in the quarter fully, because of price protected orders.

In addition, interest expenses and retiree medicals and other operating costs will be about $40m higher than last year in total, which is about the same level seen in the last quarter.

There will be no significant ABS transactions in the second quarter, and so we expect Financial Services results for the second quarter to be about the same as last year.

And in total we anticipate as a result achieving bottom line before restructuring charges slightly better than last year.

Now for the full year 2004, slide 14.

We expect that worldwide industry sales of AG equipment will remain strong, up almost 10%.

We believe that the North American market will remain strong, but will return to a more sustainable level of growth in the second half, ending the year up slightly more than 10%.

Most of the increase in sales will occur in the under 40 HP tractor segment, but we also expect that industry sales of the higher horsepower tractors and combines will be up about 10%.

Industry sales for tractors in Western Europe are expected to decline slightly, while sales of combines might decline moderately more.

Industry sales for tractors and combines should be up slightly to moderately in Latin America, and tractor sales should be up significantly in the rest of the world markets.

We anticipate that the worldwide market for Construction Equipment will be up almost 10% for the full year, with the strongest increases occurring in Latin America and the rest of the world markets.

North America should be up modestly, perhaps 5-8%, but not remaining at the exceptionally high levels seen for the first quarter of this year.

In Western Europe we believe that industry sales of both heavy and light equipment could be flat to up slightly.

Based on this industry outlook, we anticipate that our industrial operating margin improvement will continue throughout the year.

We expect continued strong price realization, coupled with volume improvement, due both to the better industry conditions and to greater market share, as we capitalize on the successful launches of this year's new products and the new products launched in recent quarters.

Partial offsets within the same sectors I just mentioned, related to the second quarter.

Higher steel costs, higher interest expenses and higher retiree medical and other operating costs.

We expect CNH Capital to further improve the quality of its portfolio, and we expect to see a bottom line improvement of almost 25% in 2004.

All in all, CNH anticipates that its full year bottom line improvement, excluding restructuring charges, should be about 20% higher than the improvement recorded in 2003.

This could be even a little higher if we get some help from the market.

Through the re-launched planned reductions of fixed costs we increased our operating leverage, and we should start to see the return on our restructuring actions as volume increases.

Finally, moving on to our restructuring charges.

We anticipate that in 2004 they could be approximately $100m pre-tax, as we will be completing the final steps in the merger integration plan, which includes the closure of five manufacturing plants and several [indiscernible].

All of which has been previously announced.

Now a few words on cash.

We expect cash restructuring costs to increase by roughly $50m from 2003, to $135m in 2004.

We may contribute up to an additional $80m for our US pension plans.

And of course, the important plus to consider is related to the cash flow generated by the increasing of Equipment Operations net income.

In total, we expect that Equipment Operations should generate approximately $100m-$200m in cash in 2004, depending of course upon the volume of activity at year-end.

Finally, CNH Capital should generate about $300m in cash in 2004, as we previously discussed.

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

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

Thanks.

Erica, could you please retrieve the first question?

Thank you sir.

Ladies and gentlemen, at this time we'll begin the question and answer session. [Operator Instructions].

Our first question comes from David Bleustein with UBS.

Please go ahead.

Good morning.

Morning David.

Morning David.

Can you tell me the compact-- Talk a little bit about the impact of the EU enlargement on both your construction business and on your AG business?

What you're seeing and what you expect for the next 12-18 months?

Construction Equipment.

Maybe I will leave Harold to answer the question, but I think the answer is quite easy.

Yes.

In general, as the new entries become active we see more funds and opportunities flowing into those markets, and we see a positive impact on the Construction Equipment business.

Clearly we have our eyes on that opportunity for growth.

And on the AG side?

I may leave the further question to Rich.

As you know he's only in charge of North America, but he's also interested in Europe.

As I anticipate the member companies coming in, there's going to be an increased emphasis on agricultural production.

So I think we will see some increased demand there for our products.

The big question mark in my mind remains what's going to happen to the subsidies.

Are they going to take the total subsidies that are available, spread those over across the current members and the new members?

If so there may be some decrease in subsidies to the current members, and that would put some downward pressure.

But those are political questions that I'm probably not the best one to predict.

Now if I may add something.

The new countries joining the EU, in terms of volume today, do not represent a material volume compared to Western Europe.

So we are confident that there will be a significant growth in those areas as the farmers in those new countries are going to become more efficient and will probably also have a lot of advantages in terms of labor costs and in terms of acreage of their own farms.

But still, this market today is a relatively small market compared to the core Western Europe countries.

And I think the other one, Michel, we are as a company, are very well positioned there in those markets.

Distribution, so, we will be there to capitalize on that growth.

All right.

And the follow up.

Can you talk a little bit about any change in the competitive dynamic in Brazil, following the AG [indiscernible] merger?

I would say business as usual.

No major changes so far.

Terrific.

Thanks.

Thank you.

Our next question is from David Raso with Smith Barney.

Please go ahead.

Hi.

Good morning.

Firstly, on the availability.

You've cited some difficulty with the small tractors and the backhoes.

Can you help us understand what's the issue?

Is it some particular suppliers?

And how much sales?

The issues are quite different regarding the nature of the products.

So let's start first with the AG products.

Rich is in the area which has been the most concerned by this situation.

Good morning, David.

Morning.

From the availability standpoint, our primary area has been on the under 40 HP tractors.

We are in the process - we actually started last November - of introducing some new series of tractors.

Any time you introduce a new series of tractors, prior to the introduction you want to wind down your old inventory as much as possible.

On the initial startups, it was a little more challenging than we had hoped.

So we're running a couple of months behind there, and that has put us into some inventory shortage situations.

Just by rough number comparison, if you look at the under 40 industry - so these are the reported industries on an inventory churn, so backward looking - the rest of the industry is running at about 5.8 months' supply.

New Holland, which is our primary segment for this, were about 4.8.

So we've got about 1 month's less supply of inventory.

We expect that that situation will be corrected.

It's actually starting to correct now, and will get better over the next couple of months.

Our backhoe order situation is quite different.

So maybe I will let Harold answer this question.

Clearly, on the backhoe loader our resale sales have been impacted, both in North America and in Europe, as we phase in/phase out the new Tier 2 product with pilot controls.

Our original plan was to release, as an example, the Case machine in the early part of the quarter, and we did not get any significant units in this marketplace until the last of the quarter.

And this was primarily due to us making sure that the quality of the product met and exceeded our commitments to the customers.

Okay.

You mentioned the New Holland on the small tractors, but the new Case - basically, the Case version of the New Holland Boomer - coming out of the UK.

Is there not a supply issue with the small new Case tractors?

Yes.

For what's been low corrections, so the Case haul tractor, which we are marketing under the Farmall sub-brand, which has been very well received.

It does not come out of the UK.

Those come out of Japan, or via our factory in Georgia.

We've had some of the same issues there on the initial inventory launch, but they are quite frankly a very small part of our total North America share on small tractors at this point in time.

So it's more of a New Holland issue?

Yes.

And the growth outlook, the first quarter - and I assume you're talking industry - the first quarter we had the industry tractor sales up 18%, combines up 23%.

So dollar-blended, say 19-20%.

If I heard you correctly, just clarification, the second quarter we're thinking 10-12%?

And then also full year 10-12%?

Second quarter we expect for tractors to be North America about the same growth as what we got in the first quarter.

I'm talking North America.

If you talk worldwide, basically, the growth in the second quarter should be less than the one in the first quarter, on 10%, slightly more maybe.

But keep in mind that we expect Western Europe to be flat to down, slightly down, in the quarter.

So in fact we have decreasing growth rates quarter-by-quarter in our expectations [indiscernible].

To that I'd only add if you look at all the industry in the first quarter of last year on a seasonally adjusted rate, the first quarter was the weakest quarter.

So there's a little of weak comparisons in this first quarter versus the balance of the year.

And is the order book reflecting the deceleration that you're forecasting?

I'd say our order book is pretty strong.

So when you look at the changing industry, as we look at it, once we get some of these availability issues corrected we're reasonably optimistic.

We're more optimistic going forward once we resolve some of these availability issues.

And the last question, the Fiat.

The $24 ceiling, so to speak, on triggering new shares being put into the EPS calculation.

Can you give us some color on - given the stock isn't really that far away from that threshold - has there been any discussion with Italy on how we're going to handle that?

First of all, we are around $21.

From $21 to $24, I would not say that we are not too far away.

I'd love to be not too far away.

But there have not been any specific discussions on that issue.

Okay.

Thank you very much.

Thank you.

Our next question comes from [Jeff Scoglin] with UBS.

Please go ahead.

Good morning.

I was wondering if you could elaborate on the earnings again.

It looks like you-- Your previous guidance for EBITDA was to improve it about the same rate that we saw from 2002 to 2003, which was about $80m.

It looks like you increased that in the press release.

I was wondering if you could clarify exactly what type of increase you're looking for.

And I was wondering, on the operating margin, Michel, I think you mentioned operating margin target for the industrial?

Yes.

It's [a bit on] the EBITDA.

Basically the driver of EBITDA change was the gross margin.

And the current driver is basically the contribution of Financial Services.

So compared to that, during the first quarter we improved about $60m.

So if you consider the full year evolution, basically the driver has not introduced a change in the gross margin or the change in the contribution of Financial Services.

Would you say you got about-- What should we-- Given that you expect a little bit of a deceleration in the remainder of the year, would we be looking at $120m?

Yes, but you cannot compare every quarter, because they're not exactly alike.

Because in our business we have seasonal activities, especially on the AG side, and the second quarter is the strongest quarter for us.

So we described what would happen in the second quarter.

But I would expect the improvement in the SG&A is going to be very closely related to the improvement in the net income.

Last question, on the pension plan.

You said you're expecting to contribute an extra $80m.

So now, instead of $155m, does that now go to $235m for the year?

No, $155m is the total.

It's an increase of $80m from last year.

Okay.

So that stays the same, there's no increase in that?

Yes.

That assumption is unchanged from the last conference call.

Great.

Thank you.

Thank you.

Our next question is from Joanna Shatney with Goldman Sachs.

Please go ahead.

Hi.

You mentioned pricing as being a positive in the farm businesses.

Can you just quantify how much it helped on top line, on both Construction and on AG?

On the CE side, contribution in terms of, as a percentage of sales in the first quarter is lately 2% and on the AG side, I would say it's about the same, basically.

And can you-- What's the expectation in terms of your full year pricing environment?

Do you expect that you'll be able to keep that 2%?

I would say yes, but I can ask Harold and Rich just to confirm what I'm saying.

Particularly in North America, where the market recovery which began in the second quarter last year and led to a strong, real strong, fourth quarter recovery.

As the demand continues to grow, we think that the pricing will stick.

And really the same on the AG side, Joanna.

And you mentioned steel costs are actually going higher, and some of your competitors have announced mid-year price increases to address that.

Is there anything similar happening at CNH?

Harold?

Yes.

On the Construction Equipment side, we announced to the marketplace in March a 3% surcharge for the steel price increase, and we're hoping that this steel pricing will moderate middle of the year and move lower in the second half of the year.

But initially we won't see much impact on the surcharge as far as dropping to the bottom line, because we guaranteed customer retail orders to protect the customers that had already given us orders.

And on AG?

Again for AG, something similar.

The surcharge is 2%, and the same way as Harold we guaranteed any of our retail orders.

But we also did some adjustments in our discounting.

So the net effect is around that 3% as well.

Okay.

And I'm assuming that because there were some availability issues that you under-produced your retail sales for the quarter.

Is that true?

And then what do you expect to do for the full year?

Yes.

In fact if you consider the AG business, in the first quarter we under-produced, over-produced retail by about 38%, and which is slightly more than that.

But if you exclude the small tractors the situation is more or less the same as the year.

But if you consider Construction Equipment, we significantly over-produced less than last year.

But it's the same [total] without that, although it's not very easy to explain, but we significantly under-produced.

But on a full year outlook for Construction Equipment, production is in line with retail.

And AG?

Same for AG.

Year-over-year, retail and production are pretty well balanced.

Okay.

So we're done with the inventory de-stocking [in the field] for both businesses?

Joanna, we did not de-stock in the first quarter.

Right.

Because you had the normal seasonal up tick?

But just for the full year, it sounds like we're done with all that.

Yes.

For the full year production will be about equal to retail.

Okay.

Thanks.

Thank you.

Our next question is from John McGinty with Credit Suisse First Boston.

Please go ahead.

Yes.

Just to start, a clarification.

The 9% over-production - was that CE in the first quarter versus 20% over-production a year ago?

Did I write that down earlier?

No.

CE [indiscernible] other in the first quarter versus more than 20% in the first quarter a year ago.

I'm sorry, what was it in the first quarter this year?

9%.

9%.

And CE overall, or CE Europe?

Europe.

CE Europe.

What was CE overall?

18%.

18%.

Okay.

Thank you.

If we look at your full year forecast for the-- The way you put it is the highest horsepower tractors and the combines in North America, you're saying up 10% for large construction equipment.

You're saying again, I think, up 10% in - I think that was North America, that may have been worldwide.

But both of those forecasts are significantly below your primary forecasts made by your primary competitors.

Are you just simply being more cautious?

You talked about gaining market share, so it obviously, if that is your industry forecast, but is there any specific reason why you are significantly more conservative than numbers that have been put out both on the AG and the CE side by your primary competitors?

It's difficult to quality ourselves, whether we are more conservative or less conservative than the others.

Well you're lower.

I don't know if you're more or less, but you're lower.

Yes.

I think we have a very cautious view on the second part of the year.

But let me just remind you what happened last year in Western Europe in the AG business.

Leading up to there we were expecting a significantly increased market in Europe, and it turned out that after the summer drought, the market changed direction.

So I think we are relatively cautious.

But don't we normally produce, I'm sorry, don't we normally make forecasts based on things like normal weather?

Obviously if there's a major drought - flooding or other kinds of pestilence - it's going to cut into the demand.

But assuming normal weather, it does seem to be a bit cautious on both sides.

Yes.

And can I come back to the CE business?

If I'm reading these charts correctly - and I apologize if I'm not, but - the CE sales in the first quarter, going back to chart six, on an excluding, on a constant foreign exchange basis, the sales were up from $677m to $695m, or up only about $18m.

For operating income, over on slide eight, the change was $23m, and I believe you said on an operating basis that currency was actually a negative in that operating number.

So was most of it restructuring?

Or would the currency play some role, because the reported sales were up a bit more obviously?

Let me, John, I'm going to summarize again the situation of CE.

In terms of sales, the 3% increase for the [$80m] is basically a big plus in North America and a big minus in Western Europe.

And the big minus in Western Europe is driven basically by the market conditions, etc., etc.

Of course, as you know, in North America we have good margins for the products that we make, at least higher than in Europe.

But when you lose the sales amount with the same amount of sales in Europe versus North America.

Overall the net impact on the margin is not as bad because the margins in Europe are less than the margins were in North America.

Is Europe yet profitable in the CE side, on a GAAP basis?

In other words, on the basis that you've got at the bottom of slide eight, I assume not.

I cannot answer.

I would say on the top of my head, in US GAAP probably Europe was negative in the first quarter.

Okay.

Now having said that, there is another consideration, which is a very good plus in Europe.

We feel we are seeming to start, and we are starting to see in Europe, the benefit of the restructuring actions, downsizing of some manufacturing plants in Europe late last year.

We have closed the [Crepe] facility in France.

So the downsizing of the structure is quite impressive in Europe, and this has offset mostly entirely the drop in margins that we got because of volumes in Europe.

Okay.

And then just a final clarification.

Your forecast had been, in other words your improvement - if I'm reading this correctly - was up just about, just a hair under $100m bottom line ex-restructuring from '02 to '03.

You had been saying you were going to do a like amount, in other words, call it roughly another $100m on top of the $30m.

Now you're saying you will do 20% more than that.

In other words, what you're saying - I'm just trying to make sure I understand this - that the improvement in '04 compared to '03 should be roughly $120m net income before restructuring.

Am I interpreting that correctly?

Good calculation.

All right.

Thank you very much.

Thank you.

Our next question is from Mike Tender with Citigroup.

Please go ahead.

Yes.

On CNH Financial you talked about the non-core portfolio.

Roughly how much is left on that?

Non-core portfolio?

Yes.

I would say if you consider non-core portfolio on the books net of the reserves, we have a very minimal number, which is less than $50m.

Okay.

Great.

And then just one follow-up on steel.

Roughly how much did steel hit you in the quarter?

Just in an absolute dollar?

Minimal.

The steel price, I would say, increase is clearly something which is hurting the second quarter, very little impact in the first quarter.

Okay.

Thank you.

Thank you.

Our next question is from Barry Bannister with Legg Mason.

Please go ahead.

Hello, gentlemen.

Good quarter.

One of the early statements in the call was that the Latin American pricing was poor in tractors, and then in response to a later question you said that it was business as usual.

Could you describe Latin America in a little more detail, in terms of both pricing and the sustainability of demand related to Finame?

Was there a spike in Q1 or can we expect the year to be a little better than expected in Latin America?

When I said business as usual in Latin America, I'm saying business as usual, as we do business in Latin America.

So as you know, in this country inflation is a significant factor, and basically the pricing in absolute is not that important.

What's important is the variation of the speed of change of price when compared to the speed of change in the costs.

What we have been, our strategy in Latin America for tractors, has been clearly to try to protect an increased margin as much as we could.

Even to the expense of some market share losses.

While on the combine side - where the margins are in essence by unit and percentage wise much higher than on tractors - we decided to push as much as we can in a very good market environment.

The Finame was not an issue in the first quarter.

Finame basically is an issue almost every six months, because everyone is wondering about whether the government [co-loans] will be there or not be there.

At the end it always comes.

And [we're very] basically in the end that is that the [indiscernible] wrecked the AG economy in Brazil.

Especially in Brazil.

It's a substantial plus for the overall Brazilian economy.

So there is no reason to believe that this will disappear.

So we might have maybe some uncertainty for a couple of weeks, but that's not really significant.

And in addition the Brazil economy is mostly driven by some large crops like soya beans and things like this, which is one of the drivers of the very good market for combines.

Thanks Michel.

And could you give us the tax rate for book purposes for the rest of the year?

We usually use a 34% tax rate as a standard, but there are some pluses and minuses due to the fact that in some countries we are losing money.

So at the best I would say you can use a 34% tax rate as a standard rate.

It was lower in Q1, so.

For the reason I mentioned.

When you have a relatively low quarter there is a need further where you make profits in the various countries.

There are some countries where we know that we may not be able to recover the tax losses for a while, so therefore this is impacting the profits.

Thanks.

Thank you.

Our next question is from Michael Salem with K Capital Partners.

Please go ahead.

Hello gentlemen.

It's [Alexander Roland].

Good morning.

Good morning.

Couple of questions.

One of the analysts, I think, earlier mentioned the $24 threshold for the automatic conversion of the price.

Considering that the maybe volume is still below 100,000 shares, are you willing to suggest if the share price goes through the $24 as we hope, are you willing to suggest to Fiat increasing the free flat in order to improve trading in the shares and to increase institutional ownership of the stock?

This is clearly a question that Fiat only can answer.

But you could have a proactive role in that respect, by suggesting to them that we would all benefit if institutional ownership of the stock were to be larger and if free float in the stock were to be bigger than it is today.

Let me say this.

From the management of CNH, I would say in the list of things which are on the priority list, our first priority is to make the bottom line input.

Either way, there is very little we can do on the stock price itself, because there are so many other considerations.

But I think our priority is to improve the bottom line.

I think it's already a full-time job.

Again, as investors, we are of course-- We would be significantly more enthusiastic about the stock if the opportunity to participate was bigger than it is today.

And as I said, the problem that we're having, that we continue to have, is that--

We understand that perfectly, but I would say if you consider also the situation compared to two years ago, the float and the volume has substantially increased, Alexander.

In line with the results of the restructuring that the Company has carried out.

So we would love to participate even further in this process, but frankly we would need some kind of help from the majority shareholders if and when the conversion, the money conversion, is triggered.

As a result these guys will end up owning 2b stock.

We will convey your concerns to our Fiat friends.

Thank you.

In terms of tax loss carried forward, can you tell us a little bit about how much there was, how long do you expect to have them for?

And when do you think you should expect to start utilizing them?

The situation depends upon the region.

On a normal basis, what I can say is that we don't have really any issue in terms of how many tax losses will expire, so to speak.

Very minimal amount, because depending upon the country we have unlimited time to use them, or if you consider the US we have almost a generation to use them.

Now having said that, on a practical basis we basically expect to use most of the tax losses in the foreseeable future.

Within the next three years.

Okay.

And from the footnotes, there's still about $2.4b of debt towards Fiat Affiliates.

What's the long-term plan in terms of reducing that amount?

What's the long-term goal in terms of exposure, or in terms of exposure towards Fiat Affiliates?

I would say on this front nothing has changed compared to what we have been saying regularly in the past.

Our primary objective is to generate cash and reduce debt.

Whether we reduce the Fiat debt or other debt is a question of when the majority are coming.

So our primary goal is to reduce debt, and we have no plan to increase the capital spending, make acquisitions or things like this.

We want to lower the debt levels and by the same token reduce the interest expenses on the P&L.

Right.

And because of the rating that the Company has right now, of course we've been stuck for some time with the ceiling (so to speak) provided by Fiat's own rating.

Have the rating agencies reviewed your numbers recently?

Do you expect them to review them recently, and to eventually, for the Fiat ceiling not to represent a cap, so to speak, on CNH Financial's rating?

Let's say that we have regular dialogue with the rating agencies and we meet with them regularly on this improvement that we are trying to achieve, and our expectations.

So as far as what the consequence is going to be, and what kind of evolution or rating, it's very difficult to answer.

Difficult to say.

Right.

The only thing I can say is that what we do is, I believe goes in the right direction.

And when I consider also the level of trading of our outstanding loans, they behave more in line with better credit companies than what we officially have as a rating.

And last question.

The pension deficit.

I was hoping that you could give us a little bit of an update.

Also, I noticed in the footnotes and comments about the impact of Medicare and the negotiations with UAW.

I was hoping that you could maybe give us a little bit of a sense of what the impact may be of those?

Yes.

Three different subjects, in fact.

On the pension side I would say-

Three questions then.

Yes.

On the pension, US benefit and UK very different benefit pension plans.

The figure shown is that because of the improvement in the overall performance of the effort, our pension expense for 2004 is probably down compared to 2003.

And also up just slightly.

So that's the good news.

In addition, we are also making cash contributions to this pension effort, because we believe it's a very good return in terms of bottom line to the Company.

On the medical benefits, the situation is (I would say) almost unchanged.

Because, as you know, the increase of medical costs per year is still quite high, and we are trying to find the best solution to minimize the impact and still keep very good benefits, competitive benefits package, compared to others.

That is clearly one of the issues where we have some increase and I don't see significant changes in 2004 on this front.

On the UAW situation, it's difficult for me to answer.

In any event, keep in mind that the number of people still in this union on a contract, active employees, is very small now.

And we've agreed with the UAW not to comment on the status of the negotiations until after they're completed.

Understood.

Thank you so much, gentlemen, and talk soon.

Thank you.

Thank you.

Our next question is from Andrew Obin with Merrill Lynch.

Please go ahead.

Good morning.

I just have a question about the incremental margin.

You noted that the restructuring actions should result in more operating leverage going forward.

Are we going to see it in the second half of this year, or is it more of [five] events?

And what do you think the incremental margin can get to, particularly for the AG business?

Let's put it this way.

In 2004 one of the major restructuring actions is going to be the closure of the East Moline facility.

And so I think it's going to be [medium].

So you won't see the impact on a full-year basis this year of course.

So I would say to answer your question on the restructuring actions taken in 2004, lots of ability to come in 2005.

Okay.

And regarding the closure of East Moline facility, I'm not sure if you addressed it on the conference call.

You changed the timing of that--

We delayed it by a couple of weeks.

We delayed that by really three weeks, and that was to meet some incremental retail demand here in North America.

Okay.

Thank you.

Thank you.

Our next question is from [Bill Heflin] with [Regiment Capital].

Please go ahead.

All questions have been answered already.

Thank you.

Thank you.

Our next question, the final question, is a follow up from David Raso.

Please go ahead.

Real quick, the foreign exchange loss.

How much was that amount for the full quarter?

[Indiscernible] at all.

I thought you noted foreign exchange as a negative on the operating profit line.

Did I get that correctly?

When you speak about foreign exchange impact, it becomes a very complicated matter.

But what I was referring was on the other expense line, the foreign exchange gain and losses, which is (I would say) the full accounting loss on some of the outstanding contracts that we have.

But if you talk about the overall currency impact, including translations, corrections, etc., there was a very minimal impact in the quarter.

What do I try and tell you, one line was the P&L, but it may be in some other part of the presentation I was talking about the general impact of currency, which is a different story.

Can you help me with that number, though?

The other expense, what was the negative effects hit?

And you're saying the operating profit line?

About $10m.

$10m negative in the other.

Basically nothing on the operating profit line?

Yes.

Okay.

On a [risk income] basis.

So if you strip out then the foreign exchange sales gains, with no impact on the operating profit line, your incremental margin then was 41%?

You essentially had $162m of higher sales core, no currency?

True.

Absolutely.

If I make a very quick calculation, on the overall margins in industrial, the reported margin is 15.5% of sales in the first quarter compared to 14.8% last year.

If I take out the currency impact, which clearly affected sales, the overall margin in the first quarter would have been probably closer to 16%.

And we basically increased margins by 1.2 points from 2003 to 2004.

I appreciate it.

Thank you.

Thank you.

Gentlemen, that was our final question.

Please continue with any closing comments.

We'd like to thank you all for joining with us this morning, and if you have any further questions please don't hesitate to give me a call.

Thank you very much and we'll talk to you again next quarter.

Goodbye.