CNH Industrial NV (CNHI) 2004 Q2 法說會逐字稿

Good day everyone, and welcome to the CNH 2004 Second Quarter Results conference call.

Hosting the call today will be Mr. Michel Lecomte, Chief Financial Officer, Mr. Giovanni Maggiora, Vice President & Treasurer, Mr. Al Trefts, Senior Director, Investor Relations & Corporate Finance.

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

Please go ahead.

Thank you Marcia.

Welcome everyone to CNH's second quarter 2004 results webcast conference call.

We're pleased to have Michel Lecomte, our Chief Financial Officer, Giovanni Maggiora our Treasurer and Rich Christman, President, Agricultural Equipment North America, Australia and New Zealand, joining us for this call.

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

Then we will be available for 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 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 are being recorded.

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

Now, we'll turn to Michel for comments on our results.

Thank you Al, and hello everyone.

Well, I'd like to start with what happened this quarter.

On slide 4, Agriculture tractor industry sales increased significantly in North America, with high horsepower [indiscernible] tractors showing the greatest strength.

In total, the Western Europe tractor industry was up from last year, led by Italy, France, the UK and Spain, with Germany slightly down.

The Latin American tractor industry was up 13%, but not only did Brazil remain strong, but Mexico and Argentina also showed strength in the quarter.

The rest of the world tractor industry markets were up 31%, driven by China, where we have a significant presence, and, Turkey and Pakistan where our joint ventures have significant market share.

Industry sales of combines were exceptionally strong in North America, compared with the second quarter of 2003; driven by stronger competitive prices.

The industries' favorite combines were strong in Latin America, compared with the same period last year, on the strength of Brazil.

Industry favored combines declined significantly in Western Europe, mainly because of France and Germany, with the UK and Spain up.

The industries' favorite combines declined slightly in the rest of the world market.

So, let's now move to our sales.

In North America, our tractor retail sales increased versus last year in all horsepower categories, as the acceptance of our new products continues to expand.

Combine sales, this is less than the industry in North America, as we had constrained production from [indiscernible].

In Latin America we gained share in tractors, but our combine share declined slightly, as we chose to preserve our margins at their current good level.

In Western Europe our share decreased slightly for tractors and moderately for combines, due to limited availability of certain new and popular models in a very competitive market.

Now, let's look at what happened in the first half.

The industry's second quarter performance followed an even stronger first quarter, with tractor sales worldwide up 18% and combines up 11% for the first half.

Overall our first half retail sales grew slightly less than the industry, due mainly to the tractor availability issues we discussed for the first quarter.

Turning to construction equipment on slide 5, we see that the second quarter industry sales of backhoes were up worldwide, led by North America, which was up 38%.

The skid steer market also improved moderately, led by North America.

Worldwide heavy equipment industry sales were up 16%, with North America up 37% and Western Europe up 10%.

Now, let's comment on our sales.

In the quarter we out-performed the market in backhoe orders in North America, and there are many reasons contributing to this.

Most significantly our strong level of sales to [indiscernible] and Swiss customers, but also, we launched four new models for backhoe loaders with our new climate controls.

So, we believe the customer acceptance of these new models was another factor contributing to our good performance.

Our skid steer loader sales essentially kept pace with this evolving market.

For heavy equipment we gained share in North America, particularly in the [indiscernible] segment.

In Latin America our heavy equipment retail sales were up, but we lagged the market in Europe, where we phased out a substantial number of old models and introduced new ones in a very competitive market.

For the first half of the year, construction equipment industry sales were significantly below major categories.

Also, CNH sales were slightly less than the market, due to the situation in Western Europe for the same reasons we mentioned for the quarter.

Now, moving to the financials, starting on slide 6, our net sales of equipment in the quarter were $3.3b compared to $2.8b last year, up 15% excluding currency fluctuations.

On the same basis AG net sales increased by 14% versus last year, due entirely to the growth in the Americas, while construction equipment sales increased by 17% in the quarter on the strength of North and Latin America.

Our net sales of equipment for the first half of 2004, as you see on slide 7, were $5.9b compared to $5b last year, up 11%, excluding currency fluctuations.

On the same basis, AG net sales increased by 11% versus last year, with gains exclusively in the Americas.

And, construction equipment sales also increased by 11%.

Sales in the Americas were partially offset by a decline of 6% in Western Europe effecting limited production to reduce working capital in construction equipment.

Slide 8 shows our adjusted EBITDA for the quarter, which increased $76m compared with the second quarter of last year.

So, the second quarter, which is typically our strongest quarter, our industrial operating margin was $256m or 7.8% of net sales.

Our AG margin improved from $132m or 6.7% of net sales to $193m or 8.4% of net sales.

And, more importantly, our construction equipment industrial operating margin, is now reaching a more acceptable level at 6.5% of net sales.

And, this increase in industrial operating margin was the principal driver of the increase in adjusted EBITDA.

About half of this dollar increase is due to volume, and the rest is heavily split between improved pricing and cost efficiency.

SG&A and R&D remained relatively constant in spite of currency.

So, let's look at the first half of the year, slide 9.

For the first half, the year-over-year improvement of $167m in operating margin - industrial operating margin, reflects almost entirely the improvement in gross margin of $182m.

As a percentage of total net sales, the gross margin was 16.3% compared to 15.6% for last year.

An increase of 70 basis points, but if you exclude currency, the gross margin percent increased by about 100 basis points, or 1 full percentage point, which on the margin percentage basis, reflects the results of all of our [indiscernible] initiatives.

Nearly all of the $182m improvement in gross margin comes from the Americas.

About 70% is relative to the AG business and the rest to construction equipment.

And, in the quarter SG&A and R&D were relatively constant for the half in spite of currency.

Net income year-over-year $167m improvement in industrial operating margin.

At the bottom of the slide, we see the segment contribution to the industrial operating margin for the first six months of this year.

Again, the key element to note is the performance of the construction equipment to industrial operating margin in the first half from $8m to $70m or from 0.5% to 4.1% of net sales.

Within these results however, there are two different sets of business conditions.

While construction equipment in North America is capitalizing on new products from higher volumes, to earn an industrial operating margin higher than the 4.1% you see on the slides.

Construction in Western Europe is cutting costs and implementing industrial efficiencies to cut the losses despite the drop in volume.

Slide 10 shows the continued decline in SG&A expressed as a percentage of net sales of equipment.

We have reached our target of reducing SG&A to 8% of net sales, and we do not expect any further decline of SG&A as a percentage of net sales.

However, we will be increasing our customer and dealer support by providing additional dedicated sales and marketing resources, additional technical support, without any anticipated increase in overall SG&A costs, as a percentage of net sales.

Moving to slide 11 - we see that we are profitable on a full bottom line basis for the first six months of the year.

We are on our way towards our goal of being profitable for the full-year.

Now, let's look at what happens - has happened to our equipment operations balance sheet.

In total, equipment operations net debt on June 30, 2004 was $87m lower than at the end of last year.

This correction is more than accounted for by the $179m of positive cash generated by operating activities in the first six months of 2004, which included an [$80m] contribution to our US and defined benefit pension plan.

And, the cash generated in the period more than covered our cash requirements on investing activities.

On slide 13, I'd like to review what I see what are our pluses and minuses for the second quarter of 2004.

We were disappointed by the performance in Western Europe, particularly in construction equipment, which has improved, but is still unacceptable.

Steel prices had a negative impact on our material costs, although this was offset by North American price sub-charges, and by industrial efficiencies.

On the other hand, we were pleased that our gross margin improved at constant currency by 1 full percentage point, and this included the impact of our margin improvement initiatives as I have said before.

In addition, we had positive pricing realization, and improved profits from the new products we launched last year.

We were also pleased with the performance in North America and with our Financial Services.

And the net income has improved over the same period last year with net interest margin improvement and lower loan losses, equalizing the EPS gain we had last year.

Turning to our industry outlook for the full-year 2004, slide 14.

We now expect the worldwide industry sales for agriculture equipment to remain strong throughout the year, closing up by about 14% over last year.

North America should remain strong through the third quarter and out-perform 2003 levels in the fourth quarter, helped perhaps by some tax related buying at the [indiscernible].

In total, we expect tractors over 40 horsepower to be up about 11% with higher horsepower tractors [indiscernible].

Combines should be up about [8%].

Industry sales of tractors in Western Europe should be flat, to up slightly for the full-year; while combines are expected to be down by as much as 10% for the full-year.

Latin America is expected to be up [14%] for both tractors and combines, with the continuation of the [indiscernible] funding for the balance of the year.

We anticipate that the worldwide market for construction equipment for the full-year will be up by about 15%.

And, we anticipate the North American market will be up moderately in the second-half of the year reflecting tougher comparables.

For the full-year, we expect that North America should be up significantly in the 15% to 20% range, with backhoe and heavy equipment expected to provide the strongest [choice].

In Western Europe heavy construction equipment should be up slightly in the second half, resulting in a full-year increase of about 7%.

The industry sales for backhoe loaders and skid steer loaders are expected to be about the same as last year.

We anticipate that the construction equipment markets in Latin America will remain strong ending the year up about 20%.

Looking ahead, two things are important.

First, 2004 is a recovery year for most of the key markets for CNH.

The recovery comes on top of the completion this year of our manufacturing footprint [rationalization] plans.

Our plan was to go from 60 plants to 39, right now we are at 39, and as you know we closed some of our facilities this year.

In total we estimate, as a result of these actions, we expect to book restructuring charges about $[125m] pre-tax this year.

But, please note that these charges should decline significantly next year.

Excluding restructuring charges, CNH anticipates that its full-year net income should improve by about $150m.

This includes $30m of net income improvement in CNH capital, which is - leaves about $120m of improvement from the equipment operations side.

Consisting of the year-to-year base improvements, [indiscernible] improvements, we see the recovery of our construction equipment business continuing through the second-half.

We believe all of these improvements reflect fundamental changes in our base business and should continue to support us in the future years.

And, we will continue to focus on cash generation.

We expect that, despite our growing sales, which should in theory impact our working capital, we will reduce our net debt by approximately $200m for the full-year including the $87m accomplished so far in the first half.

Now, in closing I would like also to remind everyone that CNH will be participating in the Fiat analyst day meeting this coming Monday in [Balacough], Italy, and now Al, Giovanni and Rich and I will be happy to take your questions.

Thank you sir.

I'll give the floor to Al, just to give you some [particulars] about these investor operations meeting next Monday.

Thank you Michel.

We will be providing a link from the investor relations portion of our website to the webcast of the Fiat investor day meeting.

So, that any of you all can listen in.

The presentation materials also will be available through the link, and directly on our website as soon as possible.

We anticipate that our presentation will be webcast live mid-morning on Monday, sometime between about 9:30 and 11:00, but encourage you to check the website Monday morning for the final details.

Replays of the presentation, of course, will be available later in the day.

We'd like to ask all of you to limit questions to one question at a time, and one follow-up in the order of expediency, so that we can answer as many questions from as many different people as possible.

Thank you.

Operator, could you please retrieve the first question?

Thank you sir. [Operator Instructions] And our first question is from Joanna Shatney with Goldman Sachs.

Please go ahead.

Morning.

Morning Joanna.

Morning.

Internally here at Goldman we've talked a lot about what the FASB is thinking about for some of the convertibles that are out there, for the contingent convertibles.

You guys have a preferred that may or may not fit in there.

Can you just talk about -- Would you be forced to put the diluted shares in the share base if FASB were to make that decision or not.

Because it's for one, with your incorporation being where it is in your ownership by Fiat, I'm not even sure if that rule will apply.

To the best of our knowledge, the final technical roll-out has not been issued yet.

My understanding is that the rule would apply to us, most likely.

So, I believe that the final decision though should come up during this summer.

So, we believe that it would apply, yes, in the Fiat ownership.

Okay.

So the rule would apply, but is the debt considered co-co debt or not?

It's not debt Joanna.

It's preferred shares.

Preferred shares.

Right.

So, would it be in the diluted share base or not?

Um, just a second.

Sure.

Let me ask you another question, while you're digging around for that.

Can we just talk about what total pricing was on a top line contribution for both AG and for construction equipment, and then what actually made its way through to the bottom line?

You mentioned that steel ate into some of that.

I'm just curious if any of it made its way down to the bottom line.

Okay.

So, I think if you are talking about the quarter for pricing, the impact of pricing on the performance is slightly above 1.5% in the quarter.

For both divisions?

Yes.

Okay.

And was that completely offset with steel costs?

No.

Okay.

Good.

Okay.

As far as your question Joanna, with the discussions from the [TF] that we've been monitoring, we believe there is a likelihood that it will be included.

But we won't know for sure until after the ITF considers its comments at the September meeting.

Tentatively it's not until about December 15 that we'll really have any kind of final definitive answer.

Okay.

Thanks.

Thank you.

Our next question is from Mario Gabelli with Gabelli Asset Management.

Please go ahead with your question.

Yeah, along that line.

Have you examined what the new management of Fiat -- The concept of financial restructuring of your balance sheet, given your own cash flows and taking out the preferred completely.

What's your current thinking?

I mean, you could probably issue a convertible bond materially higher than the current conversion price, give Fiat $2b and everyone smiles, so you won't have to answer questions like Joanna's?

Well, Mr. Gabelli, we cannot talk of course for what --

I mean, I'm asking, whatever you can share with us in terms of conversations with Milan?

Let me -- No.

We don't have discussions on this issue.

That's summarized by saying that our major objective is to generate cash flow.

I know that's not an easy task, so therefore we have to reduce our debt on the balance sheet anyway, because when we will - as we are entering this cycle, we believe that this is the right opportunity to generate cash.

Our first objective is to reduce the debt on the balance sheet.

If we have other alternatives -- Confirm the strengthening of the market to fit our valuation, we will see what position should be made.

I understood the answer.

But can you -- Just along that line, your $200m cash reduction for the year.

How much are you assuming you're putting into the pension plan?

You've put in an extra--?

For the pension plan the situation is quite simple.

We have made, in total as of today, $155m cash contribution for the US defined benefit pension plans.

We do not plan to make any further contribution to this plan this year.

As far as next year is concerned, I believe that we probably will make a cash contribution to more or less follow the -- To balance the P&L expense with the cash contribution.

It would be somewhere in the area of $80m to $90m next year, for sure less than this year.

Thank you.

Thank you.

Our next question is from Andrew Oban(ph) with Merrill Lynch.

Please go ahead with your question.

Good morning.

Morning Andrew.

I just wanted to take a 30,000 foot view and - Maybe can you talk a little bit, a. are you guys seeing any slow down in your markets, particularly in North America.

And, I'm not talking about slow down in growth rates, but absolute slow down?

And, also if you could sort of talk a little bit about 2005, because as I look at the stocks it seems that that's what investors are thinking about?

What are you guys seeing in 2005?

Not in terms of CNH, but just in terms of overall industry sales.

On the 2005 issue I think it's maybe a little bit early, because you know, the world is changing so fast.

But, I would make the same comments that was the one we have made in the past.

I mean, our market for the AG business is clearly driven by commodity prices.

And, the construction equipment market is also clearly driven by the change in the [GNP].

So, if you estimate with those key parameters, I think you have a good flavor for what's going to be the outlook for 2005.

Hold on, we believe that the North American market might not grow as fast as it has grown this year.

Of course, because this year we've [clearly] seen recovery from the past drop.

Europe, today is - I would say, not showing clear signs of strengthening so far.

Although, I think, especially on the construction equipment side, we might see some strengthening at year end.

The rest of the world market, you know, especially for the construction equipment, has been significantly impacted by the Chinese boom.

And, there are indications that this -- The Government in China is cooling off a little bit the economy, which might impact some markets, especially the construction equipment side of the business.

As far as the slow down in the US market, as you are mentioning here.

We'd maybe turn to Rich who is going to comment on the AG side of the business.

I'd say, as we're looking Andrew at the North American market.

We almost need to separate it into the US and the Canadian market.

The US market has stayed, you know, pretty strong this year, both on - on the small side and the large side.

And we -- While the market is competitive we do see an improvement there in margins.

The Canadian market remains very, very difficult, particularly anything doing with the livestock sector.

And, there it has been a challenge.

We expect for the rest of the year to be down.

And that will stay a very, very competitive market.

And, just to follow-up on the AG question.

Do you guys see any improvement in pattern of buying by dairy farmers in the US?

I'm sorry.

Could you repeat that?

Do you -- Are you guys seeing any improvement in buying by dairy farmers in the US?

Basically when we look at the dairy sector in the US, it's flat, year-over-year.

So, no major improvement.

Do you see it as getting better, or it's just very limited visibility?

No.

We expect it to stay relatively at the same levels we're seeing today in the next six months.

Thank you very much.

Thank you.

Our next question comes from Mark Koznarek with Midwest Research.

Please go ahead.

Hi, good morning.

Morning Mark.

Morning Mark.

Question is about excess costs, both on the raw materials side, primarily steel and then if you were experiencing any supply chain or expediting ramp-up costs.

We're hearing a lot of other companies, most significantly Caterpillar yesterday taking a bit hit in that area.

And, I'm wondering if you can quantify the expected impact at CNH.

Yeah.

Let me -- When you speak about contract costs I don't know exactly what it really means.

As far as we are concerned, keep in mind that many of the excess costs that we might have sustained were relative to the introduction of new products.

The area -- We were impacted in that regard, especially on the AG side of the business in the later part of 2003.

This year the situation is much more favorable for the AG side.

We still have some, let's say unforeseen costs in the construction equipment side of the business, especially in Europe, because, as I mentioned, we're introducing a substantial number of new products in this business.

As far as steel is concerned, the situation is - you know that, for instance, North America [indiscernible] costs have almost doubled since December in North America, in the US.

But, of course, fortunately, this is only one indicator.

The overall impact for us of steel costs is, let's say -- The net impact for us is about - a quarter about [NLT] it's about $30m compared to last year.

So, it's not a significant number, because the steel cost increase has impacted the US first, and, to a much lesser extent our European operations.

So -

We have been able to offset part of this price [shares] - cost increase through our manufacturing efficiencies and some price surcharging in North America.

So, the net impact is -- That we estimate, because as you know it's not always easy to estimate - is in fact I would say almost immaterial you when you compare it quarter-over-quarter.

If you consider past efficiency and price surcharge.

So, you're saying Michel that it's totally offset - at least in the quarter?

I'm not saying totally offset.

But, I would say substantially offset.

Okay.

So, the 30 -- The 30, I'm sorry, was a gross number, or that was a net number?

Yes, the gross number.

Gross.

And, then we cut that in half - or more?

I think it's a good guess.

Okay.

And then, in the second half, would those figures per quarter still be more or less valid?

In the second half, at least the [indiscernible] should increase slightly.

But I would say that we probably would get to the 7.5 - Yeah.

In total I would say, a negative impact of about [$7m] in total.

Net?

Of the balance of the [custom] fees and all the other bases.

Okay.

All right, so it really isn't that substantial.

And, then so that excess cost or supply chain question -- I'm not sure I followed you, but you're saying in Europe there was some ramp-up or start-up launch related costs, but you're not otherwise experiencing shortages of components or key raw materials?

No.

Okay.

Thank you.

Thank you.

Our next question is from David Bleustein with UBS.

Please go ahead.

Just following-up on Mark's question.

Not only did you not have problems with materials, but you didn't have any problems or manufacturing inefficiencies ramping-up to the current volumes in the quarter?

If you are talking about ramp-up problems due to the lack of ability of components, it's absolutely minimal.

We have some ramp-up issues in the production of new products.

But, I would say, every manufacturer is facing this type of issue, every time we have a substantial change of the product lines.

But we have found in the quarter, again especially on the construction equipment side, a little bit in North America and somewhat also in Europe.

Okay.

And, then just the guidance -- The $150m improvement is off what base?

Off 30 net income before restructuring last year, positive.

Okay.

Terrific.

Thanks.

Thank you.

Our next question is from Barry Bannister with Legg Mason.

Please go ahead.

Hi guys.

Excellent quarter.

Thank you Barry.

Thank you.

I was going to ask Mario's question.

You know, when you go back to Italy, and you ask for cash, I can imagine the answer.

But when you go back to Italy and you offer cash - I just can't imagine them turning you down.

So -

But we should not go to Italy then?

Well, I just -- I think his proposal - Mario's makes a lot of sense.

And, I was going to ask that question in a different way.

But, could you tell me production versus retail in the quarter for AG and CE.

And, also perhaps the first quarter, so I have some idea of the trend?

Okay.

So production versus retail, in the second quarter, I'm talking AG in total on a worldwide basis.

We -- there is almost a balance.

I would say there is a small - build-up of produced retail by about 2% which is not a significant number.

And, we end up producing for retail in construction equipment by about 5%, in this quarter.

So, in fact we did -- I mean, compared to last year, it's an improvement, because last year you'll remember that we [cut] production more, especially in order to keep control of the working capital.

Right.

Do you remember the year ago comps and also first quarter, so I can kind of gauge where we're going?

The first quarter - I don't have that in front of me - but it's going to come.

What I can tell you is that for the full-year basis, basically [indiscernible] portion should be aligned.

And, as I recall, that would be a stronger improvement on the CE side by far.

But still nearly a double digit improvement year-over-year for AG, is that about right?

Just looking at the -- First quarter of last year - basically for AG we were flat.

And for construction equipment, last year we were - production versus retail - we were up 22% last year.

Okay.

No, I'll catch up with AG with Al.

I'll give him a holler later and get the particulars, thanks for the answer.

Okay.

Really Barry - one thing to consider, you know the question that you and Mario want to ask, I think is really a question that should be directed to Fiat management.

I would agree.

Thank you. [Operator Instructions] And, our next question is from Cathy Nolan with Solomon Asset Management.

Please go ahead.

Yes, good morning.

I just have an accounting question.

On the cash flow page, which is included in the press release, in operating activities there's a category called inter-segment activity.

And, I'm just wondering what kind of activities would be included in that line item?

We are talking about the relationship between the [equipment] operations and the Financial Services side of the business.

Which is basically the movement of cash or assets through the day-to-day operations between CNH Capital and the equipment operations.

You know, every time we originate receivables in North America, for instance, we sell them through Financial Services.

Wouldn't that be included in the financing activity section?

That's my point of confusion here.

It's just segment for operating and financing.

And, I'm just trying to get a sense for what the difference between the two are.

No, it's not really a finance or financing activity.

I would say clearly our efforts were purely operational transactions.

As far as working capital as opposed to a funding arrangement defined, in no way.

You know, Cathy, we have some long-term inter-company lending between equipment and operations and financial services.

And that shows up on the balance sheet.

We have specific line items for inter-segment notes receivable.

Right.

And, the inter-segment debt.

And the line item in the cash flow for financing activities inter-segment is the change in that.

Right.

Okay?

Whereas what's in operating activities is real operations, as if financial services, was a third party provider of financial services.

And, it's just the day-to-day business dealings in terms of whatever it is, one or two day's worth of business, in settling the normal daily transactions.

Okay.

Thank you.

Thank you.

Our next question is from Mike Kender(ph) with Citigroup.

Please go ahead with your question.

Yes, just wanted to follow-up on the pension question [disaster] - you mentioned that you'd contributed $155m in the first half to the pension fund.

So, what was the expense - pension expense in the first half?

I'm just trying to get a feel for cash versus income statement.

I would say -- I'm just checking, but I think the pension expense for the first half is about $40m.

Four, zero?

Four zero - $40m to $45m.

Okay.

And, I assume it's a similar order of magnitude for the second half?

Oh, yes.

Okay.

And, the other question was on steel - the number you threw out, the $30m hit in [ES] in the quarter, was that pre-tax or after tax?

Everything is pre-tax.

Okay.

Great.

Thank you.

Thank you.

Our last question is a follow-up question from Joanna Shatney.

Please go ahead.

Hi.

Your other net number was big in the first quarter.

It was also big in the second.

And, can you just break out what's in there to get us to the $60m?

Yes.

As you know, in this other line we typically have located there - the inactive [post] retirement, medical benefits costs.

And there is a substantial increase compared to last year, which is not due to the fact that the overall cost is increasing, but is due to the cyclical fact.

This is a sector that we have closed with other facilities, and out of our post retirement medical benefits have shifted from the category of active employees to inactive employees.

So, therefore, we have to charge a little bit more for that line.

And, of course, a little bit less to the margin.

But, this is one of the main reasons for the change.

Okay.

Some other reasons, which are purely technical like - currency hedges, you know it fluctuates from quarter-to-quarter, it depends upon the situation of the second quarter.

As at the end it's next year.

Okay.

And, then can you just update us on the working capital - I'm sorry, the cash flow outlook now we're expecting [net] income to be up $150m over last year.

So, you get that about $180m D&A, and CapEx are going to offset, I guess?

Yes.

And, then how much of the restructuring is actually cash this year?

We estimate cash restructuring to be around $[160m].

So, slightly less than the expense.

For capital spending, we expense about $90m at the end of the first half.

The second half is going to be heavier, as usual.

Probably in total for the year about [$237m].

And, so your free cash flow forecast for the year is still the $200m, which implies that working capital is pretty much the - working capital on net income are the sources of the cash?

Absolutely.

Okay.

Thanks.

Thank you.

We do have a follow-up question.

The follow-up question is from Barry Bannister.

Please go ahead.

Yeah.

I see accrued and other liabilities items, 43% of your total liabilities.

It went up $247m.

Could you give us the reason for the increase, as well as the break out of pension [OPAP] and restructuring reserves embedded in that number?

Okay. [indiscernible] a little bit sometimes.

So, to answer that question.

Clearly we have on this slide, if I move it.

In the [record] no, I mean, I would say, you know there are a lots of things in these lines you know, including pension liabilities, the [warranty] costs, the marketing with some incentives, and things like that.

Some things [indiscernible] and some of it's, for instance, it's increasing typically in the first half, because most of the selling incentives - a substantial part of the said incentives will be paid in the second half, so that incentives are $100m.

And, the rest is basically pensions and some of the restructuring charges, basically.

I was just trying to gauge if the pension went up in unfunded terms by an amount almost equal to your year-to-date funding efforts?

I think that might be related to OPAP not to pension.

You know, the OPAP expense that we have is substantially less than the cash expense that we have on that.

So, that would be generating an accrual there for expected future liability that we have to book, but isn't a cash expense.

Got it.

Thanks.

Thank you.

And our final question is a follow-up question from Andrew Oban.

Please go ahead.

Hi, in terms of the tax rate.

The effective tax rate in the quarter was fairly low.

And, I was just wondering what caused it to be so low?

And, what I should be modeling for the rest of the year?

Well, Andrew, for the quarter it varies - you know, based on the mix of where the profits or losses are earned, and what the full year forecast is chewing up the actual results - to the full-year forecast.

I think that the best way to look at is - in terms of the full-year, if you look at the profit before tax that's expected, and then you subtract from that the income - the items within that that are already on a net income basis, which is the earnings of financial services, and the earnings of the unconsolidated subsidiaries.

And, you look at that as the real taxable profit number.

The rate on that should be somewhere between 31% and 32%.

And, but am I correct in sort of stating that tax rate was a bit lower in the second quarter, than it normally would be?

Yeah.

There is a reason for that.

It is the fact that, you probably have noticed in the press release that we have closed one facility in Germany.

Okay.

And, in doing so, we have generated somewhat complicated - let's say, transaction effect that we have a permanent tax [indiscernible] due to the way this plant was set up in Germany, and the way we have rationalized our legal entity structure in Europe.

Thank you very much.

Thank you.

Mr. Trefts, there are no further questions at this time.

Please continue with any closing statements.

Thank you.

We'd like to thank all of you for listening us today, and participating with us on this call.

Again, I'd remind you of the presentation on Monday, and to check our website Monday morning for the final details.

And, if anyone has any further questions, please don't hesitate to give me a call.

Thank you.

Good bye.