CNH Industrial NV (CNHI) 2004 Q3 法說會逐字稿

Good day everyone and welcome to the CNH 2004 Third 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 third quarter 2004 results webcast conference call.

We are speaking to you today from our offices in Italy.

We are pleased to have with us today Michel Lecomte, our Chief Financial Officer;

Harold Boyanovsky, President of our Worldwide Constructions Equipment Business;

Roland Sunden President of our Worldwide Agricultural Equipment Business;

Rich Christman, President of our Agricultural Equipment Business for North America, Australia-New Zealand; and Giovanni Maggiora, our Treasurer.

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

Then we will be available to answer 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 looking -- 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 on 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.

Their contents are the property and CNH Global NV are not be rerecorded or rebroadcast without our expressed written permission.

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

Thank you Al and hello everyone.

I would like to start with what happened in this quarter.

Just in summary, our earnings per share before restructuring charges was 25 cents per share as compared to about 11 cents per share excluding restructuring charges in 2003 for the third quarter.

On slide 3, our worldwide markets were strong in the third quarter.

Worldwide agricultural tractor industry sales increased 17% with increases in all major market areas.

In North America, the overall tractor market was up 10% with higher horsepower tractors showing the greatest strength more than what we anticipated.

The Western Europe tractor industry was up 7%, better showing than what we expected led by Italy, Spain and France with the UK essentially flat and Germany down slightly.

The Latin American tractor industry was up 7% even though the tractor market in Brazil declined slightly.

Tractor industry sales in Rest of the World markets were up 42% driven by China where we have an important presence.

Turkey and Pakistan where our joint venture have significant market shares were also up.

Worldwide industry sales of combines were up 13% as the market in North America was up slightly more than 50% compared with third quarter last year and significantly stronger than we expected.

However, industry sales of combines were down in all other major markets, down 7% in Western Europe, 4% in Latin America, and 15% elsewhere in the world.

In total, CNH retail sales of agricultural equipments were essentially in line with the industry.

And in North America, our tractor retail sales outperformed the industry and increased in the over 40 horse power category with the greatest strength in the utility and four-wheel drive market segments.

Our combines sales in North America increased significantly, although less than the industry, as we have transferred production from the East Moline facility to Grand Island and started building our new [KYH excellent] floor models.

Hay and forage equipment industry sales in North America were essentially flat, while the CNH sales increased slightly.

In Western Europe and Latin America, our retail sales of our agriculture equipment were essentially flat year-over-year.

When we look at the year-to-date numbers in the right hand corner on slide 3, we see that the quarter was more or less in line with the first half of the year for tractor, with North American higher horse power tractors strengthening a little in the quarter and Latin American tractor sales weakening a little.

The picture for combines now seems to be looking a little better with the industry in North America strengthening and the industry in Western Europe down less than earlier in the year.

On slide four, we see a similar chart detailing the performance of the construction equipment industry, which were up significantly overall in the third quarter, about 14%, but less than the improvement seen in the first half of the year which was about 25%.

And this quarter industry sales of backhoes were up in every major markets led by North America, which was up 9% although slightly weaker than what we expected.

The skid steer loader markets also improved in every major markets, but less than anticipated.

Worldwide heavy equipment industry sales were up 11% with North America up 34 and Western Europe up 13%, both much better than what we had expected.

Overall, CNH worldwide retail sales of construction equipments were essentially in line with the industry in the quarter.

In loader backhoes, CNH sales increased slightly more than the industry, especially in North America, whiles our sales of skid steer loaders were flat compared with the third quarter of last year.

And our sales of the heavy construction equipment increased, especially in line with the industry with the exception of Western Europe.

For the first 9 months of the year, we see the construction equipment industry sales were up significantly in all major categories.

And CNH’s retail sales also were up nicely through September, although slightly less than the market, mainly due to the continued weakness of Western Europe.

On slide 5, we can see how equipment operations third quarter sales have trended over the past 5 years.

This year, our net sales for equipment in the quarter were $2.8 billion, up 18% compared with last year.

Currency accounted for about 4 percentage points of the increase.

Net sales for agricultural equipments increased by 9%, net of currency fluctuations, due mostly to the significant growth in North America, which was up about 25% driven by the industry while sales Europe were down due to their inventory destocking.

Construction equipment net sales increased by 25%, net of currency, also on the significant strengths of North America, which was up above 50% driven by industry and greater liability of CNH new products, and Western Europe sales were down driven by inventory reductions.

On slide 6, we see a similar 5-year trend of sales for the first 9 months of the year.

Our net sales of equipment for 2004 were $8.7 billion and this compares with $7.4 billion last year, an increase of 18%.

And currency accounted for about 6 percentage points of the increase.

AG net sales increased versus last year by 17%, mainly due to North America plus currency accounting for 6 percentage points of the increase.

Pricing contributed 2 percentage points of the increase.

Construction equipment sales increased by 20%, mainly due to North America as well with currency accounting for 5 percentage points of the increase and pricing contributed about 4 percentage points to the increase.

Slide 7 shows the calculation of our adjusted EBITDA for the quarter which increased by $51 million compared with last year.

In the quarter, industrial operating margin increased to $94 million compared with $72 million last year driven by the increase in gross margin from $342 million to $396 million.

And the major factors affecting the margin are pricing almost entirely offset by higher steel costs and improved volume and mix.

Synergies offset the inflation and all other cost increases in the quarter.

The absolute increase in SG&A was primarily due to currency and economics.

However, as a percentage of sales, SG&A declined to 8.5% of sales this quarter from 8.8% last year.

The increase in industrial operating margin accounted for about half of the increase in adjusted EBITDA.

And we see the contribution from financial services in the quarter which more than doubled from last year.

At the bottom of the slide, you can see the split of the industrial operating margin between AG and construction equipment.

Our AG margin dropped to $47 million or 2.5% of net sales in the quarter due mainly to North America -- to higher steel costs, primarily in North America and lower than anticipated pricing in Europe.

On the other hand, our construction equipment margin increased significantly to $47 million or [$5.7 million] of net sales mainly due to higher pricing and increased volume which more than offset higher steel prices.

Well, let's look like -- look at the same calculation for our September year-to-date results from the slide 8.

For the first 9 months of 2004, our gross margin has improved by $236 million to $1.4 billion or 15.6% of net sales on 15.2% last year.

And increase in the gross margin is the driver behind the movement -- the improvement in our industrial operating margin which rose from 3.8% of net sales last year to 5.4% this year.

And nearly all of the $236 million improvement in gross margin comes from the Americas, about half coming from better volume and mix and the rest from higher net pricing.

As in the quarter, the year-over-year absolute increase in SG&A is primarily driven by currency.

As a percentage of net sales our SG&A has dropped from 8.8% to 8%.

And as we see at both of the slide, both the AG and CE businesses have participated in the industrial operating margin improvements for the first 9 months.

The construction equipment industrial operating margin of 4.5% of net sales improved almost entirely due to North America.

Slide 9 shows the declining 12 months rolling average trend of our SG&A expenses, expressed as a percentage of net sales of equipments since 1999.

And this quarter SG&A have leveled off at just under 8% of net sales and as I said before, we do not expect any further decline.

As we will be increasing our level of customer and dealer support by providing additional technical support and dedicated sales and marketing resources, we implement the revenue announcement initiatives we outlined in our strategic outlook updates during the summer.

Okay, on slide 10, we see that we are profitable in 2004 on a full bottom line basis including restructuring costs, both for the quarter and for the first 9 months of the year or the first time ever since the merger.

And we are on track to achieve our target of improving our bottom line results before restructuring costs by about $150 million, in line with expectation.

Now, let's turn to the cash flow and the progress that we have made in reducing our equipment operations' net debt.

At the bottom of the slide 11, we see that the equipment operations' net debt declined by $562 million or 30% to $1.3 billion at the end of September from $1.9 billion at the end of last year.

And most of this reduction has occurred in the third quarter on cash generated by operating activities as defined in our financial statement.

The $705 million of cash generation from operating activities comes primarily from our new European receivable securitization program.

Under this program, equipment operations sold approximately $484 million of receivable.

In previous years receivables were held on equipment operations books and funded with short-term and committed credit lines.

We have replaced those lines with 364-day revolving facility reported by the credit quality of the receivables and sales.

And as in North America, this has allowed us to get investment grade or greater funding on a standalone basis.

Consistent with our strategy of moving responsibility for wholesale receivables to CNH capital, CNH capital Europe subscribed to the North representing the subordinated interest in the portfolio.

In addition to the securitization program, we have continued the policy initiated last year of having financial services dividend a portion of earnings to equipment operations.

During the third quarter financial services provided dividends in the North America and Australia of $96 million to equipment operations.

Last year, the dividend totaled approximately $22 million and occurred in the fourth quarter.

On slide 12, I'd like to preview what I see were plusses and minuses for the third quarter of 2004.

We were disappointed to see the continuing decline in the European combine industry again this quarter, but we are hopeful that we will see some recovery in the fourth quarter.

We were also disappointed by our lower than expected wholesale volumes in Western Europe.

But on the other hand, we have reduced European dealer inventories and these should benefit us in the medium-term.

Steel costs had higher impact than anticipated, probably about $25 million in the quarter, and we see this continuing through the reminder of the year.

On the other hand, we were pleased with the base price realization that we continue to achieve due to the good positioning of our new products, our strong performance in North America on both the AG and the construction equipment business, our strong performance in Latin America, again from both AG and CE and higher profitability from financial services.

Turning to our industry outlook of the full year of 2004 on slide 13, we expect the worldwide industry sales of agricultural equipments to close the year up by about 15% above 2003.

And we expect worldwide industry sales of over-40 horsepower tractors to be up about 17% for the full year.

Combines will be up about 11% for the year and by region we expect North America to be up about 20% for the tractors and about 32% for combines, likely helped by some tax-related buying at the year-end.

Industry sales of tractors in Western Europe should be up 5% for the full year while combines are expected to be down by as much as 10% although we expect the fourth quarter to be up.

Latin America is expected to be up 8% for tractors and 14% for combines with a continuation of Fannie Mae funding assured through the balance of the year.

We anticipate that the worldwide market for construction equipment for the full year will be up about 17% and again by region, we anticipate that the North American markets will be up by over 20% in 2004 with backhoes and heavy equipment expected to provide a stronger showing.

In Western Europe, heavy construction equipments should be up about 12% for year and the construction equipment market in Latin America should end the year up by about 30%, slightly better than previously anticipated.

Looking at the last couple of months of 2004, we see steel cost higher than what we had anticipated mostly because of the cost increases in Europe.

This is a concern to us, but we believe that we can offset these higher costs in the fourth quarter, we [other qualities] allowing us to maintain the full year forecast we gave you at mid-year.

On the other side of the equation, we see the continuation of the major plusses and -- from prior quarter.

First is the continued improved price realization including the price increases we recently implemented.

Second is our North American volume, both AG and CE, which we believe would continue to strengthen through the balance of the year.

Third is the continued solid performance we are getting from our financial services operation.

We still expect to book restructuring charges of up to $125 million pre-tax this year, including about $50 million in the first quarter, which includes additional charges for East Moline we could not do -- we could not book until after the plant closed and also some [DEPO] rationalization costs.

Depending on the final restructuring number, CNH expects to record a net income of about $90 million in 2004.

Through the first nine months of 2004, considering our on-going contribution to plan assets, assets returns less than our assumptions and current discounts rates environment, CNH would expect an increase in the minimum pension liability of about $75 million at year-end, which would result in a non-cash charge to shareholders' equity of about $50 million net of cash.

Finally word -- word on debt.

We still plan to reduce our equipment operations' net debt by approximately $200 million for the full year excluding, of course, the impact of the European receivables securitization actions.

And now Al, Giovanni, Roland, Rich, Harold and I would be happy to take your questions.

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

Thank you very much.

Thank you, sir.

Ladies and gentlemen, at this time, we will begin the question-and-answer session.

If you have a question, please press the “*” followed by the “1” on your pushbutton phone.

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One moment please for first question.

Our first question is from Andrew Obin with Merrily Lynch.

Please go ahead

Good morning.

My question is about the performance of the agriculture equipment segment in the third quarter and particular, could we expect that profitability in agriculture equipment will decline year-over-year in the fourth quarter like it did in the third quarter, is that a possibility?

Let me turn the question to Roland Sunden who is the AG equipment leader.

No, as the matter of fact I think it's going to be improved.

Thanks to -- particularly as mentioned before, the good performance on our North American operation and on the heavy equipment large tractor side.

Could you just walk in more detail what happened in the third quarter, I missed that on the conference call, but I guess I was just surprised that it did decline from third quarter of ’03 and this is based on US GAAP numbers?

[Inaudible] just talking about what happened in third quarter in 2004.

Basically, the driver of the change compared to last year is we have on one side North America improving, Latin America continuing to improve and we have a weakness in Europe which is driven by number one, weak industry, tractors is slightly up, but combines is down; number two, because in that environment the pricing situation is weaker than in the other markets and so because we purposely reduced our total inventory -- dealer inventory and therefore slowed down the wholesale activity.

I see and basically you're just saying that North America is going to be so strong in the fourth quarter that it will swamp the weakness in Europe and you are not going to have dealer inventory reduction?

Let me say a little bit different, we expect also Europe to improve as significant part of the inventory reduction did take place in the third quarter and typically the fourth quarter also is a stronger quarter also on [seasons] basis.

I see, and as a follow-up you made comment about outlook for 2005, I believe, about a month ago sort of indicating North America was going to be -- North American agriculture was going to up 5-10% and I think sort of expectation for Europe to be relatively flat, can you comments on those statements?

It's too early to make full outlook because as you know typically we do that when we release the fourth quarter numbers, which will be at the beginning of February next year.

Yeah.

But you --

Let me tell -- let me pass the question to Ronald as far as the AG business is concerned, but I would say that we probably today are may be a little bit more conservative in terms of industry assumptions of 2005.

Thank you very much.

Okay.

Somebody asked question on -- this is Roland again, on the AG side, I think you can say that maybe we are little less optimistic than a while ago, but it still will be up overall.

So, of course, as always a mixed picture between the different regions.

Thank you.

Our next question is from Mark Koznarek with Midwest Research.

Please go ahead.

Hi, good morning, afternoon wherever the folks happen to be.

Hi, Mark.

I am just wondering if you could review again for me the price realization year-to-date in two businesses and then whether there has been announced price increases by end market or by geography for 2005 so far?

Okay.

As you know, I mean in previous discussions we indicated that given the situation of steel prices, especially in North America, we would pass on some price increase through the shape of steel surcharges.

So we are not going to make the distinction between steel sucharge and all the other pricing actions that we have taken basically in the quarter.

What we say is that the pricing realization for the quarter compared to last year on average for both two combined businesses AG and CE on average about 2.5-2.7%, slightly more for construction equipment and slightly less for AG.

On the year-to-date basis, the picture about the same.

Okay.

And then any announced increases for 2005 so far?

May be I can ask Harold to speak for construction equipment.

Harold

Yes, for construction equipment in concert with us announcing our quartering programs for the first quarter of 2005, we have announced a 2% -- 2-3% increase.

Okay.

In North America we are talking about some 3% and in Europe and European region we have right now announced about 2% increase as of October and that will rolling, of course, into next year.

And clarification please, Harold, that CE increases just North America or that is worldwide?

No, that’s a global number.

It will vary slightly by region, but it’s a global number, 2-3.

Great, thanks very much.

Thank you.

Our next question is from Joanna Shatney with Goldman Sachs.

Please go ahead.

Good morning.

Hi.

You just talked about the impact from steel, I guess, as we go into 2005, is that expected to continue to be something that negatively impacts your margins or is this kind of as bad as it gets?

For the time being, the situation for steel is this one -- we got a first wave of steel increase and it started in North America basically at the end of the first quarter of this year.

Europe hasn't been impacted during that timeframe, started to be impacted in the later part of the, let's say, late second quarter, third quarter mostly.

We got some other pricing increase in steel in North America during the quarter two.

But when you compare year-over-year it's difficult to make a clear analysis of what is going to impact year-over-year because it really depends upon the profile of how these steel costs will -- increase will last in the following quarters.

Okay.

And probably we believe that there will be some other wave of cost increase around the -- I mean, basically during this quarter.

So when you compare year-over-year, the timing of this in 2004 and in 2005 is going to be a significant factor.

Okay.

And I just wanted to go back to an answer to someone else’s question, given where the USDA has come in for grain prices at this point, can you just zero down on the AG business, you said overall you thought the AG business might still be up, but can you give us a little bit color specifically on what you're actually thinking about the North America for 2005 and what impact that lower grain price might actually have on farmers and can you just add some anecdotal stuff about what you are actually hearing from farmers at this point, both around the lower grain prices and accelerated deprecation changes?

This is Roland here again, may be I can start and, Rich, you take over on North America specific, but if you talk about worldwide, as you know, the commodity prices have come down, especially on the soybean side and that have been impacted particularly in our Latin America region when it comes to farmer earnings.

So that's why we are thinking that that portion of market will be more -- not as booming as this year, more and more normal kind of situation.

In Europe, I think the commodity prices have been very good this year, but it’s going to stabilizing I think in the low level.

Rich, could you say something about North America.

Sure.

Good morning Joanna.

The -- obviously, we all know the commodity prices are down sharply from where they were earlier this year, but when we look at the combination of where the average prices will turn out for the year and the record yield, the net farm income this year is going to be at a record, you know, it's going to be up $60 billion up over last year.

And if we look at where the real strong increases are in the industries in North America, it's really -- the very large tractors, okay, you know, once you get tractors over 160 horse power, the big combines in that.

And I think that's indicative of the larger farmers who are profitable and quite frankly there are some of our better marketers out there of their commodities have done some pre-selling and they are the ones in the marketplace and they are ones taking advantage of, you know, this final year of the depreciation incentive.

And we expect that those farmers will remain strong and pretty active in the marketplace buying equipment in the fourth quarter of this year.

What about into 2005 because it just sounds like there might be some pull forward from the tax, is that -- ?

Yeah, I think Joanna there will be some pull forward, quite frankly it's a little bit of a guess right now how much that will happen.

I will be a lot smarter in January when we see how much actually does takes place.

But it sounds like you're still pretty optimistic that flat is kind of worst case scenario or do you think '05 may actually have a negative in front of it?

I think there is a possibility that that markets in some of the segments could be down a little bit, but coming off a very, very strong increase for this year.

So if you look at in total '05 versus where we've been in the last couples of years, it will still be a good year.

Okay.

Thanks so much.

Thank you.

Our next question is from Barry Bannister with Legg Mason.

Please go ahead.

Thanks.

Just wanted to ask you when you talked about the European markets, it was pretty split in an uneven way, Italy, Spain, France up, but Germany, U.K. flat, why would you say that Germany and the U.K. lag some of the continental cousins?

It's a tough question.

I believe that the -- and I would leave Roland to answer that, but then -- Roland and myself, may be I have some better here -- I believe that part of the 2004 purchases by farmers has been driven by what happened in the last -- in the previous season and some of the countries were hurt more than others in terms of the drought.

So this may explain probably part the difference between the countries.

I just would have thought that in light of an easy weather comparison it might have been better and not relatively worse.

Let me ask you just one other question when you look at your pricing environment, are you seeing any one particularly aggressive that's just holding down the umbrella for the industry such as may be Deere or AGCO?

I think we have seen -- this is Roland again, I think in the Italian market and in Spain as well some of the players.

I don’t want to mention any specific, but have been quite tough on their pricing.

We haven’t -- though we have kept ours and when I say tough on their pricing, I mean offer big discounts and so forth.

Just in those two countries?

There are probably some others, but this is the main things.

And in South America?

In South America, we are certainly ourselves the price leader.

There are, as you know, some movements on the competition side that could mean more increased price pressure, I don’t know.

Okay, thanks.

Thank you.

Our next question is from Mike Kender with Citigroup.

Please go ahead.

Yes, the increase in the pension liability, I was wondering if you had a rough ballpark, how much that would increase your contributions in ’05 versus which have been in '04?

On pension -- I mean -- in terms of -- let's speak something about pension, in terms of pension we do not expect an increase of pension contribution to the U.S. and U.K. pension under next year; in fact, we expect a decrease, a significant decrease.

Pension expense which is what helps to P&L is going to be about flat compared to 2004 but as far as 2005 is concerned for contributions, we made in 2004 $150 million plus of pension contribution, cash, and this is going to be probably a less down to 90 -- $80-90 million next year.

Okay.

And on steel costs, you said about 25 million in terms of the third quarter hit, do you have an estimate for fourth quarter?

Difficult to estimate, but I would say it would be probably about the same.

Okay.

Thank you.

Thank you.

Our next question is from David Raso with Smith Barney.

Please go ahead.

Yes, can you help explain the change in the accounting principles which will affect how you are going to account for the convert?

I am reading you correctly, we now work with 233 million shares going forward?

Yes.

David, you know that the changing accounting things is -- there are two aspects, one is just diluted earnings where you just have to divide the net income by 234 million shares more or less instead of the 134.

The other thing is that they are some accounting changes coming also into the definition of how you calculate the basic earnings per share, which will be impacted by the dividend -- the participating dividend paid to the preferred and here things are a little bit clear for us of what’s going to do the impact.

Just to understand the way it set up previously, and as you have detail in the release, the convert will not be included in share count unless the stock was above 24 hours for 30 straight days by the end of ’06, then it would get triggered more quickly at $21 or beyond that.

What changed and excuse me if I [should notice], I don’t know what changed in the last couple of months that now you have to include it in the share account going forward?

And obviously wasn't triggered by the stock price, so if you can help me understand what change?

I would like to ask Al answer the question because I am not sure I understand exactly the question.

Well, just way I am reading it, I always get the impression that convert -- the extra 100 million shares will not be in the diluted share count for your EPS calculation unless it was triggered by the stock price and given the stock price is not triggered --

The new ITF rule, which is going to be impacting us in the fourth quarter because we're closing our fiscal year after December 15, fairly says that when we have participating instruments, the number of share -- the underlying number of shares has to be included in the calculation.

Hi, this is Giovanni, just to clearly further, there are two impacts -- one on the diluted calculation, basically the new regulation would impose that if the only trigger preventing conversation is a price trigger, that doesn’t count.

So you have to account for the diluted shares on a fully diluted basis irrespective of what the price is today compared to the trigger tomorrow.

Right?

So that’s number one.

Number two, which is a separate matter, is the fact that the dividends in our specific security that we have out there are participating, they are linked with the actual dividend payout on the count and that might make and we have to fully determine exactly what's going to happen in practical terms, but that might make even the basic equal to the diluted as again even the preferred stock participates into the distribution of overall earnings in tandem with the common stock.

So these are the two separate items that will affect the EPS calculation, both at the diluted level and basic level.

Is there any change to the balance sheet, how the insurance is going to be carried with the new accounting rule?

No, not that I am aware of.

Okay, so essentially it's just an accounting change that's making you have to show regardless of a trigger with the stock price.

Okay thank you very much.

Thank you, our next question is from Massimo Vecchio with Intermonte.

Please go ahead.

Good morning to everybody.

Two questions on the debt, first one your target of $200 million reduction, is it still based on full year 2003 basis?

That’s the first one.

Second one is on the third quarter generation of cash excluding some receivables looks like cash generation in the quarter has been pretty low considering the volume were going up and also talking about your de-stocking action in Europe, are you agreeing with the statement [inaudible] with the current cash generation and what's your outlook for the full year or for the fourth quarter basically?

Thank you.

I will answer with third quarter first and then will leave the floor to Giovanni Maggiora.

First of all, the third quarter is typically a relatively low quarter from, let's say, business point of view as Europe is basically the quarter where we have a lot of shutdowns.

In this particular quarter, we in particular reduced the inventory which of course triggered the reduction in the payables, which therefore didn't generate cash, but you're right -- I mean, third quarter we didn't generate lot of cash.

I agree.

Yeah.

Once again to summarize on a full year basis, December-on-December, the expectation continues to be a reduction of approximately $200 million, if you exclude roughly $450-500 million which divides from the European securitization which is on top of the reduction, so you go from 1.9 to anywhere between 1.3-1.2 billion in terms of net debt.

Thank you very much.

Thank you.

Our next question is from Tom Klamka with Credit Suisse First Boston.

Please go ahead.

Good morning.

Good morning.

Question on your EBITDA calculation on page 7 on slide, the net income in the finance company going from 25 to 57 which is included in EBITDA; that increase, the 25 to 57, is that primarily from the impact of the AR sale or what else is happening in that number?

You are talking about the performance of financial services basically, the improvement in the financial services profit performance is driven in third quarter by many factors -- one of them is the fact that we have done a significant ABS transaction in the quarter, about $1.5 billion, in North America.

It has been a very successful one, very good quality that very well received.

And so that’s -- and last year we didn’t have such a good transaction in that particular quarter.

Now, if you look at the clear picture year-to-date, let's say, the overall performance CNH capital financial services is driven -- number one by the fact that the volume is slightly increasing because our penetration being more or less constant in our captive financing.

As sales grow in North America our business is growing.

Number two, is growing with a very good quality paper, and we have continuously been able to reduce the delinquency rate on our paper, which of course triggers -- it improve margins and improves the quality of the paper as regarded by the rating agencies and investors.

And third, as we have now almost completed the reduction of these infamous discontinued portfolio that we had in the past, this is of course improving the bottom line.

Right.

So this itself is better, but as far as the impact on the third quarter, it looks like the primary driver of the increase in net income there is from the $1.5 billion transaction and is that -- which could be treated as almost sort of an one time gain, I guess, including your numbers.

When you look at the EBITDA --

Which transaction is a the one-time gain, but on the other hand every year we do -- in total the same amount of transaction every year.

And this year we probably are going to do a total number of ABS, I don’t know on top of my head, but probably into 2.5 billion area, which is about the same number as what we did in 2003.

True for the quarter, less true for the year-over-year where we have basic fundamental improvements.

When you look at the gains from these transactions from ’03 to ’04 and you could talk full year, that’s easier, do you expect the gains to be as -- to be much more significant in ’04 or will the gains be about the same?

Let's put it this way -- despite all the margins on the gains are improving and they are improving not because interest rates are lower but because basic -- because when interest rates are lower, we are also asking less from our customers.

So therefore margins that we make on our customers are more or less the same.

But what's improving significantly is the efficiency of this transaction and the credit quality of the portfolio that we put in those transactions which reduces the costs.

Okay and then go back quickly to the operating performance at the end of the day on the agricultural side, if you are looking at that significant decline, is it really just European competitive pricing and not being able to pass through steel because outside of combines it might have been slower growth, but looks like you are still growing on the AG side in Europe?

I believe that I may be I didn’t express myself that way, but in the third quarter for Europe, we had a combination of things.

One is the fact that pricing was weaker than what we expected, the second thing is that the volume was impacted by the fact that we decided not to follow the industry and to reduce the Deere inventory, and clearly steel prices started to pop up in Europe during basically that particular quarter.

But even with an inventory reduction, your sales were still up year-over-year, now may be you didn't hit your budgets, but in almost all categories, I guess, beside combines your sales were still up, correct?

On sales, keep in mind that the number that we gave you are the numbers in dollars and we have also some significant currency impact year-over-year.

So when I speak about Europe, my reference in the description I made was based net of currency -- translation is impacting also the possibly the P&L.

For instance, I believe that on one of the slide where you have the sales excluding currency, you would have noticed that in the third quarter currency have already impacted the quarter sales by more than $100 million, basically two-third, one-third or little bit more than two-third for AG and the rest for construction equipments.

Okay.

And pricing in European AG, was it actually down year-over-year or just wasn't up as you expected?

Wasn't up as we expected.

We introduced -- we had a big price increase, I believe, in July, it takes a while before it rolls in and at the same time, the steel prices were increasing much more rapidly than we predicted it, so --

Right.

Okay.

Thank you.

Thank you.

Our next question is from Manish Sowmaiya with J.P. Morgan.

Please go ahead.

Michel, historically you have given a break down of your production versus retail sales in AG and construction.

Would you have that number for the third quarter and year-to-date?

Let's start with third quarter first in terms of production versus retail and here I am talking about worldwide numbers.

In terms of AG, overall the production versus retail was minus 14% in the third quarter, which is more than prior year, mostly driven by Europe and construction equipment was up 7%.

So -- and last year was in fact negative.

So, there's been a significant swing in terms of relationship between production and retail in the third quarter.

In the year-to-date number, the AG is so far up 5% production versus retail and construction equipment is up about 6%.

Okay, great.

And as a follow-up, did you give guidance for potential restructuring charges that you may have in 2005?

We didn't give a specific guidance today.

But if I remember on top of my head, what we already said in late July when we presented the plan for CNH for the full fiscal year, I think we said that we'd have much less restructuring charges in 2005.

And I would say it would be fair estimate to say that from 125 this year going down to 75, that is -- in terms of restructuring, I think, the major restructuring has basically been achieved.

The closure of East Marine is really the last big, big event.

What's left in terms of restructuring, but it's a sum of small things, is basically the continuation of restructuring program for the [DEPO] organizations or the spare parts business, and a few other things here and there.

And of the $125 million in restructuring this year, how much of that is cash?

I don't have that on top of my head.

I would say it's probably around $100 million, probably.

Okay, great.

Thank you.

Thank you.

Our next question is from Randy Gaulke with Muzinich, please go ahead.

Yes, hi, my cash flow question has been answered, but I got a little bit more of a question on AG equipment business, on a constant foreign exchange basis, revenues were up 9.3% in the quarter, I believe, and on a taking a look at what you had written down in terms of the industry percentage change and you said that sales were essentially in line with the industry overall, tractors being up 17% worldwide and combines being up 13% worldwide and the price increases that have been give or take 2-3%, I guess I am having hard time understanding why on a constant currency basis that sales growth is only 9.3%?

You are talking about the quarter?

For the quarter, right, for agricultural.

If you strip out a price of 2%, that gets you to 7.3 or 7% and yet you are showing that the industry overall had tractor growth of 17% and combines of 13%?

Yeah.

But I believe that -- first of all, in our business, the sales numbers -- our sales numbers are driven by what we sell and what we ship to our dealer.

Okay.

The industry numbers are driven by what the dealers are selling to our final customers.

So that difference --

And you know perfectly that in many regions of the world, especially North America, there is a significant time lag between what we ship to the dealer and what the dealers ship to their customers.

Okay.

And with the weakness in Western Europe that's what caused the difference this quarter?

Exactly.

Okay.

I just wanted to be sure I understood the relationship.

Thank you.

Thank you.

And our last question comes from Serge Escude with UBM.

Please go ahead.

Yes.

Good afternoon.

My question is on the industrial operating margin of $94 million and could you please be more specific on the drivers of the improvement?

You talk about the price increase, it was an offset to the raw materials, but there was an increase in volume and mix of products, could you please quantify how that interact with all the elements and could you please be also specify on the FX affect in the quarter with respect to last year?

And if it's possible to give that also the drivers of the industrial operating margins for the whole year -- 9 months of 94?

Thank you.

In terms of the $94 million of improvement of operating margin-- of industrial operating margin, of course, the main driver of this is gross margin, which is about $55 million and the rest, of course, is the R&D expenses and the SG&A expenses.

Serge Escude You talk about prices increasing in terms of products, what's the weight of the prices in your $22 million increase year-on-year?

Okay, in terms of pricing, the impact on the gross margin is about 2.7% on the sales, which is about $70 million.

This is offset basically by the steel price, which is probably close to $60 million and the balance is basically volume and mix, mostly in the construction equipment, as I mentioned earlier.

How much was volume increase?

I am sorry?

Serge Escude How much was the volume increase?

The difference because the margin is at $50 million -- $54 million, let's put the price of 70, steel cost and other things at minus 60, so it's 10, so the balance is volume basically.

Okay volume and mix?

Yes.

Serge Escude And the effect of the FX, the euro versus dollar, in particular?

Yes the currency impact at the level of the industrial operating margin is minimal.

So what's also happening -- depends what you mean by FX because it's a very complicated matter.

If you look at the SG&A --

[multiple speakers] U.S and you are selling in the different currency.

Yes, the SG&A, for instance, went up from $208 million in the last year to $237 million this year.

So the difference is $29 million, to be very precise, of which currency is probably two-third of the values.

Okay.

$20 million and in the R&D area, you see also the costs and they increased from 62 to 65 in the quarter, which is $3 million increase, part of it is also currency -- almost all.

So basically we kept our R&D expenses constant in volumes.

And if you look at the other, so that’s basically it in terms of industrial operating margin.

Serge Escude Okay.

You have no global numbers for the FX effect on the --

At the level of operating margin, I don’t have it on top of my head, but I would -- again, it's probably negative given the fact that on the SG&A we have a translation impact.

Serge Escude Okay, so, it's negative.

Okay thank you very much.

Okay, I am sorry, other follow-up.

On the developments in Asia, do you have any plans to increase your presence there in Asia in construction equipment, especially?

Yes, this is Harold.

Clearly, we have our sights on growth in Asia and particularly China.

The market is served and the lead partner is Kabelco (phonetic).

We own 20% of the Japanese company, and clearly as we look to further expand and opportunities for further investment with our partner who's already in Asia and China is something we're considering.

Okay.

When do you think it's going to be the time to invest or to make that expansion, next year already?

Yeah.

Another portion next year, but not this year, if that helps you.

Serge Escude Okay.

Thank you.

Thank you.

Gentlemen, please continue with any closing statements.

I would like to thank you all for joining with us today for this call and if you have any further questions, please give me a call.

We will get back to you as soon as we can, we are in Italy, so it maybe a little bit difficult, but we will do everything we can do to get back to you as quickly as possible.

Thank you.