CNH Industrial NV (CNHI) 2004 Q4 法說會逐字稿

Good day, everyone, and welcome to the CNH 2004 year-end results conference call.

This call is being recorded.

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'd like to turn the conference over to Mr. Trefts.

Sir, you may begin.

Thank you.

Welcome, everyone, to CNH's fourth quarter and full year 2004 results webcast conference call.

We are pleased to have with us today Paolo Monferino, our Chief Executive Officer;

Michel Lecomte, our Chief Financial Officer;

Harold Boyanovsky, President of our Construction Equipment business, and our new CEO elect;

Roland Sunden, President of our Agricultural Equipment business;

Rich Christman, formerly head of our North American and New Zealand Ag operations and now Chief of Commercial Governance and Supply Chain for our Ag business; and Giovanni Maggiora, our Treasurer.

Before we move to management's comments, let me remind you 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 web cast are being recorded.

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

Now, before Michel comments on our results, let me turn the microphone over to Paolo.

Good morning, everyone.

I am sure you have all seen yesterday's announcement about the executive transition involving CNH and Iveco.

So, I will be leaving CNH at the end of this month and take the responsibility of the truck company of the Fiat Group.

And I wanted to take this opportunity to say thank you before I move on to a new challenge at the end of this month.

As you know, I have spent most of my career in the agricultural and construction equipment business and the opportunity to help build CNH into a leading and truly global company has been personally very, very fulfilling.

I remember in the beginning of the '90s, we started our journey to become CNH, with a company at the time that was a billion-dollar company.

And today, as you will see in a moment, we'll -- we had roughly $12b sales level.

So it was a long journey, but something has really been accomplished.

Most of all I will miss the people at CNH and their dedication and commitment.

They can really be proud of all they have accomplished in bringing this company together and in restoring profitability during difficult times.

I'm particularly glad that I can leave the company in the capable hands of Harold Boyanovsky and the rest of the management team who you’ll be hearing from in just a few minutes.

You probably know that Harold started to work for this company at International Harvester in the '60s, so it's a long experience.

This, as you can imagine, is a bitter-sweet moment for me, but I will continue to stay in touch with my friends at CNH as a member of the Board.

So I wanted again to thank you all and I hope that our paths will cross again.

And now Michel will begin the review of our fourth quarter and full year results.

Thank you Paolo, and hello everyone.

So just let me express again the CNH gratitude for the support that you have provided over the last few years.

So now let's focus on the slide 3 and review what happened in this quarter.

In the press release this quarter we give you most of the industry volume changes for both the quarter and the full year.

What I would like to do now is point out some of the significant changes in the fourth quarter compared with the first 9 months.

Worldwide tractor industry sales only increased 10% in the quarter after being up 20% for the first 9 months.

And what we see is a slowing down of the growth rate in all the markets, except for North America, over-40 horsepower tractors.

Within the North American over-40 horsepower tractor group each of the segments were stronger in the fourth quarter than the September year-to-date running rates.

In Western Europe the fourth quarter tractor industry was flat with 2003 levels, after being up 6% through September, and in particular the market in Italy which was up 19% through September was flat in the fourth quarter compared with last year.

The markets in France, Spain and the U.K. were down in the fourth quarter after being up through September.

For combines, the market in total in the fourth quarter went up about the same rate as September year-to-date.

But there were some large trend changes by region.

And Western Europe, which was down through September, was up 17% in the quarter.

Latin America, on the contrary, which was up through -- 30% through September, was down 10%.

And these fourth quarter trend changes are, we believe, significant for the market outlook for 2005.

Coming to construction equipment, on slide 4.

We do not see the same kind of market trend changes as we did in the AG Equipment.

Backhoe orders were up 20% in the quarter, essentially the same as the year-to-date September trend.

The Skid Steer Loader market in the fourth quarter was slightly stronger than the first 9 months, especially in Western Europe.

And industry sales of heavy construction equipment were up, but less in the quarter than the 20% increase seen in the first 9 months of the year.

On slide 5 we can see how our Equipment Operations fourth quarter net sales have evolved over the past 5 years.

This year our net sales of equipment in the quarter were $2.8b, up 6% compared with last year.

Currency accounted for about 5 percentage points of the overall increase.

Looking separately, first at the change in net sales for agricultural equipment, we see this line of 5% of constant currency as the declining sales in the Americas offset price increases in Europe and the rest of the world markets.

By a parallel factor, pricing was a positive $43m.

Currency was a favorable $87m.

These two factors were more than offset by volume and mix about $145m.

In the fourth quarter of 2003 we increased dealer and company stocks, while in 2004 we decreased stock.

And the year-over-year impact of that change, particularly for over 40 horsepower tractors and combines in North America, more than explains the volume and mix in the quarter.

In total, we under-produced tractor retail sales in the quarter by 20% and under-produced combine retails by 26%.

Turning to Construction Equipment, net sales increased by 16% at constant currency, driven by the strong industry volumes we saw on the last slide.

Like [indiscernible] factors favorable volume and mix was positive $82m.

Pricing was positive $47m and currency was favorable by about $44m.

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

Our net sales of equipment for 2004 were $11.5b and this compares with $10.1b last year, an increase of 15%.

Currency accounted for about 6 percentage points of the increase.

Turning first to AG sales, we see an increase versus last year of 20%, of which about 50% was due to currency, and by a [comparable] factor the gross, excluding currency, was fairly evenly split between positive pricing, favorable volume and mix, and sales of new products.

The largest increase was in North America.

Sales also increased in Latin America and in rest of the world markets, but declined in Western Europe.

At Construction Equipment, sales grew by 20%, with sales in the Americas increasing by over 40%.

Positive volume and mix and sales of new products accounted for about half of the 20% sales increase in the quarter with the balance coming equally from positive currency and pricing.

Slide 7.

Moving to the P&L.

We can see that gross margin has increased from $354m last year to $402m this year.

As a percentage of sales gross margin increased by 1 percentage point to 14.2%.

Principal causes of the percentage increase were positive net price recovery and currency.

Increased SG&A and R&D costs offset the improvement in gross margins so that [indiscernible] operating margin for the quarter was essentially flat compared with last year, with no net impact from currency.

The principal causes of the increase in SG&A and R&D were currency and economics about half of the time, and variable compensation costs.

By business, we see that the AG margin declined as volume and mix was negative, due to the [stocking] and pricing did not match deterioration in economics.

On the contrary, the Construction Equipment [indiscernible] operating margin improved, as volume and mix was positive and pricing mort than offset material economics.

Talking about overall material costs, we have seen 3 waves of [3] price increases last year.

The first was around April, the second in late summer and recently in November and December, and cost pressure was much higher in North America than it was in Europe.

The pricing actions we've implemented are over time offsetting the April and July [cost] increase, but November/December increases is still [up].

So, going back to the income statement, right below the industrial operating margin, we see the income contribution from unconsolidated subsidiaries.

This is primarily the net income of our financial service operations on an equity basis which have confirmed its September year-to-date improvement by increasing its fourth quarter results by almost one-third from last year.

The deduction for interest compensation from equipment operations to financial services increase reflecting higher charges for dealer floor plan financing.

Finally, the good performance of our Kobelco North America joint venture has led to an increase in our minority interest.

Totaling up all of these factors, we see that our adjusted EBITDA for the quarter was $165m, or 5.8% of net sales.

So let's look at the full-year results on slide 8.

For the full year 2004 our gross margin has improved by $284m to $1.8b or 15.3% of net sales from 14.7% last year.

The increase in gross margin is the driver behind the improvement in our industry operating margins which falls from 3.8% of net sales last year to 4.9% this year.

The impact for positive pricing action, better volume and mix, mainly on the construction equipment side of the business, are partially offset by higher steel costs and other unfavorable economics.

The year-over-year absolute increase in SG&A was primarily driven by currency and inflation and as a percentage of net sales SG&A has dropped from 8.3% in 2003 to 8% in 2004.

These factors lead to our industry operating margin of $567m for the full year, up from $381m in 2003.

At the bottom of the slide we see that our Agricultural Equipment business margin was essentially flat for the year, as the decline we saw in the first quarter offset improvements we have seen through September.

On the other hand, our construction equipment business has improved significantly.

North American CE has improved the most and its margin is now roughly double the overall level for Construction Equipment.

But I want to say that the business also improved in Latin America and in spite of operating at lower volume levels the business improved in Western Europe as well.

Favorable pricing, improved volume and mix and the profit improvements resulting from our rationalization actions were the major contributors to the improved margin of the construction business, partially offset by higher steel costs.

Overall, the incremental margins generated by construction equipment are quite satisfactory and in line with our expectations.

Going back to the income statement, we next see the line called Other Net, which increased by about $40m.

You will recall that we have closed the East Moline combined assembly facility and most of the former employees of that plant have now retired so we are now seeing the pension and medical costs on this line.

As in the fourth quarter net income in non-consolidated subs increased significantly.

This is due in large part to the significant increase in CNH Capital's results reflecting better spreads on the company's asset backed securitization transactions; improved margins and improvements in [indiscernible] quality which have led to declines in credit due and delinquency rates and lower loan loss provisions.

In addition to improvement at financial services we have learned that the company's joint ventures in Turkey and Pakistan also improved.

In total, we can see that our adjusted EBITDA has increased from $501m last year, or 5% of net sales, to $687m, or 6% of net sales, maintaining the level of improvements that we have achieved through the first 9 months of the year.

Interest coverage was 2.9 times for the full year 2004, compared to 2.1 times for 2003.

On slide 9, we see that we were profitable in 2004, on a full bottom line basis, including restructuring costs, both for the quarter and for the full year, for the first time since the merger.

We exceeded our expectations, improving the bottom line results before restructuring costs by $163m.

Let me also conclude by saying that the 2004 performance was achieved in spite of a very different market environment from the one I was describing to you one year ago.

What has to be noted in particular is the improvement of our Construction Equipment business as CNH has been able to follow the return of the industry to a more satisfactory level.

Financial services are also ahead of our expectations.

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

At the bottom of slide 10 we see that equipment operations net debt declined by $617m to $1.3b at the end of December from $1.1b at the end of 2003.

In fact, cash generated in the year by operating activities were $879m.

Clearly more than covering our $400m in CapEx and other investments.

And the remaining cash generation meant that our dividend payments went to reduce net debt.

As we discussed in the first quarter, some of the cash flow from operations is the result of the wholesale receivable securitization structure we implemented in Europe last year which resulted in deconsolidation of $466m in assets as measured at year end.

This, as you may recall from last quarter, is only one step among several structural moves that we are taking towards the expansion of our North American business model to other regions, specifically Europe and Latin America.

About the costs of 2005, you should expect CNH Capital to take responsibility for the management of wholesale receivables, originated by equipment operations in those regions as we do in North America.

To Capital, this represents an important business growth opportunity as the relation with dealers can be leveraged with additional products [indiscernible] traditional floor plan instruments.

In addition, securitization structures as those we have in place in North America, Australia and now Europe, are more efficient and a favorable source of liquidity than the on book funding instruments we have had utilized historically in Europe and Latin America.

Cash flow from operations also benefited in the fourth quarter by the early settlement for cash of $180m long-term receivable from [indiscernible] [Group] related to the pre-acquisition pension liabilities of our ONK subsidiary in Germany.

Inventory declined by approximately $85m at constant currency during the year, even as our sales volumes were higher compared to a year ago.

In terms of days of sales, company's inventories were down to 80 days compared to 90 at the end of 2003.

And finally, cash flow from operations benefited from the distribution of part of CNH Capital’s earnings to equipment operations in North America and Australia for a total of $109m in the year, or about $87m more than last year.

On slide 11 I would like to review what I feel were the strong points and the weak points for our businesses in 2004.

We were disappointed by the low level of industry orders in Western Europe, particularly for combines which were down 10% for the year.

In addition, as I said before, the Latin American tractor market slowed its growth rate in the first quarter -- fourth quarter and the combined market decline, both of which we feel are significant indicators of what we will see in 2005.

I have already discussed the impact of a higher steel costs and will talk more about it in our outlook for 2005.

Finally, our interest expense will remain at the same level as last year, despite a reduction in net debt, as we issued additional long-term notes as part of our refinancing strategy.

On the other hand we were pleased with the overall industry strength of both the AG and the CE markets during most of the year.

The positive base pricing realization that we continue to achieve outside of Western Europe and excluding steel cost recovery.

The strong performance of our Construction Equipment business, and particularly the performance in North America, the strong performance of both our AG and CE businesses in Latin America and the [indiscernible] quality and corresponding higher profitability from our financial services operations in all major regions.

Turning to our industry outlook for 2005 on slide 12, we expect worldwide industry sales of Agricultural Equipment to be at about the same level as in 2004.

We expect worldwide industry sales of tractors to be flat for the full year and combines to be down 10% to 15% for the year 2005, compared to an outstanding 2004, especially in the Americas.

By region, we expect North America to be up about 5% for tractors while combines could be down between 5% to 10%.

Industry sales of tractors and combines in Western Europe should be flat to down slightly for the full year.

Latin America is expected to be down about 10% for tractors and about 30% for combines, but starting with a base in 2004 which was clearly the peak.

As you note from the press release, we anticipate that the worldwide market for light construction equipment on slide 13 will be up possibly at 5% in 2005 compared with 2004 for the full year, with particular strength in North America.

However, the comparison with the prior year will be even more favorable during the first quarter of 2005.

Heavy construction equipment should be flat to down 5% worldwide for the full year.

Driven in particular by the unfavorable trend in China.

North America, on the other hand, should see continued growth at around 5% for the full year with a more favorable comparison base in the first quarter.

On slide 14.

Steel costs will impact us negatively early in the year as a consequence of the more [indiscernible] cost increases that we expect to recover [indiscernible].

We also expect some moderation in cost levels in the second half.

As a consequence, we may see gross margins under pressure in the first quarter and then rebounding in the second half.

The consolidation of the New Holland family of construction equipment brands in Europe may be an element of uncertainty in the near term but it is clearly an opportunity in the longer term.

Pension and medical costs for active employees and retirees are expected to remain at 2004 levels and we are continuing to work on containing medical costs.

And we anticipate contributing about $90m to our U.S. pension plan this year.

We are still unclear about the possible consequences of changes to the common and [indiscernible] in Western Europe since the entry of the new member countries.

And finally, we anticipate our financial services operations performance will continue to improve in 2005, reflecting continuing improvements in [indiscernible] quality and in production of new products to attract a larger share of our customer business.

To sum up, we expect to improve our full year net income before restructuring costs by about 15% compared to 2004.

However, for the first quarter net income with restructuring costs should be at approximately the same level as last year due to the recent steel cost increases and the planned smaller seasonal inventory build up, mainly for combines, in North America.

Now, we will be happy to take your questions.

But 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.

Thank you.

[OPERATOR INSTRUCTIONS].

We'll go first to Andrew Obin of Merrill Lynch.

Good morning.

I just have a question about your outlook, particularly on combines in North America and outlook for agriculture in South America as a whole.

Is this more of an empirical forecast or are you definitely seeing some major slowdown as you look at your order books in these regions?

Can I give out the questions to Rich Christman?

Okay, good morning, Andrew.

Good morning.

If we look at the combine market for North America, we saw a huge acceleration in 2004; it was up to about 8,200 units.

Most of this acceleration happened late in the fall, and quite frankly a lot of those units were actually pre-sold early in 2004 and then delivered late in the year.

And a lot of that growth came in the very large combines.

So as we look ahead to 2005, for what we see today we just don't see it staying at that - what I'll call super-heated rate.

There'll be -- we anticipate some back-off and -- in the 5% to 10% range.

Now, given that, the level will still be substantially higher than it was a couple of years ago, so it still should be a pretty good market, just a little less than '04.

But are you seeing it -- and this goes also to Latin America -- I understand in theory why you could think that both markets could slow down, but are you seeing it in your order books for both regions?

Well, let me talk North America.

Our order book is a little bit less but it's very different this year because, in '04 with East Moline still running, we had a tremendous order book for the East Moline combines.

This year, with East Moline being closed and we're still just doing the ramp-up of the Grand Island, we have not that same level of the pre-sell.

So there's really some of that mix issue.

So it's -- part of it is just your Case dealers know that it will take time for Grand Island to ramp positive production of the Case combine sale, right?

Correct.

And what about South America?

I mean, I get --

Yes.

For you and John Deere are very bearish and I would say Apco is a lot more bullish than you guys and I'm just trying to understand where the delta in view comes from.

Let me give that question to Roland Sunden, but combines in Latin America have really peaked in 2004 so let -- Roland, please.

Good morning, Andrew.

Good morning.

This is Roland.

Yes, as Michel indicated, the business in Latin America has really boomed during 2004.

The season is really late in the year and very early in the year and was very much driven by fantastic soy bean price at that time.

That has declined quite dramatically, as you know, and the farmers of course are getting more reluctant to buy a combine.

And on top of that, the oil prices and so forth, have driven up the cost of fertilizers and so forth.

So we see a decline in our order book.

We also see the market not being as boomy as it was 2004.

Thank you.

And a follow-up question -- I guess I'm just struggling to understand a little bit.

I understand the puts and takes but I'm still struggling why -- how much of the decline in production is related to the shutdown of East Moline and how much are some other problems, because I'm still a little bit surprised that production declined by 5% despite a terribly good macro environment in the fourth quarter and I'm just trying to understand if you could break it down in little bit more component.

You know, East Moline versus your -- versus something else on the agricultural side.

Rich?

I don't have the exact numbers.

So -- In East Moline -- I mean, think about this.

We stopped production in mid-August, so we had from September through the end of the year virtually zero production of the axial flow of combines, which is on an annual rate, a little over a couple thousand a year.

So that was a major impact on our business and as I said we aren't shipping any of those until, really, '05.

But -- I guess I'm just -- what puzzles me a little bit is the decline.

I mean, I understand that most of the decline in profitability on the AG side was related to lower volumes but I'm just trying to understand, other than East Moline, is there something else going on that's causing these declines in volumes and why, year over year --

Yes, let's --

So it is down on the AG side.

Let me explain this.

I think, for the combine -- on the combine side in North America the clear explanation is what Rich was just mentioning about the East Moline closure and the ramp up in Grand Island.

In Europe, the situation is a little bit different.

In Europe, we have clearly under-produced the retail activity because we found that the dealer -- the overall inventory level was probably not in line with the market evolution.

And this has clearly driven down the volume in -- especially in Europe.

I'm talking the AG side of the business.

And to a certain extent, in Construction Equipment in Europe, the driver of the volume reduction is also related to the -- is also related to the brand rationalization that is now taking place at the beginning of 2005.

But was under-production in Europe voluntary?

Is that the decision you made, or there was some operating disruptions or issues with suppliers?

There were no operating disruptions.

It was a voluntary decision.

Thank you very much.

We'll go next to Joanna Shatney of Goldman Sachs.

Good morning.

This is for both AG and Construction Equipment.

Can you talk about what you think the impact of accelerated depreciation had on your results?

Do you think there was any impact from what you're seeing through January?

Okay, let me -- maybe refer to Harold first as far as Construction Equipment because we were suspecting that it would happen here in particular in North America.

Clearly in the fourth quarter there was a major pull forward of retail, due to the accelerated depreciation on the Construction Equipment business.

Having said that, however, as we look at -- our order books are quite good for North America on all CE products.

And looking at the early indicators of the retail in January it's in line -- it may be able to be up a little bit better than last year.

But we're still seeing a good retail demand.

Dealer attitudes are very positive in North America.

That's --

Joanna, this is Rich.

Let me address the AG business in North America.

We don't have any industry numbers yet so it's a little tough to tell on the overall industry.

But as we look at our retail on big tractors, we were up versus January of the previous year.

And combines were about flat, just up a little bit.

So right now we don't see any huge, major impact from that.

But it's a little bit too early to tell.

We'll know more --

Okay, and that's --

We'll know more in the next couple months.

Okay, let's just stay on AG for a second.

I think the comment was made that the combine business was really, really solid and I know you guys have some of your own plant factory issues that you need to deal with.

But 8,700 units relative to history is actually -- we still have upside to go back to where we were, even in, say, the mid 1990s.

Can you just talk about what you're seeing -- I'm guessing that the reason you're conservative both on tractors in North America, maybe on combines, is just the fact that the income numbers to the farmer looks a little weaker.

Is that true, and is there anything in the market today that substantiates that theory?

Okay, there's really a couple of things.

As you indicated, net farm income which was the record in 2004, we anticipate will be down a little bit in 2005, so that's one of the impacts.

The other is, you really need to look more in detail at the combine industry.

If you look at the size of the Class 7 and above last year, it was up over 100%.

There is a shift in North America to the very large combines.

And there are many who are trading in two smaller ones for one larger one.

So if you would look at the total amount of bigger horsepower or header width or whatever, we're seeing some good increases there.

It's just coming from fewer combines.

Okay, and then on tractors.

Is there anything at this point to substantiate that impact from lower operating income?

Only that we see -- we're a little cautious, okay, relative to that.

And we also -- Canada is a big part of this so we're anticipating that the borders are going to open up.

But as you know that's -- there's still some questions around that.

Okay, but the order book looks fairly good?

Reasonably good, yes.

Thank you.

We'll take our next question from Mark Koznarek, Midwest Research.

Hi, good morning.

Hello Mark.

Hi, Mark.

I've got a question on pricing -- your announced list price increases and how much you've got in there already for '04 which I guess we've talked about.

Michel went through that.

But, how much is expected to be captured in '05 and -- maybe the way to do that is that -- your slides 12 and 13, you have a unit volume increase in your guidance.

And if we were to add on price and then also this mix phenomenon that you just talked about with combines, what would be -- these kind of guidance numbers look like?

Would you mind commenting on that?

Sounds like you're asking us to give you a dollar industry volume year-over-year forecast.

Well, yes.

I mean, I'm not trying to drag out your specific budget, but it seems like there are notable differences between the unit forecast and the probable revenue outlook for next year -- this year.

Mark, just a point.

Keep in mind that, especially in the fourth quarter of 2004, our revenues were not in line with industry because of destocking.

Basically our overall assumption for 2005 is that we are going to keep constant a month of supply.

Or, in other words, that production and retail are going to be better aligned than they have been in 2004.

That's the reason why we have revenue -- you might perceive a difference between industry assumptions and volume assumptions.

Okay, well, specifically then, for the combine market where the expectation is down 10% to 15%.

We just said a minute ago that there's a significant mix shift going on and then you've also introduced price increases.

So in that particular example, what is a more realistic industry revenue outlook?

Rich?

Okay.

Let's think about it like this.

As you know, in the combine business a lot of the combines are pre-sold.

And if we look at 2004, a lot of the units that were delivered in late 2004 were actually pre-sold early 2004.

And this is before a lot of the steel impact, surcharges and all of the rest.

So as you look at 2005 on a price basis I'd say, as an industry, because now these are fully priced for the surcharges, I would expect as an industry we're going to be up 4% to 5% over 2004 levels.

Somewhere in there.

Okay, so that incorporates both the pricing and mix?

Right.

So a big -- kind of a 15% delta on top of your unit forecast.

Yes.

Now for tractors, I don't imagine it would be quite as much, would it?

But Mark, keep in mind that a combine in pricing is twice -- more than twice the value of a unit -- a tractor unit.

So I think clearly the volume mix is impacted.

Yes, I appreciate that.

But on the -- in the case of tractors where we would be looking at more of just a raw net price impact, would that be something in the range of, for instance, 5% year-over-year?

For tractors, you mean?

Yes.

No, I think it's -- they're on the high side.

And it's far bigger -- it will be slightly less in Europe than it's going to be in North America.

Okay.

And then would that be consistent with the CE price increases '05 over '04 as well?

To a certain extent, yes.

Harold will answer, but I think the markets are -- have [been] a little bit differently so far.

For sure in '04 we had benefit of new product launches and repositioning of our new products relative to the marketplace and the competition.

So we were very successful in making pricing steady in 2004 in the area of 4% plus.

And, in 2005 I think from a guidance standpoint we're focused on a range of 3 to 4.

But clearly whatever the material cost increase due to steel brings on us we'll recover that in the marketplace.

Okay, great.

Thanks very much for the help.

We'll go next to John McGinty of CS First Boston.

Good morning.

I congratulate you all.

You have confused everyone, or at least me, totally with the last five answers.

So let me try it one more time.

Can I go back to slide 5 for a second - and I may have written the number down wrong.

But in the fourth quarter, what was the price impact in AG?

In other words, we -- I know currency was 87 and volume mix was a negative 145, but what was price in the fourth quarter AG?

$43m.

3?

43.

$43m.

Okay.

So, for the full year '04, what was the total price increase?

Full year '04?

In total --

AG and CE both.

In other words, on the total CNH --

On a full year basis, AG and CE combined is a little bit more than $300m.

So --

Almost half in AG and half in Construction Equipment. $160m in AG and $140m in CE.

So $300m, or about 2.5% overall.

Yes.

Okay.

And in 2005, you all have -- your guidance has earnings going up 15%.

And just so I clarify, that's 15% versus the 193 -- the bottom line less all -- everything - restructuring.

Right?

Yes.

Okay.

So that -- what is built -- you're saying sales will be up 5%.

Again, that's your guidance to get to the 15% earnings increase.

What is the price increase built into that 5%?

Okay.

About 3%.

3%.

Okay.

And, can I make sure I understand for the -- come back to the full year for AG and CE together.

Production relative to retail for CNH for the full year for the combined entity?

Okay, so we are talking 2004?

2004.

Yes.

For tractors, production was -- versus retail was down 1%.

So basically production and retail.

Down 1%.

[indiscernible] With tractors more than 40 horsepower slightly down, so minus 3%.

Okay.

Combines was about 4% down.

Okay.

Construction Equipment in total was flat.

However, for heavy equipment we were down 2 and the light construction equipment positive [indiscernible].

So, theoretically, you came close to produce -- you -- on a full-year basis, you came close to produce -- and if we dollar-adjust it because again you're talking units and we've got to do this mentally.

But, your production was close to retail on a full-year basis.

On a full-year basis, right.

So what you're really forecasting is a 2% increase in -- I mean, in other words, 5% increase in sales, 3% of that price.

So it's on a real or deflated basis -- a real dollar -- constant dollar weighted basis, you're forecasting essentially only a 2% increase.

Yes.

Okay.

Then, the question -- Let me ask the question people have been dancing around.

One of the things, when we look at farm equipment, there are order books and they only go out three, four, five months and they're not locked in or anything else.

There's some sense of orders on the construction side, inventories and orders and so on.

How much of this forecast -- which is more conservative than many of your competitors, obviously.

How much of this forecast is a conservatism and how much of this is based on cold hard fact where -- I'm not saying you would -- but if you were to show us the order book we'd say, 'Oh yeah that is going to be at best flat -- or that is going to be down' or 'that's not going to be that good'.

Okay, I think the situation is quite different between AG and CE.

Let me ask Harold first to speak about Construction Equipment.

Hey, Harold, congratulations.

Thank you, thank you.

In the CE side, as Michel had indicated, North America we're seeing up 5% or more.

But one of the issues that's driving our revenue forecast, maybe versus what you've heard or seen previously, is the swing and the growth of Asia Pacific, mainly China.

As you know, there's a significant decline in the second half of the year and we forecast that to continue.

And we really don't do a lot in that region versus some of the other players in the business, so it's a very small factor.

So ours is predominantly driven by North America and Europe.

Let me just get one clarification.

When you talk heavy equipment, are you talking all heavy equipment or are you talking heavy equipment that you make?

For example, you all don't make mining trucks, so do you not throw that into your equation, or do you throw it in?

No, we are not in the mining business --

No, I know that, but what I'm asking --

Or in the forestry.

So when we talk about our industry we talk about markets served.

Okay, so this is heavy equipment, markets served only.

Yes.

Okay.

Just wanted to make sure I clarified that.

Okay.

Good question.

And on the AG side?

Roland, please.

On the AG side, if I start on Latin America as I said before certainly [indiscernible] for tractors and combines is going to be down versus last year.

Yes.

And Western Europe, as we spoke about before, is continued decline, on the tractor side.

However, on the combine side I think we are building up and we will see, in the latter part of 2005, recovery.

Okay.

We think it's going to be fairly flat overall, but as you saw on slide 12 in the beginning of the year it's still down.

Right.

In North America overall it's up 5% for tractors and the combines a little bit down.

Have you anything to add on to that?

John, this is Rich.

If you look at our actual retail order board, the number of forward retail orders we have sitting here in January compared to the same time a year ago we're --

And let's just check puck (ph) tractors because combines is skewed by the East Moline closing.

Okay.

On just tractors we are probably 95% of where we were last year.

Interesting.

On actual retail orders.

Interesting.

Okay, thank you very much.

We'll go next to David Bleustein of UBS.

Just two quick clean-ups.

Restructuring in 2005 is expected to be zero?

No, in 2005 it's going to be around $30m.

30 - 3-0?

Yes. 3-0, yes.

Okay, and the guidance is before those charges?

Yes.

Okay, and --

That 30 to 35, David, is a pre-tax.

Pre-tax.

Okay, and John got --

Hold on, I made a mistake.

It's after tax.

After tax.

Alright.

And then the pricing for 2005 -- and unfortunately I've written down too many different numbers.

Pricing in '05 in CE is expected to be up how much?

Harold?

It's going to be in the range of 3 to 4.

3% to 4%.

And on the AG side?

It's about the same number there too.

3% to 4%.

Okay, terrific, thanks guys.

We'll go next to Barry Haimes, with Sage Asset Management.

Actually, my question's been answered.

Thanks very much.

Okay.

Alright.

We'll go next to John Dempsey with GE Asset Management.

Good morning.

Morning.

Good morning, John.

I was wondering if you could comment on the challenges at Fiat and how they may impact CNH and what we might expect in the way of support from CNH to the parent going forward.

Let me say this, that we have enough challenges in CNH, so I think frankly I cannot answer this question.

Okay, thanks.

[OPERATOR INSTRUCTIONS].

We'll go next to Joanna Shatney of Goldman Sachs.

Hi, I was hoping you could just break out -- did you have a gain on sale of receivables in the fourth quarter?

I think you did, and can we talk about how much of the improvement from the finance subsidiary is a gain on sale versus net income?

I believe that we didn't have any large ABS transactions in financial services in the fourth quarter.

I'm sorry, Joanna, the question is sale receivable through financial services, or by financial services?

By financial services.

How much were the securitization gains and --

Alright, compared to 2003.

Right, in financial services.

I believe it's a big number.

The two transactions were the traditional [indiscernible] transactions.

Well are we expecting -- if you take those out of '04, my question is -- was it just real operating improvement that gets us to the financial services business being better in '05.

Yes.

That's it?

There's no change in the gain on sale number?

No.

The volume of transactions in 2005 is not going to be different than it was in 2004 and we believe that CNH Capital profit improvement might be in the -- again, 10% to 15% improvement in net income.

By the way, in the fourth quarter what has been the driver of the improvement is - number one, the volume origination as the retail market is pushing up and [indiscernible] compared to last year.

So has been our volume originated.

And the number two is the drive to give reduction also in the losses because the quality of the portfolio.

And how much did that impact operating income year over year?

You mean compared to 2004?

That's the second piece of the reduction in the --

I don't have the figures in front of me but I would say probably -- I would say a good half at least of this is coming from this element.

Okay.

And then, can you just update us on -- was there a cost in the quarter from the UAW strike?

Contingency plans?

There was an impact, Joanna.

We've included it on our volume and mix calculations.

It was not significant and since we are in talks at the present time we'd prefer not to disclose any further information.

Okay, just so I understand -- when I look into '05, what kind of an impact do you have in that 15% earnings number -- earnings growth number from the UAW issues?

We don't have anything.

We have not made any assumptions there.

Okay.

Thanks very much, guys.

We'll go now to Barry Bannister of Legg Mason.

Morning, guys.

Hi, Barry, how are you?

Struggling with the technology here.

Can you -- you painted a pretty dour picture for '05, not shared by some of the order trends of your competitors and what we're hearing from the field.

Your EBITDA was $687m in '04, $501m in '03.

It looks like it's doing well.

Could you outline the goal for that?

And then before you answer, free cash flow was negative $126m in '03, positive $700m in '04 on equipment ops -- this is before dividends.

Do you have a goal for '05?

So, EBITDA and free cash in '05 - are you going to have more improvement?

EBITDA improvement in '05 is clearly going to follow the improvement of operating margin.

This is the only driver.

So maybe if we count -- I mean, as we are saying about 15% including net income.

This is making a calculation on top of my head -- it's probably going to be maybe $800m region in EBITDA.

And free cash?

Your working capital was about $0.5b improved year-over-year, so what do you think?

I think on the equipment operations side to cash flow, of course we have a structure [indiscernible] of receivables out of equipment operations to financial services and we'll continue to do so in 2005, especially on Latin America.

We should expect cash flow to be positive.

And we expect capital spending to be in the same region as the one that we had in 2004.

Depreciation will be in the same area too, so I think basically the improvement in cash flow in 2004 should be equal to the improvement in EBITDA.

And you have just really made the fact that we won't have the one-time benefit of the securitization as we got in 2004; so I would say on top of my -- probably in the $200m area.

Okay, right.

Okay, thanks a lot.

Keep in mind also that working capital is also in front by the fact that pricing cost is increasing, so, therefore, it impacts in dollar terms, the working capital absolute numbers.

Everything as being equal.

Right.

Got it.

Thanks.

And at this time, ladies and gentlemen, we will take our final question, which will be a second question from John McGinty with Credit Suisse First Boston.

Yes, just two quick questions.

Al, what should we use for the tax rate, assuming that you have pre-tax earnings?

32%, 33%, something in that range.

Okay.

And then, if we're talking about retail sales being up very, very modestly, just explain to me why the credit company is going to be up 10% to 15%?

In other words is it all the reduction?

I guess I got lost on that, because the top line -- in other words, the percent of receivables financed, assuming -- unless you're going to do more than you were, stays relatively flat.

So why does it go up as much as it does?

The growth of the CNH Capital operations is not only driven by North America, so it's -- we have the [indiscernible] we have been carrying over our impact on the portfolio of the significant growth that we got in 2004, which is going to carry over from a portfolio point of view, into 2005. [Indiscernible] you [up].

Because eventually our structure and arrangements in the joint venture is providing good returns in terms of growing the business.

And in North America we are expanding also into other mix products.

Used financing, credit cards and the like, which are all related to AG and construction equipment -- don't worry, we are not going to go outside of our core operations.

But we are expanding the nature of the offer to the final dealers and customers; and this is growing quite a bit.

Well, just one -- the line which is -- one of the things that's going on is there's more wholesale financing being done.

You're going to ship that over in Europe.

Is there some offset to the -- of the 10% to 15% increase, is there some offset from the interest compensation to the finance subsidiary?

There is some -- two offsets.

One --

What is that -- what number -- I think that was 113 was the actual -- are we talking about 125 or 130 or -- I mean, is that -- just give us an order of magnitude, because there's got to be some offset to the credit company.

Sure.

The offset in the [indiscernible] operations time would be the reduction in the SG&A because we have [indiscernible] the structure.

And we have also some reduction in [non-provisions in the Capital corporation].

Giovanni, do you want to add anything?

If you're looking at the interest compensational line as you could figure it out for 2005 that's close to '04.

You're probably looking at 130, 140 --

130, 140.

Yes.

And -- But are we looking at lower SG&A or is that where all of that shows up?

No, no, no, no, because as Michel was saying we are going to be seeing less bad debt provisions at equipment operations because it will be financial services first, taking the risk and provide for that and so on.

So, what -- I mean --

The net income growth in financial services is already net of these negative factors that move --

On top of my head, John, the transfer of margins, so to speak, from equipment operations to financial services related to the transfer of securitization of materials is probably in the area of $10m to $15m pre-tax.

Okay.

year-over-year.

Okay, so I got $10m to $15m savings there, I've got [$25m] up in the finance -- in the interest [cap]-- okay.

Thanks very much.

Alright.

We'd like to thank you all for joining us today and if you have any further questions please feel free to call me in my office.

Thank you.

Bye-bye.

Once again, ladies and gentlemen, that concludes today's call.

Thank you for your participation.

You may disconnect at this time.