CNH Industrial NV (CNHI) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to the CNH 2005 first-quarter results conference call.

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

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

Please go ahead, sir.

Thank you.

Welcome, everyone, to CNH's first-quarter 2005 results Web-cast conference call.

We're pleased to have with us today Harold Boyanovsky, our President and CEO and also President of our Worldwide Construction Equipment business;

Michel Lecomte, our Chief Financial Officer;

Roland Sunden, President of our Worldwide Agricultural Equipment business;

Rich Christman, head of our Commercial Governance and Supply Chain for Ag; and Giovanni Maggiora, our Treasurer.

Before we continue, 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, as discussed on slide 3.

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.

As noted in the slides, the appendix contains reconciliations to GAAP from various non-GAAP measures we use in analyzing our performance.

Finally, this conference call and Web-cast are being recorded.

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

Now, let's turn to Michel for comments on our first-quarter results and outlook.

Thank you, all.

Hello, everyone.

What I would like first to focus on is in slide 4.

It's a trend of the total worldwide tractor and combine industries that we saw in the first quarter.

As you can see from this slide, the worldwide agriculture equipment industry remained strong in the first quarter compared to recent years, despite the downturn in the combine industry retail sales in Latin America.

Overall, the picture is favorable for the Ag industry but with significant regional differences.

Worldwide tractor industry unit sales, on slide 5, increased 1% in the first quarter, led by a 6% increase in North America.

But although the under-40 horsepower tractor industry was down slightly, sales of utility tractors in the 40 to the 100 horsepower range were at 19% and over 100 horsepower tractors were at 6%.

Tractor industry sales in Western Europe and Latin America were down slightly while sales in rest-of-the-world markets were flat with last year.

On a worldwide basis, our tractor market share was essentially unchanged.

Worldwide combine industry unit sales declined by 20% in the quarter with a sharp decline in Latin America, principally in Brazil but also to a lesser extent in Argentina and a small decline in Western Europe.

The market increased 39% in North America and 24% in the rest of the world.

On a worldwide basis, our combine market share was down from last year.

Our section equipment industry retail sales, on slide 6, remained a very strong in the first quarter.

Total heavy and light equipment sales, in units, were up 6% compared to the first quarter last year.

Keep in mind that last year's first quarter was helped by very strong sales in China, which didn't reoccur this year.

Note that the strength we see in all segments, heavy, skid steers and backhoes and all other light equipment, of which the mini-excavator is the principle product.

Overall, the picture is good for every market except China.

There, we have a limited presence, as you know.

On slide 7, we can see the C (ph) segment changes in more detail.

Worldwide, the backorder market was up 21% compared with last year with particularly strong increases in North America up 20% and in Latin America up 63 within a much smaller base.

The skid steer rotor market increased by 5% worldwide, up 12% in North America and 20% in Western Europe, while in the Latin American market it was down slightly.

Heavy construction equipment, on a worldwide basis, was down in unit terms, primarily because of the decline to the Chinese markets.

Our major markets, however, were up.

North America was up 19%, Western Europe up 16% and Latin America was up 26%.

In total, our worldwide market share of total heavy and light construction equipment was essentially flat with last year, although there were some variations by product line and valuation.

On slide 8, we can see how our equipment operations' first-quarter net sales have evolved over the past three years.

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

Currency accounted for about 3 percentage points of the overall increase.

Our net (indiscernible) for agricultural equipments were up 1% worldwide and by (indiscernible) sector, hike (ph) pricing increased sales by $86 million.

Pricing was not most favorable in North America but was positive in all areas.

Currency valuations increased our net sales in dollars by about $59 million or about 3 percentage points.

Net sales of new products contributed an additional $14 million.

These positive factors were affected by a decline of approximately $147 million, due to volume and mix, about half of which is in Latin America. (indiscernible) to the 52% drop in our net sales of combines in Brazil, a market where CNH is particularly strong.

The last of our Ag volume and mix decline came relatively (indiscernible) in North America and Western Europe while rest-of-the-world markets were up.

North American Ag dealer inventories at the end of March were at industry average levels for tractors and about 1 month higher for combines on a trailing month supply basis.

Turning to construction equipment, our net sales increased by 20%.

By (indiscernible) factor, volume and mix was a positive $87 million, reflecting the strong industry volumes we saw on the last slide.

Construction equipment pricing was positive in all our major markets, increasing net sales by about $40 million.

Currency valuations increased our net sales by about $20 million or 3 percentage points.

Our North American construction equipment dealer inventories at the end of March remained below industry levels on a trailing months supply basis.

On slide 9, we see factors contributing to the year-over-year change in our industry operating margin from $117 million or 4.4% of net sales in the first quarter of last year to $99 million or 3.5% of net sales this year.

Volume and mix were down by approximately $44 million, primarily because of the significantly lower mix of higher margin combines in 2005 and in the first quarter of 2004.

This occurred both in North America, relative to the transfer of combine production to Grand Island, Nebraska, and in Brazil with the decline in the combine market.

Net price recovery on a worldwide basis was essentially breakeven but in total, pricing was favorable by $126 million while total economics, including higher steel costs, increased by $118 million.

Currency evaluations were a slight negative also.

LG&A and R&D costs increased by about $6 million in the quarter, excluding currency variations, reflecting investments in our initiatives to better support our dealers, improve product quality and to announce our global sourcing efforts.

Manufacturing efficiencies and Other contributed approximately $30 million of savings during the quarter, reflecting the manufacturing footprint and the deeper rationalization savings of approximately $22 million, primarily as a result of the closure of the East Moline plant and the construction equipment facility in Europe in 2004.

New products contributed an additional $3 million of margin and labor and other items, such as expenses savings, for the balance.

By business, our Ag and Industrial operating margin declined by about $45 million, reflecting the lower mix of the higher margin combines while our CE industry operating margins improved by about $20 million.

On slide 10, we see changes -- the changes in our net income and the adjusted EBITDA for the first quarter since the first quarter of 2003.

Net income in the first quarter this year improved by $24 million compared to last year, despite the decline in equipment operations industry operating margin, which we reviewed on the previous slide.

Walking down the income statement, from industry operating margins to net income, financial services' net income has improved by $22 million, compared with the first quarter of last year, and our net income in the earnings of our unconsolidated subsidiaries have improved by $5 million.

In addition, our structuring costs, net of tax, declined by $9 million.

Our adjusted EBITDA improved this year from $128 million in the first quarter last year to $113 million in this quarter this year but declined as a percentage of net sales slightly from 4.8% last year to 4.6% this year.

Interest coverage -- we have 2.2 times for the first quarter of 2005 compared with 2 times for the prior year.

Now, let's turn to equipment operations, cash flow and net debt on slide 11.

Looking first at the bottom of the slide, we see that equipment operations' net debt increased by 265 million in the first quarter of 2005.

This was a change from $1.3 billion of net debt at the end of December 2004 to approximately 1.6 billion at the end of the first quarter.

In the quarter, $257 million of cash was utilized by operating activities, more than explained by an increase in working capital of constant currency of $466 million.

Working capital was driven by three main factors.

First, our international trade finance receivables, the export business, increased, reflecting a higher sales -- level of sales to our distributors throughout the world.

Secondly, in Brazil, as the combine market dropped more than which we expected, 52% compared with the 30% we projected, we didn't decrease production as much as we could have in the first quarter.

Third, payables declined, reflecting changes in payment timings with our suppliers, to support a timely availability of supply.

At constant currency, our inventories increase in the quarter of $258 million was in line with our $262 million increase in the first quarter last year.

As a result, in terms of days of sales(ph), companies' inventories were down 26 days compared to 91 days at the end of the first quarter of 2004.

On slide 12, I'd like to review what I feel were the pluses and minuses in this past quarter.

Although we expected a decline, we were surprised by the low level of combine industry volumes in Latin America, which as I said earlier were down 52% on a unit basis.

We have not seen, in the quarter, any signals that (indiscernible) costs are going down but we were hoping that first increases would begin to slow down or stop, but it didn't happen, especially in Europe.

We experienced more significant component shortages, especially for wheels and tires and for some engine components.

Finally, in keeping with our commitment that every new product we launch will be of higher quality and improved reliability and product implications, we delayed the launch of our new generation of skid steer loaders until later this quarter.

On the other hand, we are pleased with the continued industry strength of our major CE markets and positive net pricing realizations that we continue to achieve, especially outside of Western Europe.

We reorganized our logistics operations in Europe to provide better service to our customers and we anticipate ongoing cost savings of about 20% for the long term.

We consolidated our four European and Latin American construction (indiscernible) and networks into one under the New Holland label, providing us now with two strong global full-line bands, New Holland and Case.

The settlement, which we reached with the UAW, was a positive step forward and our portfolio quality and profitability from financial services continue to improve.

Turning to our industry outlook for 2005 on slide 13, we expect full-year worldwide total 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 to down for the year and combines to be down 15 to 20% for the year, compared to an outstanding 2004, especially in the Americas.

We anticipate larger decline for combines coming from Latin America.

Volumes in North America remain strong.

We expect about a 5% increase, compared with 2004, for tractors coming from expected sales increase of over-40 horsepower tractors while sales of under-40 horsepower tractors could be flat.

We expect North American combine industry revenues to be up about 10% for the full year.

For the second quarter, we expect most of the markets should be more or less in line with the full-year expectations except for North America and Western Europe combines.

Turning to our construction equipment industry outlook for 2005, on slide 14, again, we see a second quarter that is more or less in line with our full-year expectations.

We expect that light equipment industry retail unit sales will be up 5 to 10% while heavy equipment should be flat to up 5%.

By region, we expect particular strength in the Americas and in Western Europe while industry unit sales of heavy equipment in rest-of-the-world markets will probably be about the same as in 2004.

Moving to slide 15, starting with the second quarter, we anticipate that our second-quarter net income before restructuring costs will be at about the same level as last year, but in developing this outlook, some of our key considerations are as follows -- to expect our net sales of equipment to be up about 7%, including interest pricing, currency valuations and a combination of increased construction equipment wholesale volume, partially offset by a reduced agricultural equipment volumes.

Ag volumes are projected to decline in part because of the sharp industry volume drop in Latin America and because we plan to underproduce our rental tractor volumes in North America by about 5% for the full year in order to reduce total inventories.

We expect that net price recovery will again offset material costs and other economics and currency valuations, although we do not expect material costs to decline until the second half of the year.

We plan to increase R&D and SG&A, both in dollar terms and moderately as a percentage of sales, as we continue to invest in our dealer and customer service quality and global sourcing initiatives.

Financial services' bottom line for the second quarter should be in line with its first-quarter results, which means a similar improvement over the second quarter of last year.

In total, this should result in a second-quarter net income before restructuring at approximately the same level as last year.

Restructuring costs for the second quarter should be about $10 million net of tax.

For the full year, we expect that our net sales of equipment will increase by approximately 5% in total, including pricing and currency valuations.

In addition, North American combine production in the second half of this year should be higher than the second half of 2004, where our combine production was minimal last year after the closure of the East Moline facility.

We expect material costs to decline in the second half of this year, improving net price recovery and margins.

We plan on resolving our component shortage issues and our Western European construction equipment business should be back on track following the New Holland plant consolidation.

Our logistics operations in Western Europe should be performing at a more cost-efficient level and the launch of our new compact truckloader should allow us to start participating in that market segment.

Net interest expense should continue throughout the year about 10% higher than the first quarter and all the operating expenses also should be higher.

Financial Services performance in the second half of this year should be in line with the second half last year.

In total, we anticipate that our net income before restructuring charges should be approximately 15% higher than in 2004.

Our restructuring costs, net of tax, should be at about the same level as last year.

Finally, we expect to generate approximately $200 million of cash flow during the year after including our $90 million contribution plan to our U.S. defined benefit pension plans.

We plan to use this cash, of course, to further reuse our equipment reduce our equipment operation debt.

Now, I'd like to turn the microphone over to Harold Boyanovsky, who would like to make a couple of additional comments.

Harold?

Thank you, Michel.

It's my pleasure to speak to you really for the first time as CEO of CNH.

I wanted to take a few moments to give you my thoughts on CNH.

Last summer, in Veloco (ph), Italy, Paulomont Graino (ph) presented our strategic plan for the 2005 to 2007 period, highlighting a number of new initiatives for CNH.

On slide 16, you can see that list plus a few more.

Our commitments to increase customer and dealer support, to product quality and reliability improvements and to continued improvements at financial services has not changed.

As you can see, we have refined our plan by adding some more specific new initiatives, such as the consolidation of our new New Holland brand CE family, the reorganization of our European logistics operations and our commitment to recover cost increases through pricing.

Our commitment to achieving $500 million of cost reductions in the 2005 to 2007 periods have (sic) not diminished.

As Michel noted in his earlier discussion, some of these initiatives impacted the first quarter and probably will impact the second quarter, but we expect that, in the longer-term, their contribution will be positive.

As you know, our merger integration phase has come to a successful close.

Today, I can tell you with confidence that our financial and manufacturing infrastructure is firmly in place and that we are now pressing ahead to the next phase, greater growth, both topline and bottom line.

Our strategy focuses on our core agricultural and construction equipment business, growing through continued product innovation, best-in-class product reliability and strong support to our dealers and their customers.

Moreover, we will continue to expand the business by reaching into new and emerging markets and by developing CNH Capital into a total financial solutions provider.

Our successes, both present and future, is (sic) directly related to the efforts of our employees, our independent dealers, our suppliers, and more generally, all of our stakeholders, all of whom are committed to delivering superior results this year.

With that commitment in hand, I want to state once again that we intend to meet our goal of 15% improvement in net income for the full year.

Thank you for being with us this morning.

Al?

I think we're now ready to begin the question-and-answer session.

For this session, we ask that each questioner please limit themselves to one question and one follow-up at a time.

Operator, could you please retrieve the first question?

(Operator Instructions).

Andrew Obin of Merrill Lynch.

A question on North American outlook -- if I compare your outlook versus what you guys stated at the end of the fourth quarter, looking at the large stuff, we now have a higher forecast for large tractors up 10% versus previous forecast of up 5% and we have a significantly higher forecast for combines up 10% versus down 5 to 10%.

The question I have -- how much of this is a function of better near-term outlook for second quarter?

How much is a function of feeling better about the second half of the year?

Well, in general, I think, when we had the telephone and analyst meeting the last time, we were quite concerned on the implication from the specific tax conditions at that time that could favor a lot of (indiscernible) for the 2004.

For the 2005, we have a more positive outlook and, actually, I think, when it comes to the combines, it's not predominantly to any certain quarter.

I think, as you know, the combine market is really strong at the end of the year.

That's when you have the season and so it's quite even, I would say.

What about tractors?

Looking at the large tractors, they haven't been that strong, I think, industrywide so far.

So, does that mean that you also expect steady demand for tractors throughout the year?

Well, when it comes to the big tractors, we see quite limited -- surprisingly strong demand for the range between 40 to 100 horsepower.

On the very big tractors, especially the four-wheel-drive tractors, actually the demand is right now in the first quarter at least down and is probably going to pick up a little better in the latter part of the year.

When it comes to the small tractors, below 40, we were more optimistic the last time.

Now, it seems to me that the actual market is going to be around 140,000 units, which is -- it's a little bit less than we stated at the last meeting.

Just a follow-up question in terms of profitability by segment -- you used to provide profitability for Ag and CE.

I know that you guys sort of told the relative change between operating profit for agricultural equipment and construction equipment, but if I look at the numbers that would be consistent with what you have this quarter disclosed and 1Q of '04 from which Ag equipment profitability was 110 and construction and forestry was 7 million, should I be -- are the corresponding numbers 75 million and 27 million?

Absolutely.

Thank you very much.

I would just comment we're not into the forestry business in our construction equipment.

I realize that.

I'm sorry about that.

That's some other companies.

John McGinty of Credit Suisse First Boston.

A clarification -- the comment was made I think that -- and I didn't realize it until you were talking about -- it was one of the factors in the quarter that, in consolidating the brands into two construction equipment brands, the implication was you're losing money in Europe.

Now, is that on an operating basis or does that get picked up in the restructuring charge?

We are talking specifically to the construction equipment side of the business in Europe.

In this quarter, I don't have the exact number in front of me but Construction Equipment Europe is still in the red in at least the first quarter.

But is that because it's seasonally the business is weak?

I mean, the implication from what you were saying, I thought -- and this is --(multiple speakers).

It's the combination -- (multiple speakers).

(multiple speakers) -- because of the combining.

Yes, it's a combination of two things.

Number one, it's because the first quarter is typically a weak quarter for that business and the second quarter would be better.

The second reason is that because of this consolidation of the brands, in addition to some of the additional expenses that we have to carry to organize this reorganization, we didn't completely have all the price realization that we wanted to in this quarter.

But the expenses were not -- I mean, whatever accommodation expenses were put into restructuring?

No, no, no, you know, you have forgot about our expenses, which are not in restructuring when you consolidate brands.

For instance, advertising, promotions.

John, if I might -- this is Harold, if I might just comment.

There were some expenses that did hit the SG&A in the quarter that we didn't have a year ago.

One is, in January in Rome, we had a major dealer meeting and launch of the new brand with the new network in Europe.

Also, we consolidated the brands in Latin America, namely Brazil, moving Tiadalis (ph), if you may, to the New Holland brand.

So, associated with that is some incremental advertising promotion which is not a restructuring charge.

It's actually -- it's pretty impressive to be able to show the kinds of gains you are doing in that market despite those kinds of costs.

An overview question -- my follow-up is the overview question, which is, conceptually, you haven't changed the full-year forecast but clearly Latin America is substantially weaker, primarily in combines, which is obviously the high profit -- much weaker than you had expected it to be.

Is the offset primarily the fact that prices that you have been able to get -- substantially higher prices?

In other words, big picture -- why are we with one of your most profitable areas substantially lower?

Why are we still at the same forecast we were?

I would answer and maybe Harold will add to your other comments.

I believe that we're expecting effectively to have better price realization (ph) in the second half of the year and we also expect that material costs, the increase, which seems to be plateauing now will at least stabilize or go down slightly in the later part of the year.

That's basically the driver of this.

The other point compare -- with respect to Latin America is Latin America is in a situation where our combines market is down.

On the other hand, the construction equipment market of Latin America has picked up some steam and is -- we expect that to continue for the balance of the year, which was more than what we expected initially.

But on the material cost side, you would expect that those costs to come -- I am trying to look at where we are now versus where we were with the forecast three months ago.

I mean, the material costs you expected to come down.

I guess it's that prices are somewhat better in Latin America, the combine increase is offset by -- a decrease is offset by construction increase -- again, expectations to expectations.

Yes, probably not a direct offset, John, because of the size of the two businesses, but what has changed is, on one side ,in the first quarter, material cost pressure increases have been a little bit more than we had planned when we talked at the fourth-quarter and full-year '04 results and also with the markets holding stronger CE in all regions and also Ag in North America, we have been able to place more pricing in the marketplace.

You know, we're anticipating that most of that will hold.

Exactly.

Thank you very much.

Barry Bannister of Legg Mason.

I may have missed this earlier in your response to Andrew Obin's third question, but when you gave the numbers for segment profit, I believe you said it was 35 down in Ag and I understand that to be GAAP.

Correct me if I'm wrong.

Yes, it's an estimate, yes.

Okay.

Then CE, it looks like 20 up.

It was rounded because, when I add the delta from those two figures to your finance and other income on the equipment P&L, it normally flips to sales minus COGS, minus SG&A, minus R&D, in other words, true operating profit.

But, you're off by -- (technical difficulty).

Is that just an estimate or can you give us an Ag exact breakdown for those of us who actually model it in detail?

Oh -- (multiple speakers).

So, what was your GAAP profit in each of the two segments?

This is an estimate, as you know, because there are some estimate in making this allocation between Ag and CE.

So, for Ag, the industry operating profit would have moved from 110 to $74 million and CE would have been up from 7 to 25.

So, then, 74 plus 25 Ag and CE makes the $99 million that you have in your slides.

That's exactly what I needed.

Tom Klamka of Credit Suisse First Boston.

Can you talk a little about the working capital changes for the quarter?

It seems like a rather large use, especially when you look at, sequentially, this is not a big change in revenues.

Is part of that seasonal, part of that the build in Latin America or maybe you could walk me through some of those items?

Yes.

First of all, the first quarter is typically a quarter where the season is such that we increase working capital.

In this quarter, the working capital change has been quite sizable, as you have seen when we gave you some of these financials but I can try to summarize again and Giovanni Maggiora can add a few comments.

Well, I guess specifically maybe, you know, on the -- (multiple speakers) -- you seeing inventory build -- but receivables were up -- (multiple speakers).

Yes, inventory build is typical in this quarter.

By the way, it was about the same size as last year in dollar terms, which basically means that, in inventory terms, it was slightly better.

Please also keep in mind that the working capital in absolute terms just increases because of price increase year-over-year.

Capital, that's a couple of million (ph) dollars.

What has been impacting this quarter is the fact that we have stronger sales in the distributors' markets, you know, export markets outside of the (indiscernible) regions.

This is typically businesses where we generate receivables that we don't send to the financial services side of the business.

We have also some increases of volume of business, especially in Europe, that have not been (indiscernible) to the financial services because they were in regions or in countries where we don't have that operations funding so far.

Last but not least is the fact that we have a slightly on average reduced payment terms to our suppliers, probably because, at the end of last year, we were a little bit longer than normal.

Especially we have also an increase of value-added tax because of the volume of Europe.

So, Giovanni, do you want to add some comments?

That's more (indiscernible) of course the pricing increases automatically translating in increasing the value of the receivables so that that definitely adds up.

On top of that, the 80 in Europe typically multiplies the effect on receivables, and so that's more or less it.

Brazil, of course, is also another factor as the slowdown occurred and we ended up with higher receivables on our books than we normally would have expected.

There again, those are receivables that, at this time at least, stay on industry books as opposed to being financed by Capital, which will occur during the rest of this year instead.

Is that increase in receivables then roughly 300 million from December more of a permanent increase you think in the business going forward or just flow through with the inventory sales?

No, no.

In Brazil, for instance, it's clear that what happened is that the market dropped faster than we expected.

We decided to slowdown productions but by the time we react, this is going to be beneficial in the second quarter where basically production is going to be very low for combines, so I would characterize that as being permanent.

The only permanent thing I hope is price, even though (indiscernible).

Okay.

Then the extent of the material cost increases, is that on Page 9 of your slide presentation?

Is that included in the economics?

Yes.

Yes.

You have economics and currency lumped together.

How much is actually materials here?

I think you said 118 was the whole bar.

126 is all economics, material, labor and everything.

The specific --.

More than 2/3 of it is still in the cost impact and materials and the other third is other type of economic sensations.

Okay.

It sounds like you were forecasting a decline in primarily steel input costs.

Is that -- do you see anything significant happening there?

Have you seen any softening so far this year?

This is Harold.

There has been some, as you know, moderation in some of the commodity prices in the North American market, but I think we're in the same mode as the rest of the industry that are looking for in the second half of the year the moderation of the steel costs.

Banco IMY (ph) and Sabina Bluma (ph).

I would like to ask you a more strategic question.

We've heard that the management of Fiat Group actually has been in talks with Tata of India.

My question is would that be -- also involve a possible cooperation between yourselves, CNH, and Tata, or hasn't that actually reached the discussions at level, or would you be interested or what stage are the talks if you're involved at all?

That's a good question for the management of Fiat, but I can tell you that, personally, I'm not engaged in any talks at this time.

We might want to remind you, Sabina, that we do have already our own wholly-owned tractor operations in India and we already do participate in a joint venture on the construction equipment side that produces primarily backhoes and some light equipment.

So, we already do have a presence in that market.

Thank you.

Just a follow-up question on material costs -- you are -- in the past few quarters, you emphasized that, in North America, you were able to actually pass on the higher steel costs.

Is this still the case, whereas in Europe and I understand, you have to actually absorb it?

Michel may have indicates in his comments, Sabina, pricing was more favorable in North America than in the other parts of the world.

Mike Kender of Citigroup.

On the slide where you talked about 500 million of cost savings between '05 and '07, how should we see those layout?

Is it roughly even each year or is that going to be front ended or back ended?

It's on slide 16.

I think it's almost even maybe a little bit less in the first year and slightly back-ended in 2007 but it's not very significant either.

Just a couple of fill-in-the-blanks on just trying to get to the free cash-flow number -- you talked about 90 million of pension contributions.

How does that compare to your pension expense?

If we talk strictly -- the $19 million cash contribution to the U.S. pension is of course connected to the U.S. Army.

The pension expense for the U.S. is about $40 million only expected.

Overseas, should we expect the cash and expense to be roughly even?

Do you mean for pensions?

Yes.

No, outside of the U.S., the only country where we have almost a similar system would be the UK, where we plan to make a $20 million contribution in the UK.

But, you know, it's not a discretionary contribution.

It's basically based on payroll calculation.

The pension expense in the UK is about the same amount, so cash from expenses is about the same.

Okay.

What about cash restructuring costs and cash taxes?

Do you have a ballpark for those?

Cash restructuring costs -- I would believe that it's going to be relatively close to the cash -- go the restructuring expense that we expect on the year, which is I think in the 60, $65 million cash.

On the tax side, it depends if we include the sum of the taxes that we pay in Italy called IR.

It would be either the cash tax would be in the 30 to $40 million range.

It depends upon the profitability, mostly of the Brazilian operations, where we have difficulties to avoid not paying any taxes.

From Cay (ph) Capital, Michael Saline (ph).

It's (indiscernible).

Just expanding a little bit on the working capital again -- and thank you for the previous explanation.

So I was just wondering to what extent you think that the expansion in Accounts Receivable may later in the year become part of some kind of either securitizations or we may see that transfer effective to the financial part of the business or whether -- and therefore, as a result, what type of working capital assumption are you making it this point for year end?

Thank you.

Yes, I mean, as you have seen in the past, I mean, our strategy has been to develop our financial services operations in such a way that they will manage not only the retail portfolio but also the management of the wholesale portfolio.

I would characterize the situation as CNH being halfway through that process.

It's fully done in North America for the floor plans and the receivables with the dealer network.

In Europe, we have started the process.

It's not fully completely fully achieved.

We're in the process of doing that and we'd say that, by the end of this year, we will be in much better shape.

We're also doing the same thing as far as the Brazilian and Latin American operations are concerned.

So, and other words, once everything will be achieved, which I would say probably by the middle of next year, we will have basically remaining on the equipment operations books mostly the receivables coming from the export sales to countries where we do not have the right preparations, for instance exports to Africa or to some countries in Asia -- and some activities related to national accounts, rental companies or business with government, with municipalities.

So, there'll be something in the bottom of the barrel that we will not transfer to the financial services operation, but our strategy has been to build tools, processes, and platforms to make that happen.

I believe that, by the end of the year, probably the transfer that corresponding to these European entities and half of the Brazilian operations might be in the $100 million area.

Is the process -- this process building phase that you just described, is that a precondition in order to possibly do a transaction like the one that Eveaco (ph) just recently signed in with Barclays?

No, no, not necessarily.

I think the situation, as far as we are concerned, is different in the different regions.

For instance, if I take the Brazilian operations, if we do that, we have possibilities of funding our operations in Brazil, for instance by issuing CDs, Certificate of Deposits.

In North America, we don't -- we have, as you know, this wholesale (indiscernible) Provence.

In Europe, we have already a significantly larger wholesale securitization program, which is almost structural, which is providing us the necessary funding.

So, this is not the prelude of what you say.

I understand, but in order to increase the value of the Company and highlight that value to third parties, particularly in light of the fact that free float is limited, I would've thought that setting up this process that you described earlier would be, at the very least, useful to -- if you were able to convince either somebody else to come in and acquire part of the equity in the financial business that, if I'm not mistaken, is carried in your books as something like 1.4 $1.5 billion, right?

Today, yes, approximately right.

That value, at least you know as I understand it, doesn't seem to be fully recognized in the marketplace for a number of reasons.

So, wouldn't the evolution of this strategy that you described earlier on the financial side eventually suggest that you go down a similar route, like Eveaco (ph) has done and like even Fiat has done in the past with regard to this retail financing business.

Let me -- you know, this is an interesting question, but let me summarize what we do maybe in a different way.

I mean, the strategy that we have in CNH -- I'm not talking about financial services but in CNH in general -- is clearly to provide to sell equipment and parts to our customers that we really want to improve the full-service that we provide to our dealers.

If you take, for instance, the ag business, our dealers, they are on a day-to-day basis involved in selling new equipment, but they are also trading used equipment.

They are selling attachments, implements which goes with the tractors or with whatever we sell.

We, if we want to be partners, we need to be able to provide the full support for that.

So, that's the reason why we have this strategy of segregating, if you wish, all of our equipment operations, which is I would say a distributor of new equipment with and parts and services and the function of providing full support to our dealer network through a broad range of financial products.

This -- you know, wholesale receivables is only a piece of that because, following -- you know, the financing is up to the dealer.

We hope that the customer of the dealer will come to us and ask for retail financing.

So, it's part of the whole thing. (multiple speakers).

Also this strategy -- this strategy is independent of whether or not we have partners in the business or not.

The strategy that we show and Giovanni was talking about is the business strategy for financing our customers.

You might recall that we already have a partner in our retail financing business in Europe, as it's a joint venture with BNP Paribas.

But I don't recall that very well.

The point I'm making is that it would appear that, with the kind of rating remaining at double B-, your recourse to the asset-backed market being of course the main way through which you currently finance your financial operation, that your strategy, which works really well, would suggest that, at some point, like other parts of the Fiat Group, like (indiscernible) recently, you're able to replace significantly you know, the current financing that you have with even cheaper financing, like, say, Barclays financing now, Eveaco (ph) finance and LIBOR plus, you know, a few basis points.

That would supposedly should improve the -- your ability to service your customers even more plus potentially highlight the value of the equity that you retain in the financial business, which right now, nobody seems to be recognizing.

So let me (indiscernible) because I think we have to leave here some time to other questions, let me just conclude on that issue by saying that the best demonstration of the fact that the rating may not influence what you say is the fact that, in the first quarter of 2005, we have achieved $1.4 billion of (indiscernible) facility in the U.S. with the lowest spread ever.

Thank you for your thoughts and -- (multiple speakers) -- them under consideration.

Let's go onto the next question.

Mark Koznarek of FTN Midwest Research.

It's actually Adam Ullman (ph).

Just a clarification here -- first of all, what is the full-year raw material cost increase forecast, both growth and then net of pricing?

We have not specifically indicated that at this point in time, but it probably will be slightly in excess of $200 million.

Yes.

On a gross basis?

Yes, a gross basis, yes.

Then how much visibility do you have into the Latin America Ag market right now?

Do you have any anecdotal commentary about acreage, cultivation, you know, expectations for the year or comments on the financial health of the farmers down there?

Just, you know, some kind of anecdotal evidence of what the current market is down there?

Good question.

This is Roland Sunden here.

Yes, the Latin American market, in particular the Brazilian market, has gone through a lot of change lately and it's been very much governed by a huge decrease from a very, very high level on the soybean prices.

If I relate to some of the farmers I visited lately in one of the bigger regions, Masto Grosso (ph), of course that has affected their profitability.

First of all, they recently acquired the land so they have a lot of investment.

They have a lot of fixed costs and so forth and they're very dependent on a very good price level.

So, actually, these farmers have gone from a very, very profitable situation at the beginning of last year to even being below the breakeven point thanks to lower commodity prices, in particular on the soybean side.

But also, that the currency change, the strengthening of the Brazilian currency versus the dollar of course has impacted the income side.

I think where they have been fortunate lately is that they had had pretty good weather conditions and actually they haven't been hit so hard by the Asian rust (ph) like some other parts of the world and also in the south of Brazil.

So, right now, I think the mood among these farmers is actually more positive than just a month ago.

Actually, that's why we are fairly confident that maybe we have seen the worst part of the combine market decline, in particular in Brazil, but that's still a lot of uncertainty of course.

John McGinty of Credit Suisse First Boston.

Let me just follow up.

The combine season is now over down there.

So, would you think that '06, we see a recovery in the combine market or thoughts on that?

Yes, you are right.

The season is basically -- you can say end of last year December up to end of March, halfway into April, so what we have managed to do as a company very, very rapidly is to cut our production so our inventory situations with our leaders and ourself is I must say it's quite favorable comparing to maybe some others in the marketplace.

When it comes to the rest of the year, I will say that the sales right now as we speak is not doing so bad but it's -- of course the season is over, so it's going to be fairly flat.

Well, let me ask it a slightly different way.

Given the inventory situation, if the market is up 10, 15, 20% next year, in other words kind of the proverbial bounce off the bottom, would your production have to be flat to get rid of the excess inventories that you have at the dealer or factory level?

Right now, if I understand what you're asking is --.

If retail is up 10, 15, 20% next year --.

Yes?

What does your production do?

Well, of course, we will lease -- in Brazil, in our plant in Brazil, we have very good labor relationships and quite huge -- very good flexibility how to flex the amount of output from the factory.

Right now, we have a lot of down days, meaning that the factory actually don't get closed totally closed but what we need there are the workers to come in and do the work.

It's very quickly to do so.

Actually, we are always transferring people from the tractor lines or from the combine lines to the tractor lines and vice versa, depending on where we are during the course of the year.

So, I think it's -- what we see -- if we see an uptick in the market in the latter part of the year, I think it's fairly easy for us to respond to that.

So, you're not sitting with finished goods inventory at the dealer or factory level?

John, let me put it this way, I mean, at the end of March, we were sitting on dealer inventory and company inventory.

By the end of the second quarter, I can guarantee that we will be sitting with very little because we have reduced the production significantly.

Yes, that was what I wanted, exactly.

I lose track where we are, which continent and which country, but on the tiering of the engines, off-highway engines in the United States and in Europe, is that -- are you on track with meeting all of the requirements?

Is that going to necessitate further price increases or have those all been built in at this point?

I think, in general, John, we're covered for Tier 2 because we're looking at three Tier 3 regulations now and a lot depends upon what the industry and the competitive situation is but we're okay for Tier 2.

Then you made a comment in your press release about a -- I think it was an April price increase of 3 to 5%?

Yes.

Was that worldwide?

What that U.S.?

Was that farm, construction?

Could you be a little bit more specific?

Almost across-the-board everywhere.

Fabulous.

Then final question, what should we, in our models, use for the net of the finance company?

I mean, it was up because of the securitization in the first quarter.

I think you did 159 last year.

Should we still use something like 175 for the full year?

Our strategy is to position all of the ABS transactions that we do in the U.S. and Canada and everywhere in such a way that every quarter would look alike, so I would be guessing that we might be close to the $200 million range by the end of the year.

Just final question, just to clarify -- you -- people asked the question a different way.

In doing a cash-flow model, what will working capital build be for the year?

It's not going to be as much as what it was in the first quarter but a couple of hundred million?

I'm not sure I understood the answer to that -- to your -- when somebody asked that earlier -- use of cash for the full year on -- (multiple speakers).

Use of cash?

No, we have general cash of $200 million.

So, basically, it means that we will reserve the increase of working capital that we got in the first quarter.

Totally?

Yes.

So it will zero out for the year?

So basically, we are shooting at having the working capital level at the end of the year in the neighborhood of the one that we had at the beginning of the year.

All right.

Thank you, everyone, for participating with us today and if you have any further questions after the close of the call, I will be in my office.

Good day.

Thank you.

That does conclude today's conference.

Thank you for your participation.

You may disconnect.