CNH Industrial NV (CNHI) 2005 Q3 法說會逐字稿

Good day everyone and welcome to the CNH 2005 third quarter results conference call.

Hosting the call today will be Mr. Al Trefts, Senior Director Investor Relations and Corporate Finance.

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

Please go ahead, sir.

Thank you, Elaine [ph].

Welcome everyone to CNH's third quarter 2005 results Web cast conference call.

We are pleased to have with us today Harold Boyanovsky, our President and CEO, Michel Lecomte, Chief Financial Officer, and Camillo Rossotto, Treasurer.

Before we continue let me remind you that in recognition of Regulation FD we've provided public earnings guidance in this morning's Press Release, which will be elaborated on in today's call.

After this call earnings guidance will not be updated until CNH issues another public press release on the subject.

Also, will 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 slide, the Appendix contains reconciliations to GAAP of 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 N.V. and are not to be re-recorded or rebroadcast without our express written permission.

Now let's turn to Michel for comments on our results and outlook.

Thank you, Al.

Hello everyone.

What I would like to focus on first in slide 4 is the trend of total worldwide tractor and combine industries we saw in the third quarter.

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

Overall the picture remains favorable when compared to past years.

On slide 5 worldwide tractor industry retail unit sales increased slightly, about 1%, in the third quarter on the strength of a 21% increase in industry sales in the rest of the world markets.

Industry sales in North America of utility tractors in the 40 to 100 horsepower range were up 3% with industry sales of over 100 horsepower tractors up 2% and 4-wheel drive tractor industry sales up 26%.

Industry sales of under 40 horsepower tractors were down 8% continuing the trend of the first two quarters.

Tractor industry sales in Western Europe were down 9% with weakness in Spain, France, and the UK although the market in Germany was up.

In Latin America the market declined which started in the fourth quarter last year continued with tractor industry sales down 27%.

Brazil, the largest single market in Latin America, was down almost 47% in the quarter with the over 100 horsepower tractor segment down by 2 sales, which mirrors the decline in the combine industry.

On a worldwide basis our tractor market share was essentially flat.

Worldwide combine industry unit sales declined 19% in the quarter with a sharp decline in Latin America including brazil which was down over 80% as the strengths of the currency and the weakness of soybean prices continued to impact purchases of large equipment.

The market in Western Europe increased about 8% with trends in a significant increase in some countries to a significant decrease in others.

This is a change in trend from what we thought we saw in the second quarter due to market delays in reporting.

The market increased slightly, only 2% in North America but declined slightly in the rest of the world.

On a worldwide basis our combined market share was down from last year, partially due to the impact of the decline in Latin America where we have a strong market share position and for market mix in Western Europe.

Construction equipment industry retail unit sales on slide 6 continued to strengthen in the third quarter.

In total industry unit sales of heavy and light equipment were up 13% compared to the third quarter of last year and note that the strength we saw was in almost all segments and almost all markets except Western Europe as we will see on the next slide.

On slide 7 we can see the construction equipment market segment changes by a geographic area.

Worldwide the backhoe order market was up 9% compared with last year.

The market was up 11% in North American and industry sales in the rest of the world markets continued strong up 22%.

The worldwide skid steer loader market also was up 9% from last year.

The market which counts for us, North America, was up 9%.

Heavy construction equipment on a worldwide basis was up 15% driven by a 24% increase in the rest of the world markets, which include China.

In total our worldwide market share of light and heavy equipment was essentially flat with last year with some gains backhoe orders in North America.

On slide 8 we can see how equipment operations third quarter net sales have evolved over the past three years.

Net sales of equipment in the quarter were $2.8 billion, essentially the same level as last year.

Worldwide net sales of [indiscernible] equipment were down 5% while construction equipment net sales increased 9%.

Ag net sales were unfavorably impacted by declines in the tractor market in Western Europe and in both the tractor and combine markets in Latin America, which were the principal factors in a 215 million decline in sales for volume and mix.

On the positive side ag pricing increased net sales by about $80 million or about a 4% price increase with most of the improvement in Western Europe and North America.

Currency accounted for the balance of the increase.

On a follow on months of supply basis our worldwide tractor and combine dealer inventories at quarter end were at about the same level of last year's third quarter.

Turning to construction equipment where net sales increased by 9% volume and mix was positive $21 million primarily in North America.

Pricing was positive in all major markets increasing net sales by $42 million or about a 5% price increase.

Currency translation increased net sales by about $17 million.

Worldwide on a follow-on months supply basis dealer inventories were unchanged from end of September last year for heavy equipment and up for light equipment.

On slide 9 we see the same shot as on slide 8 for September year-to-date net sales of equipment.

This year net sales of equipment in the first nine months were $9 billion, approximately the same as last year excluding currency valuations.

Ag sales in the first nine months were down 1% while construction equipment sales were up 14% compared with the same period of 2004.

Currency accounted for 3 percentage points increase in each business.

Net pricing was a significant driver in the period with prices up about 5% in the construction equipment business and up about 4% in ag.

On slide 10 we see the segment contribution of our industrial reporting margin for the third quarter this year and last year.

As you know, we measure the performance of our business segments using IFRS accounting principles followed by CF as explained in the Press Release footnote 14.

At the top of the slide 10 we see the $83 million industry or trading profit reported to Fiat for the quarter for our ag and C businesses.

Mirror that are the various adjustments to trading profits to reach industrial reporting margin under US GAAP and at the bottom of the slide is the split of the margin between our agricultural and construction equipment businesses.

As you can see our ag industry operating margin increased by $15 million to 3.4% of net sales and our construction equipment improved by over $20 million to 7.3% of net sales.

Slide 11 shows the factors contributing to year-over-year change in our third quarter industry reporting margin and as previously defined industrial reporting margin is net sales less cost of goods sold, SG&A and R&D.

Volume and mix were down by approximately $61 million primarily because of lower ag volumes in Latin America and Western Europe, which more than offset the favorable volume and mix of construction equipment.

Pricing net of all currency and economic impacts was positive $68 million and in total pricing was $121 million higher while total economics including higher steel costs increased $63 million.

Currency valuations were a positive $10 million.

Net price recovery was more favorable for ag than for construction equipment as inflation was relatively higher for construction equipment.

And please note also that cost increases in Western Europe have trailed cost increases in North America.

Gross margin as a percentage of net sales increased by 1.5 percentage points in the quarter compared with last year.

The main driver was the over 2 percentage points improvements in agri [ph] gross margin from favorable net price realization and manufacturing efficiencies.

R&D costs increased $7 million in the quarter excluding currency valuations reflecting our investments in new products.

SG&A costs declined $11 million in the quarter excluding currency valuations due to lower than previously expected incentive compensation for the full year 2005.

Manufacturing efficiencies and other savings of approximately $26 million in the quarter reflects improvements in efficiencies, manufacturing footprint and deeper [ph] rationalizations.

A quick point on our economic increases in the quarter, costs increased year-over-year by about $63 million or slightly less than 3% of cost of goods sold.

About half of the increase was directly related to steel purchases and we continue to see some steel cost increases from the second quarter to the third rather than a flattening out or a reduction as we had expected.

Slide 12 shows the segment contribution of our industrial reporting margin for September year-to-date results.

By business our ag industry reporting margin declined by $48 million to $302 million or 5% of net sales while construction equipment improved by $59 million or $176 million or 6% of net sales.

On slide 13 our reserves for the third quarter and first nine months of each year since 2003, at the top of the slide we see the equipment operations profit before tax, minority interest and restructuring and $24 million improvement from third quarter 2004 to third quarter 2005 reflects the combined improvements of equipment operations operating margin and financial services net income.

Year-to-date 2005 the total improvement is $64 million or 37% compared with the same period last year.

The bottom of the slide shows net income before restructuring.

The year-over-year increase for the third quarter and the year-to-date are less than expected considering the improvement the net income before restructuring, taxes and minority interests because of our higher tax rate this year.

Now let's turn to equipment operations change in net debt on slide 14.

Equipment operations net debt was essentially flat in the quarter.

Contributions from net income, depreciation and amortization and working capital were essentially offset by the discretionary $120 million third quarter contribution to our US defined benefit pension plan and by our changes in accords.

The working capital improvement included a further $60 million impact of our accounts receivable securitization program in Europe.

Note that in the quarter we have modified our North American cash management operations as explained in the Press Release.

This modification will reduce our cash and debt balances with Fiat.

Equipment operations is now using a portion of its excess cash in North America to directly form financial services rather than depositing that cash with Fiat.

Equipment operations position has changed from being a net lender to Fiat at June 30 to being a net borrower and financial services is now borrowing much less from Fiat.

This change obviously has no impact on the consolidated net borrowing position with Fiat.

Also note in the quarter equipment operations repaid $218 million of Case Corporation bonds that matured in August and increased cash and deposits with outside third parties by $170 million all out of funds drawn from Fiat cash management pools.

These actions are consistent with our objective of reaching an equal balance of cash and debt with Fiat on a global basis.

Next slide 15 shows the components of the $446 million net debt reduction for the first nine months of 2005 compared with the $562 million reduction last year.

The impact of our accounts receivables systematization [ph] program was $404 million in the first nine months of 2005 compared with $484 million in the same period last year.

Including these impacts net debt declined by $42 million in the first nine months of this year compared with a decline of $78 million in the first nine months of last year.

On slide 16 I would like to review the plusses and minuses of these past quarters.

First, of course, although it happened at the very end of the quarter, is our reorganization to focus on our Global brands.

We have appointed for President each with full commercial, marketing and product portfolio accountability for the respective Global brands, Mario Ferla for the Case IH ag brand, Marco Mazzu for the New Holland ag brand, Jim McCullough for the Case construction brand and Franco Fenoglio for the New Holland construction brand.

As Harold indicated their charge is to strengthen our position and accelerate goals in sales, margins and earnings driven by customer expectations for quality, service and responsiveness.

These Global brands are key for our transformation and we expect the achievement of our goals planned will follow.

Next is what happened in our quarter during the third quarter?

Although the worldwide agricultural equipment markets were flat, they were slightly better than what we had and expected.

In Latin America where we had expected a substantial decline, the decline for both tractors and combines was slightly less than anticipated.

The construction equipment industry remains strong, about as we had and expected and the North American high horsepower tractor market also remained strong.

We still have not seen any signs that material cost increases are stabilizing.

We were expecting that cost increases would begin to slow down or even stop but it didn't happen.

On the other hand pricing recovered all economics and cost increases in the quarter.

We also note that while we are seeing some improvement in the component shortage situation, it is continuing and caused some shipment delays in the quarter.

Turning to our industry outlook for 2005 on slide 17 we expect full-year agricultural equipment worldwide industry unit sales to be about the same as last year although based on what we have seen during the third quarter there are regional differences not previously anticipated.

We now expect the worldwide tractor industry to be up slightly.

We also expect industry sales of tractors in North America to be slightly weaker driven by a decrease in our outlook for under 40 horsepower tractors from down about 5% to down about 10%.

However, we still expect over 40 horsepower tractors in North America to be up 5% to 10%.

We now believe tractor industry sales in Western Europe will be down 5% to 10%, more than previously indicated.

For tractor industry sales in Latin America we have closed the anticipated range from down 20 to 30 to down 20 to 20 to 25.

The offset for these changes is much stronger expected sales in the rest of the world markets while we have revised our forecast from up 5% to up 24% give or take.

This includes improvements in markets like China.

We now expect worldwide combine markets to be a little weaker.

Last quarter we thought the combined markets should be down 15% to 20% for the full year.

We now believe that it will be down closer to 20% with North America essentially flat, Western Europe up slightly and Latin America and the rest of the world markets unchanged from the prior forecast.

For the fourth quarter we expect tractor markets to be flat to perhaps up slightly compared with the fourth quarter last year and this is an improvement compared with our prior outlook.

The highlight of this outlook is that the North American over 40 horsepower tractor market should remain strong, up to 5% higher than last year.

Out combined outlook is now weaker with declines in all markets except rest of the world markets, with the largest decline again expected to be in Latin America.

Turning to our construction equipment industry outlook for 2005 on slide 18 we have a slightly stronger outlook for both heavy and light equipment for the full year than we did three months ago.

We now expect light equipment industry unit sales to be up about 12% for the full year compared with up 10% in our last outlook.

Heavy equipment should now be up 9% compared with up 7% in our last outlook.

Also, please remember that last year's market in North America was up significantly from the first quarter of 2003 so this is a further improvement of a very high base.

By region for the full year we now expect stronger light equipment industry unit sales in Western Europe, Latin America and the rest of the world markets.

North America is unchanged from our prior outlook.

Full year industry unit sales of heavy equipment should also be stronger in Latin America and the rest of the world markets with North America and Western Europe unchanged from our last outlook.

Fourth quarter industry unit sales should increase in all markets except for heavy equipment sales in Latin America and Western Europe, which could be down slightly.

Our outlook for both light and heavy equipment unit sales is now stronger in each geographic area than last quarter.

As far as our Company outlook is concerned on slide 19, our reorganization to focus on Global brands is our number one highlight that will set the tone and create the conditions for future results improvements also, although it will probably not have a significant impact on 2005.

For 2005 we are looking at agricultural equipment markets relatively level with last year, perhaps stronger in certain key areas like the North American higher horsepower tractors and the worldwide construction equipment markets are much stronger in all product lines than last year.

As far as equipment operations improvements are concerned, we expect higher worldwide combined production in the fourth quarter this year compared with last year despite a drop in Latin America.

And remember that our combined production last year in North America was minimal after closing East Moline [ph].

In total we expect to under product retail unit sales in the first quarter following our normal seasonal pattern and we look for continued improvements in net price recovery and margins as we have seen through the first nine months.

In addition net interest expense should be about the same level in the fourth quarter as in the third quarter and financial services performance in the fourth quarter should be slightly less than in third quarter.

In total for the full year we expect an improvement in profit before tax, minority interest and restructuring costs of about 45% [ph].

However, these anticipated operating improvements and a strong performance of CNH Capital will be offset by expected increases in minority interests and our effective tax rate.

As such we now expect our net income before restructuring should be approximately 15% higher than in 2004.

Our outlook for restructuring costs net of taxes is unchanged from last quarter of $65 million for the fourth quarter and we expect net income before restructuring costs to be slightly less than in the fourth quarter last year.

Full year cash flow is expected to be positive by approximately $250 million after including $120 million of contribution to our US defined benefit pension plan and this cash has been used to reduce equipment operations net debt.

This concludes my comments.

Al and I and Harold, we are now ready to begin the question and answer session.

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

Elaine, could you please retrieve the first question?

[Operator Instructions] Gary McManus of JP Morgan.

Could you tell me what your tax rate assumption is for both the fourth quarter and 2005?

About the same on average of what we have year-to-date September.

It's about 34% or so.

For the full year.

For the full year.

And obviously it would be for the fourth quarter as well?

Right.

And my follow-up is can you at least talk directionally about what you're thinking about next year?

There's a lot of concern in North American ag with drop in grain prices and higher input costs may cause demand to be weak or at least show a lot of growth.

Can you talk about in all the end markets in both ag and construction kind of directionally what you're thinking about in those sects?

Well typically you know that we are providing outlook for 2006 later in the year basically what we need in January so we have not developed the full outlook for 2006 at this point but maybe some indications Harold can answer some of these indications that we might have today.

Yes, I guess I would say let's start with construction equipment sector.

All the indicators we see indicate another good year in the construction equipment market.

I don't think we'll see double digit growth but clearly we should see in our range of mid single digit growth.

On the agricultural side of the business, as you know, the major issue for the industry this year has been Brazil and although there has been some improvement in commodity prices year-over-year, still the farmers are under cost pressure and many of them have not sold their crops so they're holding waiting for some turn in pricing, which impacts their cash flow.

But in general prices whether you're talking about wheat, soybeans or cotton, are up over last year at the same period in the US and also when you look at international prices.

The uncertainty, of course, I think that we have to study is the impact of these natural disasters that we've had and what the impact is going to be on oil and gas prices as we go through the first half of the year.

Clearly in the US market the second half of the year will be impacted by Katrina and Rita but I think in the first six months of 2006 we'll see an equal boost as reconstruction starts in the Gulf states area.

Andrew Obin of Merrill Lynch.

Just a couple of questions on your outlook and maybe according to my notes as I look at your full year outlook in North America, and this is I guess a more detailed version of worldwide retail industry unit sales, it seems that you actually cut your outlook for combines fairly substantially for the year and as I look at your forecast for retail sales in the fourth quarter you have combine harvesters down 15% and I was just wondering what are you seeing in the market exactly?

Is it the order activity?

Is it just a function of your production shut down?

I guess I'm a little confused, Andrew.

Our forecast for worldwide industry sales was down.

This is page 7 of your Press Release.

Yes, the chart, it's down 19%.

It was down 18%.

No, no, no.

I'm talking in particular about North America.

Okay, it was up 9 and now it's down 1.

Yes, so the question is and as I look at your fourth quarter outlook for North America, you have retail sales of combines down 15%.

Correct.

And the question I have is what exactly are you seeing in the market because I think September retail sales were pretty good.

Obviously you guys are seeing something and I'm just wondering what is it you're seeing in the market to have such a conservative forecast for the fourth quarter?

Well, I think a couple of things.

For the first part the harvest went pretty good in the third quarter compared to year and we know that we will not have the accelerated depreciation tax buying that we had in the fourth quarter of last year.

Last year the fourth quarter was up 42% from the fourth quarter of 2003 so it was a very strong quarter and we're still expecting this year that it will be up from the fourth quarter of 2003 but we're just saying it's not going to be as strong as it was last year.

So it's just-- this was just driven purely by comps as opposed to more cancellations?

Correct.

Yes.

Gotcha and just a little bit more detail in Europe, once again looking at your European outlook I guess we had cut outlook for tractors a little bit and raised outlook for combines.

Yet you noted that Germany is stronger and it's a fairly big market in terms of tractors and what is offsetting a) how much better is Germany versus your expectations?

And b) something must be a lot weaker to sort of drag the whole thing down if Germany is better.

Yes, we are looking for the exact answer to your question about Germany but in Europe it's clear that the countries which we are offsetting Germany are basically Spain, France and Italy to a certain extent.

And the situation in Europe this quarter is quite peculiar because we have seen a significant dispersion in terms of changes compared to the prior year by individual markets so some of them being very strong and some of them being very weak, which is quite unusual.

And we have drought in Southern Europe so we see weakness in Spain, Portugal, Italy.

We're also seeing weakness in the UK and I think that concurrently we're seeing those a little weaker than we saw before and that's really what's offsetting Germany.

How is the Nordic region doing?

The Nordic region is up slightly in terms-- like less than 5%.

And just a follow-up, are you guys expecting sort of I guess there's the usual bounce back after Agritechnica [ph].

Are you forecasting something like this for this year?

Are you expecting this to happen or do you think that drought is just severe enough so that that will offset Agritechnica bounce?

Well clearly a great number of the farmers and ranchers that go to Agritechnica look to that event for new product and a normal increase in orders occurs after the show but I think it's too early to say whether that will offset the drought declines that we've had in the countries that Michel just mentioned.

We won't see that before the later part of-- or the early part of the Spring next year.

Right.

Oh I see.

So the-- any Agritechnica bounce will take place in calendar '06.

Is that right?

It could be.

David Raso of Citigroup.

First a clarification on the guidance, using the base of 193 million net income in '04 pre-restructuring, a 15% increase would be about 222 million.

Yes.

That implies a fourth quarter net income of about 38-39 million, which is below a year ago fourth quarter which was 48.

That's what we said.

This is what we said.

Yes.

Okay but there's a slide here I thought it says fourth quarter net income pre-restructuring at the '04 level, slide 19 "net income before restructuring at '04 level."

What I said in my speech is slightly different.

I agree.

You are correct, David.

The slide is wrong.

Okay that's fine.

On ag with a tier three rollout, Deere's rollout a little bit more limited with the 8000, the impression I get from the channel is that you're selling some tier two new '06 models through December 31st.

The launch of marketing that tier three '06 models was pushed back a month or so because the order book was maybe a little lighter than you had hoped.

Have we now begun to market the tier three '06 models and what's been the reaction so far because obviously it's a bit of a step up in price?

An answer to your question is yes depending upon the product line both in ag and CE where we had some carry over credits.

We have elected to use some of those so we will be selling some tier two engines in '06.

The anticipation where we've installed next new engine family product in both ag and construction equipment is quite good on performance as well as lower engine noise or vibration through the system so it helps us in meeting noise as well as emission requirements and the fuel efficiency is quite good, at least from some early tests in Nebraska compared--

Have they been marketed yet though?

Are we still selling the '06 models tier two or have we yet gone out with the tier three '06 and do you have some feedback on that?

On the big tractor side the tier three will be launched in '06.

Is that later than we initially thought?

I mean is your-- essentially the credit usage is a little bit different.

No not-- it doesn't move.

If it moves it moves about a month only for testing but it's not a substantial change that would move quarter-over-quarter.

And what type of price increase, the difference between buying an '06 model with a tier two and an '06 model with a tier three and the reason I'm asking is obviously the farmer right now in the US is maybe a little jittery about his '06 outlook and a higher price increase even with all the bells and whistles and the added value of the new tractor maybe not the most opportune time of that to be forced with a price increase.

I'm just curious the feedback you're getting from demand.

How much of a price increase are you willing to put out there on the tier three?

Well our general intention unless we're adding performance or efficiency to the farmer, we're not pricing for tier three or emission changes so when we look at our launch of the new products moving forward as we have in the last several years, we will be increasing the performance of the vehicles and if it does more work we will price for it.

So just so I heard you clearly, the tier three engine '06 models will or will not have a higher price increase than the tier two version?

You've got to look at the total product.

Essentially we're not pricing for tier three sake or pricing where we will price will be providing our farmers with increased productivity or efficiency.

And, of course, we'll be pricing for any increased costs that we continue to see as well so it will make any comparison very difficult.

And I apologize.

If you don't want to answer it that's one thing but I apologize if I'm not asking it correctly.

Will the tier three '06 models have a higher price than the '02 because if the answer is no your costs are up to produce that.

I'm getting-- I'm trying to figure out the profitability of the new models versus the old because if there's no price increase there's going to be some margin squeeze I would think.

Yes, well in general we've been able, as Michel has indicated year-to-date in the third quarter, to have price realization greater than economics and we've committed that we would continue to make sure that we offset the economics.

But having said that we have to also keep an eye on the competitiveness in the marketplace so if the market holds strong, which we know it will in construction equipment, we would continue to price for performance feature enhancements that add value to the customers and if economics are moving we want to recover the economics.

And the last will be very quick.

On the construction side a lot of your profitability comes from the skid steers and the backhoes.

The rental houses, at least for Areal [ph] seem to be pretty aggressive and pretty confident in their cap ex for '06 and even for that matter '07 with some of the Areal suppliers getting contracts for deliveries into '07 already.

The backhoes and skid steers that you sell are maybe even more broadly.

What percent of your product is now going through the national rental houses and can you speak to what kind of demand profile you're seeing, especially relative to my Areal comment?

I think in general on construction equipment 40-50% of the retails go through some form of rental on the way to the final user, either through the dealer channel or national account channel.

We've had a strong year with our national account business this year.

As a result of Katrina and Rita there's been a lot of inquiries from the national rental companies as well as our dealers looking at adding to their current fleet in addition to normal replacement so we anticipate that rental sales moving into the first half of 2006 will continue to be strong.

And what percent is that of total construction?

Through the rental channel-- this is dealer and customers, it's 40 to 50% depending upon the year.

In North America.

In North America.

That wasn't an industry comment?

That's for you?

No, no, no.

That was a CNH comment.

John McGinty of CSSB.

Yes, I just wanted to follow up on Gary's original question, which is could you-- you talked about CE.

You talked about ag in Brazil.

Could you specifically talk about your outlook as it stands now for '06 for ag in Europe and for ag in North America large tractors and combines?

Could you talk about those two markets?

John, we-- as we said, we don't have an outlook yet for 2006.

We're still in the middle of the budget process and what was talked about was some trends that we see in the marketplace.

We will be discussing our full outlook in January when we give our year-end results.

Well yes, but on the other hand you've got-- you all have to have some opinion.

You obviously-- you're much closer to the market than we are.

You've got to have some view of how you see North America and Europe.

Those are really the key markets for the ag when we look at '06.

We don't see much change in Europe from what you're seeing now.

The question is is the implications of the weather patterns.

You know, will you have a drought in the southern countries that we have this year?

You know we can't forecast that so we don't see a significant change.

And for the Latin American regions it's much too early because we are not yet in the season.

The wheat season starts now and this is going to be the significant test of how the market is going to go.

And how do you read the States?

And what we are seeing in Latin America is that after devaluation in the first two quarters of this year, the situation seems to have stabilized in the fourth quarter compared to last year.

And I the US?

I believe that Harold has already answered that question.

Yes, we don't see a major change in the US market and we still see some growth in the-- that's ag?

That's ag, right.

And in construction we still see the opportunity for some growth.

Could we talk about pricing in terms of you've been aggressive.

You've said that material costs continue to surprise you and yet you have obviously as you alluded to in the charts gotten more than the costs.

Given the prices that you have already announced and put into effect, effective I'm sure of what January, November, whenever, what kind of price increases do you see at this point in '06 versus '05?

In other words, carryover increases or increases that you've announced, are we looking at the same kind of 3, 4, 5% increases in '06 versus '05 that you have put in so far or what is your thought process there?

I believe that Harold has already answered most of these questions already by saying that the function of how the economics change will take place, we'll try to recover.

Except what have you put in already?

In other words, yes it's you have announced I assure.

You have put in price increases that are going to be effective.

You will go out and get more if the material costs keep rising.

What I'm asking is what have you put in already?

What is already baked into increases that you've announced for '06 versus '05?

Basically you're asking the question of what's the carryover impact of what we have already done and announced.

And what you've already announced for '06.

John, I believe that what we've announced already for the beginning of '06 is about 2%.

So with a carry over it would be 3, 3 to 4% overall given what you've announced plus the carry over?

That would be a reasonable assumption.

Mark Koznarek of FTN Midwest Securities.

I'm wondering first a clarification.

Could you review again the difference again between the current outlook that's on an equipment operations basis and the previous outlook that was on a consolidated basis?

What are the plusses and minuses again?

I know you treated that but I didn't quite get all the dynamics there.

Well this outlook is a little stronger than the last outlook.

You may recall that the outlook last time we gave a range of 10 to 15%.

Now we're saying about 15% and I think that essentially what we're saying is that the benefit that we saw in the third quarter will flow through effectively to the full year.

But what about the difference between the equipment operations versus the finance sub?

Are we saying the finance sub is going to contribute more than previously expected?

No.

It's going to be at the same level so really what we're seeing is a flow through from equipment operations.

Now my actual question has to do with your Global brands initiative that you put as sort of the number one issue in some of the slides as new developments for the Company.

What does that mean from a tangible standpoint?

I imagine you're not going to do something like that unless you believe that it's going to either improve sales growth or profitability or presumably both but things like that typically just don't happen in a vacuum and they often require some up-front investment either actual physical or SG&A type investment, so what does this initiative entail?

Is there an up-front expense that is going to be absorbed in 2006 and then we would get benefits beyond that?

Can you clarify what this phrase means please?

Well I would-- I mean I can let also Howard answer that question but let me say that, of course, drive of the change is to give more focus to our organization towards the customer needs and the customer expectations whereas in the last few years this Company has been very much inward looking in trying to do and implement the restructuring plan and the merger integration plan so it's clearly a shift in terms of recognizing what the focus of the Company should be going forward.

As far as the-- I mean it's clear that it's not coming up in a vacuum and it has been a very well thought process and in terms of consequences or I would say cost and benefits if we can summarize, it's clear that we are as I said, we are not expecting an impact in 2005 but I don't believe that in terms of additional SG&A we should see any significant swing.

You probably are going to see some and as you have already seen I the recent quarters, some additional focus on the R&D area and not only in terms of absolute dollars but also in terms of allocation of the dollars spread inside the R&D spending, we have been spending quite an amount of money in new products in the past few years.

Probably the new products are going to be maybe a little bit less of importance and we are going to spend much more money inside this R&D spending in terms of improving the existing range of products, cutting the cost out of the products and meeting the customers specs so it's more an allocation of the way we expend our money than an absolute increase of our spending.

I would agree with Michel's comments.

The anticipation in the mid to longer term is that our core customers for our key brands will see products and services that are more aligned to their expectation and needs which means more differentiation rather than less.

Would you expect there to be a material product line expansion because of this or is this more or less the same product footprint we're talking about but it's just more specificity and more tailoring of those products to specific customer needs?

I'd say it's the latter versus the first.

Okay and it sounds like because we're talking about new products it's really the '06 momentum might be relatively modest and it's a time frame beyond that where it would likely have more impact?

Yes.

Mike Kender of Citigroup.

Yes, just a couple follow-ups-- one is on the fourth quarter guidance.

Can you give us an EBITDA translation of that?

Do you expect in terms of year-over-year what you expect EBITDA comparison to look like based on the EPS guidance you gave?

Yes, we are just looking.

Interest expense and depreciation should be more or less about the same as the previous call, Harold?

Probably down about 10 to 15.

Million?

Percent.

Okay and also on the-- you gave a pension number in the Press Release in terms of liability change at year-end.

How does that-- how do you expect that to impact the cash contribution requirements next year?

This is just the pension accounting and this fixes the balances on the balance sheet.

It doesn't have any cash effect at all.

Right.

I would assume you also have done the ERISA calculations in terms of liabilities there and potential contribution requirements or is it just--?

Just one second.

Well in total, Mike, I think that our contribution next year will probably be somewhere right around the same level as this year so really not much of a change.

Okay great.

And the last question was on the cap structure.

You've done a fair amount of restructuring of the Fiat inter-company transactions.

Is that set for now or should we expect some more movement in the near term in fourth quarter in terms of about how you're handling that?

Let me comment on that.

I would not call that restructuring.

I would say evolution.

Clearly our objective is as I indicated is to have no balance, no net balance of debt and cash with Fiat, reducing of course the cash or the debt as much as we can provided that we need to have the most efficient cash pulling organization as possible so that's basically what we are trying to achieve.

Right and we've done the stock structural changes so we don't expect any other structural changes at the moment.

Okay great.

That's all I had.

David Bleustein of UBS.

A quick question on fuel prices-- you mentioned that the raw materials prices hadn't been coming down as quickly as you wanted and also differentiated between what you're seeing in the US and the EU.

Can you talk a little bit about your negotiations for 2006 steel prices and how your experience is differing in the United States and in Europe?

Clearly the gap between North America and Europe in terms of steel cost increase is probably a couple of points.

I would say 4 points maybe difference.

There are some I would say a lot of reasons behind that apart from industry assumptions.

It's clear that this gap is probably going to continue going forward.

Now having said that in terms of expectations for cost increase going forward, as you have seen and you have noticed, every time we meet and we discuss the quarters we are telling you that we apologize for having seen higher costs than what we expected.

It shows that forecasting the evolution is quite complicated.

What we see today is no clear sign of a decline.

Even in mid-quarter we have seen some relief.

Then the prices went back up again so it's hard to say.

We expect those costs to be probably settling now but I would be extremely cautious in making that statement.

But to the extent that you're signing contracts for '06 delivery, are the contracts you're signing at higher levels, flat or lower levels than what you experienced in '05?

I think it's fair to say looking at the way steel prices moved in the last quarter any long term contract versus fourth quarter of last year is higher, but again we're looking to negotiate and we're right in the middle of that process with key suppliers as we speak between now and year-end so we'll have a better view when we discuss the full year and fourth quarter earnings.

Okay, operator, I think we have time for one last question.

We will now take your final question from Charlie Wintsler [ph] of Foresight Research.

My question has to do with the new organization.

I have difficulty believing that there won't be any significant change to SG&A going forward from having added four Presidents but leaving that aside because you covered to get some more insight into this who are the manufacturing plants going to report to?

In other words, take the combine operation out in Grand Isle.

Who will-- that right now manufacturing is color blind right, so who is that going to report to in terms of this new organization?

For the construction equipment plants they'll report to Luciano Paola [ph] and for the agricultural equipment plants to Linda Nowell [ph].

Linda, as you may know, was already responsible for the agricultural production facilities in North America so she picks up a Global responsibility, as does Paola.

But is this to say the four new Presidents, they have responsibility in the product and marketing and sales areas but not in the manufacturing?

Well clearly the main focus of these gentlemen is to develop the commercial network, improve customer penetration, manage the portfolio within the brand to make sure we continue to take advantage of the current and historical strengths of our key brands both in ag and CE and for the overall profitability it will be shared not only between the brand heads but the heads of manufacturing, the heads of strategic sourcing and the heads of our parts and service business, which is another major change that I've made to bring focus on not only the service levels to our ag and CE customers but also to the level of growth in profit in that business.

Great.

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

Good-bye.

Ladies and gentlemen, that will conclude today's conference call.

Thank you for your participation.

You may now disconnect.